Global oil and natural gas upstream spending is climbing sharply higher from initial 2022 forecasts, with North America likely looking at a 33% jump from last year.

upstream capex graph

Evercore ISI last December in its global upstream capital expenditure (capex) survey, said the average increase over 2021 would be 16%. However, exploration and production (E&P) companies worldwide now are set to raise capex by 22% through December, in line with natural gas and oil demand. 

“The Russia/Ukraine War has accelerated the new recovery underway, with growth accelerating as operators pull forward spending plans in a realigned global energy order,” the Evercore analyst team said. 

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North American (NAM) capex plans since the start of the year have accelerated by 1,200 basis points (bps) to 33%. U.S. E&Ps are leading the way, with spend now predicted at around 36% from 23% last December. Canada E&Ps should increase spending by 17%. 

It’s not an apples-to-apples breakdown, however. Percentage-wise, the public and private E&Ps are prepared to outspend the majors and national oil companies (NOC).

“Private and independent operators are leading the recovery, with capex growing by 56% and 42% respectively, while more modest growth of 25% and 19% is anticipated from the majors and NOCs,” the analysts said.  

“Majors account for almost 30% of U.S. capex, while independents including privates account for 70%.”

Still, the increased domestic spending forecast for 2022 may be too low, analysts said.

“In the U.S., despite a steady chorus of capital discipline and a remarkable return of capital to stakeholders, capex is poised to increase by 36% in 2022. We believe our estimates could be too low, as the growth in private operators and consolidation has increased this pool of operators.

“Privates make up less than 20% of our U.S. E&P capex estimate, which is well below their 60% share of the land rig count. Nevertheless, we believe our survey accurately captures the directional change in spending plans, with the group accelerating from a 41% increase in 2021 to 56% growth in 2022.”

Corporate mergers, bankruptcies and dissolutions also have led to a “structurally smaller NAM market that is 22% of global E&P capex and remains more than 60% below the 2014 peak,” according to Evercore. “From a lower base, we believe the setup is positive for growth in 2023 and beyond.”

Strong Fundamentals

Concerns about a recession are real, but “the fundamentals for E&P upstream spending are the strongest they have been in recent memory, fueled by years of under-investment and energy security and reliability concerns, which are unlikely to change for the next decade.”
International E&P spend is set to jump by 18% in 2022, up 400 bps from the December survey results. 

“All regions are in recovery mode, with spending growth led by the Middle East at 23%, followed by India, Asia and Australia at 19%, Latin America at 18%, and Europe at 16%,” the research indicated. “More subdued growth of 13% is anticipated in Africa, the lone region where spending growth contracted, likely due to delays in contracting…with service costs rising and availability tightening. We believe higher service costs are also driving an 8% increase in spending by Russian/Former Soviet Union companies.”

Notably, one-half of the respondents in the survey “would revise their second half 2022 budgets due to changes in oil and gas prices, with almost one-third increasing while only 15% would cut spending if prices fall.” 

E&Ps and the oilfield services sectors continue to stress capital discipline, the analysts noted. However, many respondents said they would boost activity “by varying amounts corresponding to changes in the oil price,” the analysts said.

Increasing activity by many in the sector “implies a good setup for a multi-year recovery rather than a race to grow production that has defined the oil and gas markets over the past two decades.”

For 2022, E&Ps are using an average Henry Hub natural gas price of $5.18/Mcf, with a West Texas Intermediate (WTI) oil average of $84/bbl and Brent crude at $85. E&Ps are using average price decks in 2023 of $5.07 Henry, $83 WTI and $86 Brent.

“More than half of our survey respondents plan to increase spending in 2023, with an equal number planning to increase spending by more than 25%,” with other respondents looking to hike spend by 5-10%.