Exploration and production (E&P) spending this year is forecast to jump by 8% to $353 billion among more than 110 of the largest publicly traded producers, with the largest North American producers boosting their capital spending by 24%, according to the newly released IHS Herold 2010 Global Upstream Capital Spending Report.
An initial IHS Herold study of 65 oil and gas producers issued in February had predicted a 7% total increase in spending this year (see Daily GPI, Feb. 11). North American E&Ps in the initial survey predicted they would spend 22% more this year than in 2009.
“This is a nice turnaround from the 22% decline in upstream spending in 2009, when the global recession and tight credit markets made companies rein in upstream spending,” said IHS Herold Senior Equity Analyst Aliza Fan Dutt.
“The market conditions have improved, which is reassuring, and WTI [West Texas Intermediate] prices have hovered between $70 and $80 per barrel during the past few months. Steadier oil prices, combined with continued uncertainty over the near-term outlook for natural gas prices, are driving some E&Ps to shift their focus from gas to oil.”
However, “this shift comes with a caveat, since following the explosion and oil spill in the Gulf of Mexico, there is growing uncertainty in the industry over possible changes in government regulations and taxation relative to oil and gas drilling,” she noted.
“As a result, we expect some shifts in E&P spending from deepwater to onshore U.S. and, to a lesser extent, overseas plays, due to increased risks associated with drilling in the deepwater Gulf of Mexico. In addition, the uncertainty over the causes of the Deepwater Horizon oil blast and government restrictions on deepwater drilling will dampen activity in the U.S. offshore waters.”
The potential long-term impact of the Deepwater Horizon incident on E&P capital spending will not be known for some time, but “regulatory and safety requirements will be heavily scrutinized, which will likely translate to higher oil service costs,” she noted. “These higher operating costs, and, hence, increased capital spending, will likely occur gradually, though, over an extended period of time.”
Despite increased costs and related capital spending, there may be benefits from the incident in the form of increased transparency and the implementation of tougher safety measures and emergency response provisions within the oil industry, Dutt noted.
Most U.S. E&Ps already had begun to tout their increased exposure to onshore liquids production, the report noted. Many natural gas-focused producers are shifting to oil drilling or are highlighting their exposure to liquids-rich unconventional gas.
“Conventional gas development is being severely cut back,” Dutt noted, “while prolific shale gas plays such as the Marcellus and Haynesville continue to drive spending among many E&P companies.”
Decreased spending in the past two years led to a decline in demand for equipment, which in turn translated into lower oilfield service costs, which now are 15-20% below the peak prices and demand of 2007-2008. Lower oilfield service costs should help oil and gas producers stretch their dollars even more, but with increased upstream spending this year, rig prices may increase, the report noted. Last year the combined integrated oils peer groups cut capital spending by 14% mostly because of big reductions by the North American integrated oil companies, the report said. However, spending by the integrated oil companies is expected to rebound 5% this year.
After dropping almost 40% in 2009, spending by E&Ps also is forecast to jump 21% because of higher oil prices and the need to increase production.
“More economical gas shale plays and liquids continue to be red hot, driving much of this year’s upstream spending for this group,” noted IHS Herold analysts. “Particularly attractive are shale plays that yield significant oil and liquids, such as the Eagle Ford Shale play in South Texas.”
Last year as the credit market deteriorated, small U.S. E&Ps slashed their capital spending by 61%, the report noted.
“What a difference a year makes,” Dutt said. “The improved economy has opened up new sources of capital, which should result in a 62% increase in spending for these small companies, which is the most dramatic rise in spending among all peer groups.”
Global integrated oil companies, which represent more than one-quarter (28%) of the total spending among companies in the IHS Herold study, are forecast to cut capital spending by a “modest 2%” in 2010. However, the integrated companies outside North America are seen raising their spending by 12% this year “on stronger spending in Russia, Latin America and Asia. Offshore development will fuel a 23% increase in spending at Petrobras.” For U.S. integrated oils, upstream spending, which fell 26% in 2009, is forecast to jump 13% this year, “primarily due to brightening prospects in the North American upstream.”
For example, Hess Corp. has plans to boost its capital spending by 26% this year, with most of the increased spending directed to the Bakken Shale play. Capital budget “rationalization” following Suncor Corp.’s merger with Petro-Canada last year “is the primary reason for the expected 8% drop in upstream spending among the Canadian integrated companies,” the report noted. Meanwhile, the Canadian E&P trusts “should boost capital spending by 44%, a reversal of the 5% decline last year. All companies in this peer group are expected to increase spending.” E&Ps have enjoyed higher spending increases this year but not ever energy sector has benefited, noted IHS Herold’s report.
Depressed natural gas prices affected the U.S. pipelines, power and diversified energy group, which can expect an 8% cut in total spending this year, analysts said. “On a positive note, this is less severe than the 27% decline in spending the group experienced in 2009.”
©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |