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Oil, natural gas industry beyond North America picking up steam: Schlumberger CEO

Houston — The long-awaited bottoming of the two-plus-year oil and natural gasindustry downturn has finally reached beyond North America, with gradualrecovery this year before accelerating into 2018, the CEO of oil servicesgiant Schlumberger said Friday.

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While North American investment will be up as much as 50% this year, mostof the world's production comes from other arenas. And, "we're heading towarda third year of significant underinvestment," Paal Kibsgaard said during aquarterly earnings conference call.

Lack of funding on such a wide scale "increases the likelihood of amedium-term supply deficit, as produced reserves are not replaced insufficient volumes," Kibsgaard said.

During the first quarter, Schlumberger began to reactivate idle equipmentin the North American onshore, which started its own recovery late in 2016 asa steadily increasing rig count increased demand for services and equipment inunconventional plays.

The equipment re-activations will accelerate for the rest of the year,with all idle capacity back in the field during the fourth quarter, Kibsgaardsaid.

North American land is also the one area likely to increase E&Pinvestments this year, although investment levels in Middle East and Russiaare also expected to remain "resilient" this year, he said.

But a close look at recent data clearly shows the depletion rate ofproved and developed reserves is "rapidly accelerating" in several keynon-OPEC countries, Kibsgaard said.


Investment in exploration is at record lows, leading to industrydiscoveries of less than 5 billion barrels last year, versus produced volumesof over 30 billion barrels, he said.

"At present, there is no clear sign of any general increase inexploration spending," with the exception of Mexico where Schlumberger isseeing increased interest in offshore multi-client surveys, he said.

The country has held bid rounds in the past two years in its offshoreGulf of Mexico and onshore fields, and will continue to hold biddings thisyear.

But US Gulf of Mexico activity is at record low levels, to the point thatSchlumberger is currently moving both service capacity and technical supportfrom that arena to what Patrick Schorn, the company's president of operations,called "other, more viable markets."

"Product and service pricing in several cases have fallen to levels thatmake it impossible to hold at our operating standards and at the same timeturn a profit in this extremely challenging operating environment," Schornsaid.

In the US Gulf, the deepwater rig count dropped by 15 at the end of Marchwhich represented a 74% reduction compared to peak 2014 activity, he said.

"In addition to low drilling activity [in the Gulf], we also saw afurther sequential drop in seismic multi-client sales," Schorn said.


However, Kibsgaard said Schlumberger was getting "significant traction"on pricing in North American land.

The company in mid-2016 had warned industry that price cuts for itsservices and equipment conceded during late 2014 and early 2015 when thedownturn began could not continue much longer.

As oil production from shale picked up after the 2008-2009 downturn,industrywide costs also rose in lockstep with the boom. By 2014, costs hadgreatly escalated, but for the first half of that year oil prices were over$100/b.

But as oil prices retreated in second-half 2014 and plummeted at year-endafter OPEC refused to prop them up with production cuts, operators asked andreceived cost concessions from oil services providers of 10% to 30% or more sothey could continue production -- albeit at lower levels.

Meanwhile, bright spots along the way to recovery are cropping up ininternational arenas, Kibsgaard said.

For example, in Latin America, there are emerging signs of opportunity --for new commercial models as a focus is brought to mature land basins, hesaid. And in Argentina, plans to bring stability to natural gas prices shouldlead to higher investment levels. Schlumberger also this month inked anagreement with YPF for joint development of the Banderria Sur area ofArgentina's Vaca Muerta Shale.

In Europe/CIS/Africa, Kibsgaard sees stronger activity in the North Sea,Russia and the Caspian in the coming quarters as winter ends and new projectsstart up.

In Africa, activity should improve as Schlumberger starts up asmall-scale land operation in Libya after a three-year shutdown. Land activityin Chad, Congo and Ethiopia is improving steadily and there are a number ofdeepwater startups in the Congo, Guinea and the Ivory Coast.

In the Middle East, activity will continue to be driven by GulfCooperation Council countries, although Kibsgaard doesn't see "significant"growth from that region over the next several quarters.

"Even though we see positive signs in many countries, we only expectmoderate sequential activity growth over the coming quarters," Kibsgaard said.

"This slow recovery, together with lingering pricing pressure, meanswe'll likely face another challenging year in international markets, while weexpect acceleration of activity growth towards the back end of 2017 and into2018," he said.

--Starr Spencer,

--Edited by Richard Rubin,