Tempered Optimism

Numerous reports suggest that the worst of the oil industry downturn is decidedly over, and that the outlook for renewed capital spending this year is positive. Some firms are even hiring again. But production is also rising, which will moderate oil price increases.

Industry E&P spending is on the upswing but remains well short of spending levels reached 2-3 years ago. Oil and gas firm upstream expenditures will increase 3% this year to USD 450 billion, reversing 2 years of steep decline, according to Wood Mackenzie’s latest global upstream outlook. Spending this year, however, will still be roughly 40% below 2014 expenditures.

Most of the spending increase this year will be in US shale, according to Wood Mackenzie, because that resource is less expensive to produce and wells can quickly come on line. US shale has emerged as the global market’s “swing producer” in the past couple of years, as output quickly ramped up or declined based on oil prices. That role was formerly held by Saudi Arabia, which would increase or decrease oil flows into the market to moderate prices.

The consultancy forecasts that oil prices will average USD 57/bbl this year, gradually rising to USD 85/bbl in 2020. If oil prices stay higher than USD 50/bbl, independents could increase spending by as much as 25% this year, Wood Mackenzie says, but spending by larger operators will be more conservative.

It also sees new life in new projects, predicting that more than 20 major developments will go forward this year, a third of them in deep waters. Several independents have already signaled higher capital budgets this year, including Pioneer Natural Resources and Diamondback Energy.

Other reports also are optimistic about an oil industry rebound. Rystad Energy predicts that new offshore production capacity of 15 billion bbl will be approved this year, tripling last year’s total. And a Barclay’s survey of more than 100 E&P com­panies shows upstream capital spending could rise by an average of 7% this year.

The US Energy Information Administration (EIA), which earlier predicted a slight decline in US production this year, reversed its forecast last month. It now predicts an increase in total US output from 8.9 million B/D in 2016 to 9 million B/D this year and 9.3 million B/D in 2018. The increase will come from increases in tight oil production, drilling efficiency, and better well productivity. The EIA predicts that WTI prices will average USD 52/bbl this year and USD 55/bbl in 2018, as the increased production keeps the global supply/demand in balance.

Tempered Optimism

John Donnelly, JPT Editor

01 February 2017

Volume: 69 | Issue: 2