Our colleague shocked us last week when he emailed the chart you’ll see below.

We’re professionals, we do our homework, endless homework, but the harsh reality of collapsing international oilfield equipment and service spending has never been so starkly presented to us. The chart shows that Q4 2017 was the first time in multiple decades that domestic oilfield spending was higher than international oilfield spending:

Oilfield Spending (Billions)


Two quick observations as to why international oilfield spending was still falling throughout 2017 despite rising oil prices:

  1. Most international drilling activity is financed by super-majors who are under intense pressure from investors to maintain capital discipline and improve shareholder returns.
  2. Field development cycle times are longer in the international market than in North America. All else being equal, operators prefer to invest in places where they can get their money back faster.

Also consider the following metrics:

Approximately 80 million barrels per day (mbd) of oil is produced from “international” (ex-US and Canada) sources. Since existing fields decline at a rate of ~5% per year, this means that international output would fall to about 76 mbd over the course of a year if no new wells were drilled.

As recently as 2014 the industry spent about $300 billion per year internationally to replace that 5% decline and grow output ~1%. In 2018, the industry will spend about $120B in the international market, which isn’t enough, nowhere near enough, to both offset the decline from existing fields and accommodate the increase in demand. At best the current level of international spending is just barely enough to hold international production steady.
Meanwhile, around 20 mbd of oil is produced from North American fields. However, if no new wells were drilled in North America, output would fall around 10% within a year, to about 18 mbd. The decline rate is greater in North America than in the international market since much of the oil produced in the US and Canada comes from shale oil wells that deplete very rapidly in the first two years of production.
In 2018, the North American industry will spend about $140B, which will both offset the decline from existing fields and add another 10% to output.

Here’s what it all means:  

It currently costs approximately $35B to add a million barrels of oil per day of production from new wells.  International, domestic… it’s about the same cost. Each year the world’s oil from old wells falls about 6 mbd, plus we need 1.5 mbd more of oil due to demand growth. 7.5 million barrels x $35B in cost = $265B per year to arrest declines and grow output.

As the industry continues on this path over the near term – adding production in North America, the region with the fastest-declining wells, while international output trends flat-to-down – it will end up rapidly exploiting shale oil resources in the US and Canada (great for the NAM oil service industry!) but just as rapidly exhaust those same resources. At which point oil prices will have to sharply increase over a sustained period in order to lift international spending by factor of 2-3X so as to reverse the trend in international production.