As US shale operators and OPEC Gulf countries and Russia continue battling out low oil prices versus global supplies, the bulk of the world’s producers are keeping output flat by working assets harder — which could result in a midterm supply crunch, a key oilfield executive said Friday.

The “harvesting approach” now pursued by many national and international oil companies that represent over half the world’s production at a time of persistently low crude prices below $50/b may not be the best course for oil markets long term, Paal Kibsgaard, CEO of oil services provider Schlumberger, said in a quarterly earnings conference call.

“The longer the current underinvestment carries on, the more severe the cliff-like decline trend will likely be when producers run out of short-term options to maintain production,” Kibsgaard said. “Given the size of this production base, it will be difficult for the rest of the global producers to compensate for this pending supply challenge.”

Related post on The Barrel blog:Rising US rig counts slow as oil prices remain below $50/b

Meanwhile, two things are “very clear,” he said: “Come 2019 or 2020 we will have significant supply challenges,” and global investments will rise in that period, as this have already begun.

Until then, “what happens to oil markets comes down to the interplay between Russia/OPEC on one hand, and US producers on the other,” the CEO said.

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US land producers, which account for 8% of global oil supply, have taken a “fast barrels” track as they ramp up production this year after a two-year industry downturn, he said.

The breakneck rampup in US production — about 450,000 b/d since the start of this year — has “spooked” oil investors into believing that oil will flood the markets and keep global inventory levels relatively high into the foreseeable future, he said.

As a result, pursuit of short-term equity returns in US land E&P stocks prevents recovery of oil markets, sends oil prices tumbling further and tamps down any equity appreciation the investments had aimed at creating, he added.

On the other hand, the OPEC/Russia/Gulf countries, which combined make up 40% of global oil production, have shown commitment to a “sound and consistent” stewardship of their resource base, Kibsgaard said. They have steadily increased oilfield activity in recent months and moderated their oil output since the industry downturn began in late 2014.

OPEC/non-OPEC nations’ agreement in late May extended 1.8 million b/d of production cuts through first-quarter 2018, but sentiment unexpectedly became more negative when global oil inventory levels did not reduce to anticipated levels and oil prices failed to rise as US shale supply shot up.

Increased crude out of Nigeria and Libya “is also a major concern,” Kibsgaard said, even though the pair were excluded from production cuts since their output was relatively low at the time of the OPEC agreements.

Even as US shale production booms, producers have not seen positive free cash flow in six or seven years, he said.

“Whether that will continue or not will come down to whether they can still continue to borrow in 2018 and whether they continue to hedge,” he said.

Since US E&Ps’ capital budgets this year are set, activity should be steady through the rest of the year. Strong drilling is likely to continue into 2018, but perhaps not at the same growth rates as this year, Kibsgaard said.

–Starr Spencer, starr.spencer@spglobal.com

–Edited by Jason Lindquist, jason.lindquist@spglobal.com

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