Until recently, oil industry analysts and executives were lamenting the slump in global investment in upstream oil, and many continue to predict a looming oil supply shortage in the early 2020s, when the sector will feel the pinch of the plunge in major project investment during the downturn.
But higher oil prices and lowered development and project costs have lately led to cautious optimism and measured risk-taking within the industry that is set to see an uptick in global oil investment this year, energy consultants Wood Mackenzie say.
While much of the investment increase is happening in U.S. onshore—with shale companies lifting 2018 budgets by 15-20 percent in response to higher prices—conventional oil project investment around the world is also coming back, especially in top offshore areas where project economics are competitive with U.S. tight oil, says Simon Flowers, Wood Mackenzie’s Chairman and Chief Analyst.
As early as in December last year, Wood Mackenzie said that it expected global capex to grow slightly in 2018 to US$400 billion, as the sector had already made the big cost cuts and repositioned itself for profit in the lower-oil-price world. During the downturn, close to US$1 trillion was taken out of company spending from 2015 to 2020, Angus Rodger, Upstream Research Director, said back then.
The International Energy Agency (IEA) predicted last month a modest rise in 2018 investment, after a flat 2017 following a slump by 25 percent in each of 2015 and 2016. Investment is currently focused on U.S. shale, and investment in large conventional projects “may be inadequate to avoid a significant squeezing of the global spare capacity cushion by 2023, even as costs have fallen and project efficiency has improved,” the IEA said.
WoodMac now predicts that operators will lift their budgets by an average 5 percent this year, but the recovery is uneven across areas, projects, and operators, as companies are still cautious. Nevertheless, the high number of project sanctions at the end of 2017—especially if compared to the two previous years—points to a broader recovery in global upstream investment.
Last year, 32 projects were sanctioned, with reserves totaling 12 billion barrels of oil equivalent (boe), with oil/gas reserves split evenly. This compares to just 14 projects approved in 2016 and only 9 in 2015. Related: An Oil Price Rally Is Likely
However, both the spending and reserves per project were the lowest in a decade—with average spend at US$2.7 billion and reserves average at 376 million boe. Companies are now overcoming the cost hurdles in the low oil prices with phased developments and projects close to existing infrastructure.
Although this trend for smaller projects may cause one to wonder if this industry is spending enough for the future, last year’s projects showed that operators targeted a much wider range of geographies compared to 2016, when the focus was primarily on onshore projects and big gas developments that had very stable cash flow profiles and low sensitivity to oil prices. In 2017, companies returned to deepwater projects and lifted the share of oil projects in the mix of projects approved, WoodMac says.
“The halving of global deepwater development costs in three years to an average of just US$8/boe is a key factor,” the consultancy noted.
Another factor for the return of deepwater is world-class offshore discoveries such as Brazil’s Libra and Guyana’s Liza whose phased developments have some of the lowest breakevens among new projects and are competitive with U.S. shale.
The projects likely to receive final investment decisions (FIDs) this year have average breakeven costs of US$44/barrel, which is 15 percent lower than the average breakevens of the projects approved in 2017. WoodMac expects the lowered breakeven costs to lead to another year of more than 30 FIDs this year that would further diversify project types and resources. Company budgets globally vary widely, but Wood Mackenzie expects this year more firms to show a “measured approach to risk”.
The vast resources offshore Brazil and Guyana are largely seen as the top-quality top-economics offshore projects capable of competing with U.S. shale breakevens. But the industry has cut costs across all areas, and even in European offshore, the number of sanctioned projects is bouncing back from the 2015-2016 lows. Related: Will Gazprom Leave Ukraine Forever?
Offshore developments are making a comeback, with Norway leading the pack, Rystad Energy analysts said earlier this year. Norway was the largest contributor to offshore developments in 2017 with US$18 billion worth of projects, followed by the United States and Mozambique, the analysts noted.
In the UK offshore, Rystad expects operators to reach a FID on 13 UK fields this year, compared to just four UK fields sanctioned in the past two years.
The trade association Oil & Gas UK expects 12 to 16 oil and gas developments to receive approval in 2018—more than the FIDs over the last three years combined—and unlocking investments of around US$7 billion (5 billion pounds).
Globally, upstream investment is making a comeback as operators have become more optimistic now that the cost cuts are paying off in the form of significantly lowered breakeven costs.
By Tsvetana Paraskova for Oilprice.com
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