(Offshore Engineer) Believing that major spending cuts are over, Wood Mackenzie expects global upstream capital expenditures to grow slightly in 2018 to a total of US$400 billion.
The downturn resulted in nearly $1 trillion being taken out of company spending from 2015 to 2020. But the consultancy believes that oil and gas companies are poised to enter 2018 in their best shape since oil prices collapsed, and will now focus how showing they can thrive in a low-price environment, Wood Mackenzie reported today (14 December) in its 2018 Upstream Outlook.
“Now that the belt-tightening is done, companies are looking to deliver profitable growth and build for the future,” said Tom Ellacott, senior vice president of Wood Mackenzie, in a 14 December statement. “We also expect to see signs that the investment cycle is starting to turn and the sector has reset itself to operate at lower commodity prices.”
This shift is all the more impressive, given that the LNG cliff has arrived: LNG spend will plummet by $16 billion – roughly 40% – as major projects in Australia and Russia are completed, said Angus Rodger, upstream research director, Wood Mackenzie. “The resulting investment gap will be filled by unconventionals and deepwater projects, with spend to rise 15% for both. The growth in deepwater comes after three years of decline, signalling this key resource theme is back on track.”
Wood Mackenzie forecasts a third successive increase in project sanctions from the 2015 low, another sign that recovery is under way. Wood Mackenzie expects the number of major project sanctions to increase from just over 20 in 2017 to 25 in 2018, as operators take advantage of what may represent their best chance to lock in rock-bottom costs.
“The rise in project sanctions will be a clear sign that new projects can work in a low-price environment,” said Ellacott. “Oil and gas companies will continue to adapt portfolios to perform at high and low prices and also to provide a platform for longer-term energy transition.”
“Optimizing the core business, controlling costs and employing digital technology like predictive analytics will all play a part. We expect companies to continue to develop high-value, low-cost oil. Building exposure to gas will also be a core strategic objective for most larger companies as they transition towards low-carbon portfolios. This process will include small-scale investments in renewables to bring more optionality in wind, solar and power markets,” Ellacott said.
Business developers will look to capture prime discovered resource opportunities. Wood Mackenzie expects Iran and the United Arab Emirates to award at least 10 billion boe of discovered resources next year. There’s also growing interest in Latin America, where around 10 billion boe of deepwater resources could be auctioned in Brazil alone.
Companies will need to find the right formula to win back investors after a year of poor stock market performance in 2017. Demonstrating that free cash flow can grow in a low-price environment and fund higher shareholder distributions will be a core focus. Companies must also build a compelling case for long-term investment. This may not happen in one year, but they will need to show clear progress in 2018.
Looking at the upstream sector as a whole, Wood Mackenzie expects more activity from the Asian national oil companies as they tackle structural production declines. Meanwhile, the majors will continue to cherry-pick opportunities, building on the great progress already made in repositioning portfolios for lower prices.
