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Global E&Ps, Led by U.S. Brethren, Locked And Loaded For New Investments

The global oil and gas industry, already expected to boost exploration spend during 2017, is poised to more than double final project approvals as optimism spreads across the energy sector.

According to an analysis by Wood Mackenzie Ltd., operators should greenlight more than 20 oil and gas developments this year, compared with nine in 2016. Tudor, Pickering, Holt & Co. (TPH) sees even more final investment decisions (FID) worldwide, estimating there could be about 40 in the upstream sector, mostly bent to natural gas.

"A leaner industry will emerge from the gloom," Wood Mackenzie researchers said. "Costs have already come down by 20% on average, and a further 3-7% reduction is expected in 2017. This will pave the way for a doubling in FIDs compared to last year."

Wood Mackenzie last month predicted that 2017 would be a much better year for the energy industry, now a consensus among the industry prognosticators.

Capex/boe for the potential FIDs "averages just $7/bbl, down from $17/bbl for the 2014 project sanctions, according to Wood Mackenzie. “The projects also give more bang for their buck -- with an internal rate of return (IRR) increase from 9% to 16%."

More Gassy FIDs?

TPH is estimating as many as 60 projects, mostly overseas, could be sanctioned this year, and roughly two-thirds (around 40) likely will take FID. On a risked basis, the 40 projects could develop 21 billion boe and create 3.7 million boe/d of production at plateau, 60% weighted to natural gas. The overall cost of the combined pre-FID portfolio is estimated at $130 billion using a cost of $6.00/boe. That production level would require around 450 wells. The average start date for the projects, "without factoring in any delays, is 2020, with a contribution of just 900,000 boe/d that year."

During 2016, TPH estimated that 18 projects were sanctioned (pre-FID) that could create around 7.5 billion boe. About half of the output would be from the Zohr gas field offshore Egypt and the Tengiz field in Kazakhstan. Combined, the 18 projects may produce 1.6 million boe/d at plateau, 66% gas-weighted, at a cost of $60 billion ($8.00/boe), using an average time to first production from FID of three years.

Norway's Statoil ASA and BP plc "both sanctioned three operated projects" last year, and Norway was the most active region with five projects. However, BP in December pulled the trigger for the $9 billion Mad Dog Phase 2 project for the Gulf of Mexico (GOM).

In its outlook, Wood Mackenzie also outlined projections for exploration and production (E&P) spending, some of which mirror other analyst forecasts. Capital expenditures (capex) for new developments and existing project spend is seen rising worldwide by 3% to $450 billion. U.S. unconventionals spend alone is expected to be around 25% higher than in 2016.

Evercore ISI also predicted U.S. E&P capex could increase by as much as 24.5%. Raymond James & Associates Inc. is predicting a "massive" capex surge for U.S. E&Ps, and other analysts are forecasting rising enthusiasm.

However, Wood Mackenzie sees capital outlays by the oil majors still trending lower, with combined development investments forecast to decline by around 8% as spend in recent capital-intensive projects, particularly in deepwater and liquefied natural gas, winds down.

This year "will demonstrate how efficient the industry has become, showing projects in better shape all around," said Wood Mackenzie's Malcolm Dickson, principal upstream analyst.

Capex in 2017 still is expected to be 40% lower than during the champagne days of 2014, as E&Ps retreated to smaller, incremental projects and slashed spending. Today, however, the mood is "cautiously optimistic."

Less Costs, Higher Output

Production is forecast to grow by an average 2% across Wood Mackenzie's corporate service universe, " impressive given development spend was slashed by over 40% between 2014 and 2016. All eyes will be on how quickly the U.S. tight oil sector responds to rising prices."

U.S. tight oil production declines are seen bottoming in 1Q2017, with output growing by 300,000 b/d over the course of the year.

The U.S. Energy Information Administration, in its latest Short-Term Energy Outlook issued Tuesday, said Lower 48 natural gas and crude oil production should trend higher in 2017, with crude output averaging 6.8 million b/d, up slightly from 2016.

Mirroring myriad forecasts, Wood Mackenzie said the recovery in U.S. oil volumes this year will be led by the Permian Basin.

U.S. independents overall are expected to respond first to rising commodity prices, leveraging their "advantaged assets and access to capital," researchers said.

"The U.S. unconventional sector exemplifies how operational efficiencies can offset low capex and potentially even cost inflation. There has been a dramatic increase in efficiency in the sector, exemplified by the drillers, who are managing to complete wells up to 30% quicker."

There's "potential for a further improvement in drilling speed of 20-30%" for early-life plays that include the Permian Basin's Wolfcamp formation and Oklahoma's myriad stacked reservoirs.

Uncertainties are built into the 2017 forecast, as the incoming Trump administration's policy plans and potential actions by a GOP-led Congress remain unclear. Operators face more scrutiny under low-carbon protocols agreed to in the United Nations climate change accord. And global oil production totals for 2017 are uncertain following an agreement to reduce output through May by members and allies of the Organization of the Petroleum Exporting Countries (OPEC).

Discipline, Deleveraging Dominate

In any case, the industry should “turn cash flow positive for the first time since the downturn if the implementation of OPEC production cuts drives oil prices above $55/bbl," said Wood Mackenzie’s Tom Ellacott, senior vice president of corporate analysis.

"Capital discipline and deleveraging will remain dominant themes, but companies will increasingly look for opportunities to adapt and grow, spurred on by OPEC's move to boost prices," said researchers. "The industry will continue to reposition portfolios lower down the cost curve and, at a more cautious pace, into new energy."

The Permian will be at the fore for tight oil, while Brazil's pre-salt offshore discoveries should lead to higher output, as "both...have materiality and among the lowest development breakevens globally. Some of the larger players may instead choose to focus on low cost opportunities in resource-rich regions such as Russia and the Middle East."

Deepwater projects, typically the most expensive because of the infrastructure impediments, remain challenged. However, there is a bit of optimism for the sector.

About one-third of the predicted FIDs to be made this year are expected to be deepwater projects as costs also have declined. Even some massive GOM projects are profitable with oil prices above $40/bbl.

Many of the projects slated for FID in 2017 are competitive with tight oil, but many longer-term deepwater pre-FID developments are still out of the money, according to researchers. Of the 40 larger pre-FID deepwater projects, around half fail to hit a 15% IRR at $60/bbl," Wood Mackenzie said. However, "likely" candidates for FIDs this year include Royal Dutch Shell plc's Kaikias in the deepwater GOM; ExxonMobil Corp.'s Liza project offshore Guyana and Petroleos Brasileiro SA's Sepia in Brazil's deepwater.

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