Oil Industry Starts Revival as Project Approvals to Double
The oil industry will shake off the effects of the biggest downturn in a generation this year as they more than double project approvals and increase exploration spending for the first time in three years, according to Wood Mackenzie Ltd.
Companies will green-light more than 20 oil and gas fields for development compared with nine in 2016, the Edinburgh-based industry consultant said in a report Wednesday. Drillers, led by U.S. shale operators, will also increase spending on exploring for new oil and developing existing projects by 3% to $450 billion following two years of cuts.
The outlook is improving after a 2 1/2-year slump that bankrupted some companies and forced those that survived to curb billions of dollars of spending, mothball projects and take a hit on earnings. Producers also renegotiated contracts to squeeze suppliers and reduce costs. This and rising oil prices since the Organization of Petroleum Exporting Countries Nov. 30 decision to cut production is helping the industry recover.
“The cycle we’ve just been through, we believe we’re coming out of that cycle,” said Malcolm Dickson, a principal analyst at Wood Mackenzie. “We are cautiously optimistic.”
About a third of the oil and gas fields that are likely to go ahead this year will be located in deep waters, he said. These are typically the most expensive to develop. Companies have managed to bring down the cost in some projects in the U.S. Gulf of Mexico to make them profitable with oil prices above $40 a barrel, Dickson said. Benchmark Brent has held above $50 a barrel this year and traded 0.8% higher at $54.09 on the London-based ICE Futures Europe exchange as of 9:28 a.m. local time.
Likely Candidates
Exxon Mobil Corp.’s Liza project in Guyana, Royal Dutch Shell Plc’s Kaikias in the deepwater Gulf of Mexico and Petrobras Brasileiro SA’s Sepia in Brazil are likely candidates for final investment decisions in 2017, he said.
Beyond 2017, there are still many projects that have break-even costs higher than $60 a barrel. Of the 40 larger deepwater projects that are moving toward approval, about half have a rate of return less than 15 percent at a $60 oil price, according to Wood Mackenzie.
Spending is picking up fastest in the U.S., where operators can respond quickly to higher oil prices. Spending on U.S. onshore projects is likely to grow 23% to $61 billion, according to the report. In much of the world outside the U.S., including the U.K. North Sea, exploration spending is likely to decrease, Dickson said.
Oil Spigot Not Wide Open
While the outlook is improving, global upstream spending in 2017 will remain 40% below 2014, Wood Mackenzie said. Project approvals will also be below the 2007-2014 average of 40 a year. Explorers, still recovering from oil’s collapse, aren’t ready to turn on the tap just yet.
“For us this will be about not starting to run too fast,” Statoil ASA Chief Executive Officer Eldar Saetre said at a conference in Oslo last week. “There won’t be a lot of new activity initiated when it comes to larger projects in 2017.”
Though Brent oil had its best year since 2009 last year, with prices surging 52%, it remains about half its value in mid-2014. Prices are down more than 4% this month amid concerns about how effective the OPEC supply cuts can be if U.S. output rises.
“Most players will be hedging their bets because there’s still some uncertainty where oil prices are going to land,” said Tom Ellacott, a vice president of corporate analysis at Wood Mackenzie. However, “companies now believe they have reset their portfolios to operate at these sort of low prices that we have been seeing.”
By Rakteem Katakey
