Capital spending on exploration and production (E&P) by 139 publicly traded oil and gas companies is expected to increase to $406 billion this year, a 12% increase compared with 2010, according to a report from IHS.

“Although this modest increase is less than the 19% rise in 2010, oil and gas companies, many of which decreased spending considerably during the economic downturn of two years ago, are continuing to increase their investments in their upstream portfolios, particularly for oil-weighted projects,” said IHS analyst Aliza Fan Dutt. “Despite recent volatility and a wobbly economic recovery, oil prices remain relatively strong, which supports higher upstream spending. In addition, investments in oil and unconventionals continue at a rapid clip, while conventional gas outlays remain relatively depressed.”

A shift to drilling on oil and liquids-rich properties that began in 2010 accelerated through this year, according to the IHS Herold Global E&P CAPEX Review. Companies that shifted their portfolios earlier will benefit more than those that moved more slowly, Fan Dutt said.

“Cost inflation will continue to be a key issue, with more companies competing for oil services and equipment during a time of elevated oil prices,” said Fan Dutt. “Cost containment will be particularly important for natural gas-weighted producers as they struggle to achieve strong margins amid weak natural gas prices.”

The largest chunk of spending will come from U.S. E&P master limited partnerships (MLP), which will increase their spending 43% this year, according to IHS. Those MLPs, which are riding strong cash flows from a predominantly crude oil base, also increased spending 83% in 2010, the analysts said. Companies in the “U.S. Pipelines, Power and Diversified” category are expected to boost upstream spending by 49%, “which is largely tied to infrastructure investments needed to support the tremendous influx of gas production.”

Mid-sized U.S. E&Ps are expected to see a 25% increase in spending, while companies in the “Canadian Integrated Oils” and “Outside North America Integrated Oils” peer groups will increase their spending by 13%, IHS said.

Companies in the “U.S. Integrated Oils” category are expected to increase their spending by 14% this year, led by Marathon Oil, which is ramping up its spending by 37% as it drills on expanded U.S. acreage in the Anadarko Woodford play, the Niobrara play in the Denver-Julesburg basin in Colorado and Wyoming and in its Bakken shale position (see Daily GPI, Feb. 3).

The “Global Integrated Oils” peer group will increase E&P spending by an average 9%, down slightly from last year, while companies in the “Largest North American E&Ps” group are expected to increase capital outlays by 3%, which will be buttressed by spending on unconventional resources in shale basins, according to the report.

The IHS report follows Barclays Capital’s recent mid-year global E&P survey of more than 400 energy companies, which indicated that capital spending is on track to jump 16% year/year to $529 billion from $458 billion (see Daily GPI, June 14). E&P companies are more confident about spending now than they were late last year, according to Barclays.

Last December E&Ps had predicted they would spend about 8% more in North America and 11% more globally than in 2010 (see Daily GPI, Dec. 16, 2010).

©Copyright 2011Intelligence 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.