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Optimism Reigns

picture of JPT Editor John DonnellyThis year promises to be another one of healthy upstream spending. Perhaps the only thing that can derail the optimistic outlook is the global economy.

Strong oil prices will lead 2012 worldwide E&P spending to a record high of USD 598 billion, according to a new report by Barclays Capital, which annually tracks oil and gas industry upstream spending. That reflects a 10% increase over 2011 E&P spending, which also set a record, according to the survey of 350 oil and gas firms. But Barclays notes that the rate of growth will be slower than last year’s because of the global economic uncertainty that is hanging over most industries. If that uncertainty were to disappear, the E&P forecast would appear very conservative, the report said.

Spending is forecast to increase by 8% within North America and by 11% outside of it. The increase in spending is across the board, with strong increases in the former Soviet Union and CIS countries (42%), Latin America (21%), and Africa (14%), and smaller increases in Europe and the Middle East. Latin America is seeing aggressive E&P spending by Brazil’s Petrobras, Colombia’s Ecopetrol, and Mexico’s Pemex. Mexico is trying to reverse rapidly declining production rates and Colombia is trying to jump-start an upstream profile that has largely languished since the mid-1990s. Brazil is forging ahead with its promising pre-salt development. Other large upstream spenders this year are expected to be ExxonMobil, PetroChina, Lukoil, and Chevron.

The survey said that oil and gas companies were basing their 2012 capital spending budgets on an average oil price of USD 87 a barrel for West Texas Intermediate and USD 98 a barrel for Brent. Global benchmark Brent was set to finish 2011 at its highest annual average price, in both real and nominal terms, since the modern oil industry began, according to an IHS Cambridge Energy Research Associates analysis released just before the end of the year. Continued strong global demand, concerns about supply constraints in some regions, and higher production costs all combined to support the record-level price. Brent was expected to average USD 111/bbl last year.

In short, the supply/demand balance and higher labor and material costs are driving the highest prices. Upstream production in challenging areas is also a factor. Drilling in North America should continue to be strong, although low natural gas prices have caused companies to shift away from gas and toward liquids plays. Companies responding in the Barclay’s survey said that the biggest factor in determining their North American activity was oil prices, followed by gas prices and then cash flow. Spending growth in North America is forecast to last until at least 2015.