Oil prices have seesawed over the past few years, still far below the pre-2014 highs, but upstream spending is expected to continue to rise in the years ahead, according to a new report from Morgan Stanley.
"Global upstream capex - more muted growth, but still a positive trajectory from here," the investment bank wrote in a note to clients. Spending should rise by 6 percent CAGR through 2022, Morgan Stanley said, which is down from its prior estimate of 8 percent, largely because of the recent downturn in oil prices.
Between 2019 and 2022, global upstream spending rises from $461 billion to $554 billion. That comes after several years in which spending hovered at around $450 billion. It should be noted, however, that spending will not reach the 2014 peak of well over $700 billion for the foreseeable future, if ever.
Crucially, there is an "inflection point" where oil spending rises and falls. Morgan Stanley says that oil needs to trade above $50 per barrel for WTI and $60 per barrel for Brent for the industry to steadily ratchet up spending. Anything below that level and the expected spending increases go out the window.
In fact, the investment bank says that the oil industry would see a 20 percent decrease in cash flow if Brent averaged $50 rather than $60. Global spending would contract by $100 billion if oil prices averaged $10 per barrel less.
U.S. shale is expected to continue to play a key role in driving spending levels higher, even though many shale drillers are burning through capital and are trying to convince their shareholders that they will dedicate themselves to capital discipline. Red ink continues to pile up and some even within the industry think that this problem is not going away anytime soon.
Morgan Stanley sounds more optimistic. "While investors have called for a much more restrained spending outlook, we expect that higher cash flows from shale production growth will enable both higher capex and higher capital return to shareholders," the investment bank wrote. Spending in North America could fall by 5 percent this year, but should rebound a bit next year before growing more substantially in 2021-2022, Morgan Stanley predicted. Shale will be one of the dominant sources of supply growth going forward, which, to be clear, is a prediction that few dispute.
In the short run, spending and production growth in North America will come mostly from the majors. This reflects the increasingly apparent bifurcation of the shale industry, one in which small and even medium-sized shale companies are getting squeezed by the encroachment of the majors. High land prices, a loss of access to capital, and a falling out of favor with investors more generally has smaller drillers scrambling. Some are hoping to be bought out. Others are battening down the hatches, cutting spending or otherwise looking for asset sales. Meanwhile, the majors are ramping up drilling and spending in places like the Permian basin.
Another significant source of spending growth will come in the form of LNG. The market is still reeling from a surplus, but the majors view gas exports as a key source of growth for years to come. A wave of new terminals are coming online in 2019, largely from the U.S. and Australia, which should keep the market well-supplied for several years. But, analysts have also warned that there could be a supply shortfall in the mid-2020s. These projects take several years before they come online, so investments made today are made with an eye on the mid-2020s market. "We expect substantial project sanctions over the next two years to drive out-year capex growth in the US, Australia, the Middle East, Russia, and Africa," Morgan Stanley said.
Finally, offshore oil spending also inches higher after hitting a low point in 2018 at $121 billion (down by more than half from the $268 billion spent in 2014). Morgan Stanley sees offshore spending rising to $171 billion in 2022, even as the oil industry's long-term viability is increasingly in doubt. "We sense high degrees of market skepticism around the growth trajectory for offshore markets, but the combination of a robust project list and sustainable reductions in offshore project breakevens will drive some of the highest levels of offshore greenfield project sanctioning in years for 2019-20," Morgan Stanley concluded.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More