Upstream operators are set to sanction up to 50 new large oil and gas projects next year, up from 40 in 2018, with deepwater oil developments in Guyana and Brazil and liquefied natural gas (LNG) projects leading the way, energy consultancy Wood Mackenzie said this week.
‘Capital spending discipline’ will continue to be most of the companies’ key words for 2019, and this conservative expenditure approach since the 2014 oil price crash has made upstream players well prepared to withstand oil price turbulence next year, according to WoodMac.
On the flip side, continued capex discipline has resulted in significantly reduced upstream investments during the downturn.
Although investment in oil and gas exploration and production next year is expected to grow from the lows of 2016 and 2017, it won’t be enough to guarantee projects with resources capable of meeting future demand growth and at the same time to offset the rate of decline from maturing oil and gas fields, Wood Mackenzie’s upstream research director Angus Rodger told Reuters.
Companies will spend a total of US$425 billion in the upstream in 2019, up from US$400 billion in 2016 and 2017, but significantly below the US$770 billion spending in 2014, before prices crashed from $100 a barrel.
Despite an uptick in global spending on oil and gas development, the upstream recovery is much slower and shallower than in previous cycles, with current investment levels insufficient to meet future demand growth, WoodMac said at the end of October.
Exploration austerity and the cherry-picking of projects will continue to drive the capital budgets of the upstream players globally, at least in the near term, while decision-making will still hinge on a lot of uncertainties, including the price of oil and the pace of the energy transition, Wood Mackenzie noted two months ago. Related: Big Oil Stocks Crash As Crude Prices Tumble
Global oil and gas development expenditure will need to rise by around 20 percent in order to meet future demand growth and make sure that oil and gas firms will sustain their production in the next decade. WoodMac estimates that annual development expenditure has to rise to around US$600 billion so as to meet future demand for oil and gas through the next decade. Yet, it doesn’t expect upstream players to rush to significantly boost investments.
Companies are still careful about spending beyond their means amid uncertainties over supply and demand and where oil prices will be heading next.
Yet, it will be this conservative planning that would help E&P firms to thrive in 2019, according to WoodMac’s upstream and corporate outlook reports.
“Oil and gas companies can cope with whatever’s thrown at them in 2019,” senior vice president Tom Ellacott said. “Portfolios are set to weather low prices, and the recent slide in prices justifies the sector’s conservative mindset. In our view the commitment to capital discipline will not budge entering the new year.”
Should oil prices rise to $70 a barrel or above, there might be temptation and pressure to return more cash to shareholders, but companies will be careful not to overspend and raise investments too quickly, according to WoodMac. Related: Libya Declares Force Majeure On Largest Oil Field
Many companies will prefer to cut down on debt and “keep their powder dry” for opportunistic mergers and acquisitions, the consultancy said.
One area in the world, however, will continue to attract a lot of capital investment, led by the oil majors—the U.S. shale patch.
“Permian mega-deals defined 2018, and we expect more in 2019,” Rodger said. “After spending nearly US$35 billion on tight oil acquisitions in 2018, the Supermajors and bigger Independents are serious about ensuring long-term success.”
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WoodMac sees pipeline constraints limiting the Permian oil production growth to 650,000 bpd in 2019, after eclipsing 1 million bpd of growth in 2018. Relief for Permian operators is expected in Q3 2019 with new pipeline capacity coming online, according to the consultancy.
In terms of conventional discoveries, WoodMac sees 2019 as another promising year, with hotspots to feature Guyana, Brazil, Mexico, the U.S. Gulf of Mexico, Cyprus, South Africa, and the Barents Sea in Norway.
By Tsvetana Paraskova for Oilprice.com
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