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Capital Spending Declines

John Donnelly, JPT Editor

JPT Editor John DonnellyBoth international and national oil and gas companies are putting tighter reins on capital spending this year, which is not only affecting merger and acquisition activity but could also impact expensive deepwater projects and total global oil supply growth.

The industry often must maneuver between the long-term view of financing complex, costly projects and appeasing short-term shareholder demands. This year is no different. After hearing repeated complaints from the investment community on what it sees as lackluster performance amid historically high oil prices, several large firms cut back spending this year. Most notable to cut were the largest Western majors ExxonMobil, Chevron, Total, Shell, and BP, according to investment banker Morgan Stanley. These integrated majors are cutting capital spending by 10% this year compared with 2013 to a total of USD 33 billion, according to Energy Intelligence Research and Advisory. Morgan Stanley now predicts that global oil supply growth will rise to just under 6 million BOPD before falling to 4.7 million BOPD during 2016–18.

With deepwater and ultradeepwater projects among the most costly, calls have arisen for the large operators to wring more efficiency out of operating costs. At last month’s Offshore Technology Conference in Houston, John Westwood, chairman of the well-watched Douglas-Westwood consultancy, said that “business as usual is not an option.” He noted that capital expenditure has increased 374% in the past 13 years because of rising demand, difficult technical challenges, the technical skills shortage, local content requirements, and project management issues. During that time, several offshore projects ran into significant delays and cost overruns.

The industry has a habit of “over-engineering” projects, Westwood said, and needs to return to fit-for-purpose engineering and look for ways to standardize. In addition, the industry needs incentives to bolster R&D and technological solutions demanded by these complicated deepwater projects.

But the medium-term outlook for deepwater spending remains robust. Douglas-Westwood forecasts that it will grow by approximately 130% over the next 5 years to USD 130 billion. The consultancy believes deepwater capital spending will be especially robust after 2016, sparked by projects in Latin America, west Africa, and new developments off east Africa. Recent deepwater natural gas discoveries in Mozambique and Tanzania as well as in the Orca field offshore Angola will require heavy investment, but promise large payoffs. Before 2016, however, the industry’s spending emphasis will be placed on shallow-water developments.

The drop in capital spending by the Western majors as well as Asian national oil companies is affecting the mergers and acquisitions (M&A) landscape. In the first quarter of this year, M&A activity was 28% lower than the average quarterly M&A spend over the past 3 years, according to Evaluate Energy. That confirms a report issued by the US Energy Information Administration that tracked expenditures since 2000. The data collected from filings with the US Securities and Exchange Commission on 42 producers revealed that worldwide spending on upstream acquisitions fell by USD 17 billion last year.