E&P spending to top $700 billion globally in 2014

Global E&P spending is poised to reach a new record of $723 billion in 2014, up 6.1% from $682 billion in 2013. This year should mark an acceleration of growth in North America, to over 7%, led by the U.S., coupled with continued solid growth (+6%) in international markets, particularly in the Middle East, Latin America and Russia. Capital bud-gets in the U.S. and Canada are expected to rise 8.5% and 3%, respectively. Companies are basing 2014 spending plans on oil prices averaging $98 Brent and $89 WTI, and U.S. natural gas prices at about $3.66 Mcf.

GLOBAL E&P SPENDING UPCYCLE CONTINUES

Global E&P expenditures are projected to rise for the fifth consecutive year during 2014. In fourth-quarter 2013, we had discussions with more than 300 oil and gas companies, to assess the health of the industry, and the outlook for future growth. The budgets and regional breakouts in this report are Barclays Research estimates.

International growth continues. E&P spending abroad is forecast to reach a re-cord $524 billion (+6%) in 2014. This compares to spending that totaled $496 billion in 2013, up 10% from 2012 levels. Sustained high oil prices, the sanctioning of major projects, and the delivery of a large number of offshore rigs—in both 2014 and 2015—are driving the spending increases. International spending is expected to be impacted by relatively flat Chinese NOC spending in 2014, and a slowing of capital spending growth from the majors. A continued focus on developing domestic portfolios for North American independents is exacerbating this trend. An up-tick in unrest and uncertainty in Africa is weighing on growth, as well. Outside these transitory issues, growth is expected to be strong internationally, led by the Middle East (+14%), Latin America (+13%) and Russia/FSU (+11%), Fig. 1.

Fig. 1. 2014 E&P spending by geography.

Oil prices dominate budget decisions. Our most recent surveys indicate that oil prices remain the overwhelming determinant of E&P spending, with more than 60% of respondents claiming that the price of oil will be a key factor in 2014 budget plans. The renaissance continues in North America, and this marks the fourth year in a row, in which companies indicated that oil prices weighed more heavily on spending decisions than gas prices.

SUPERMAJORS UNDER-INVESTING

Meanwhile, the European majors, led by Total, as well as Statoil, are calling for capital constraints. As a result, there is scope for large projects to be postponed and potentially scrapped in the coming years, with more scrutiny around plans that remain on the table. The slowing of capital spending growth expressed by the majors presents dangers to global oil markets. This trend is reminiscent of the early-to-mid 2000s, another time when such companies failed to invest, contributing to significant oil price appreciation in the mid-2000s. We expect an increasing divergence of capital allocation strategies will emerge among the supermajors, with some firms rising to the competitive challenges presented by the NOCs, and others retreating from prior production growth strategies, in an effort to satisfy near-term shareholder demands.

U.S. gains driven by land market, GOM. After a slight breather in 2013, following several years of intense CAPEX acceleration, activity levels in the U.S. market are poised to resume a steady upward trend in 2014. Spending gains in the U.S., after the 2009 downturn, were impressive, with annual increases in upstream CAPEX averaging roughly 20% from 2009 through 2012. In 2013, there was a tapering in spending increases, though the trend was still positive, as we expect 2013 CAPEX in the U.S. will be roughly 4.3% higher than 2012 levels. In 2014, we anticipate a renewed acceleration and are forecasting an 8.5% increase in upstream spending.

Basin outlook dominated by oil plays. We think the Permian will be a dominant driver of incremental activity among U.S. land basins in 2014. A number of E&Ps have plans to boost unconventional activity, notably Pioneer Natural Resources. Traditional big spenders in the Permian include Pioneer, Apache, Anadarko, Devon and Concho—all of which plan to increase spending in the U.S. this year.

Other oil plays should also see activity increases from the large independents. In the Bakken, Continental Resources plans to increase upstream spending nearly 14% in 2014. Noble Energy is expected to surge upstream CAPEX by over 40% in 2014. In addition, the company is targeting a long-term run rate of new well completions in the Niobrara that is more than 40% higher than current levels.

CANADA POISED FOR GROWTH

After two years of declining spending, driven by weak natural gas prices, wide oil price differentials and challenged, small-cap, E&P balance sheets, Canada appears set for a return to growth. We forecast E&P spending in Canada to be $43 billion during 2014, up 3.2% from $41.7 billion in 2013. The installation of midstream infrastructure, influx of capital from majors and NOCs, and a burgeoning LNG ex-port market all point to an upward trajectory of E&P spending in Canada for the balance of the decade.

Majors, NOCs deliver incremental spending. Over the past few surveys, we have seen increased investment in Canada by majors and NOCs. PetroChina’s JV with EnCana, to develop the Duvernay play, occurred shortly after CNOOC’s acquisition of Nexen, and Petronas’ takeover of Progress Energy. Exxon Mobil closed its acquisition of Celtic Exploration in March, as well. Talisman announced in December that it will sell 75% of its Montney assets to Petronas for $1.5 billion. Each of these deals is leading to higher CAPEX spending in Canada.

Optimism building in Canadian gas plays. While the Canadian oil rig count was down 15%, year-over-year through first-half 2013, compared to second-half 2012, the natural gas rig count has aver-aged 50% higher than second-half 2012 levels, leaving the overall count in line with last year’s average. These shifts in activity have been driven by diverging price differentials, coupled with incremental drilling programs in the Montney, Duvernay and Horn River plays. The Montney and Horn River areas have attracted 63% of the $7 billion invested in Canadian E&P JVs since 2010. However, Canadian gas producers continue to face a structural headwind in the form of growing U.S. production.

LNG export activity could be a boost. While gas producers have grown modestly more optimistic, their best hope for material improvement in the supply-demand dynamic for Canadian gas is LNG exports to Asia. Canadian gas production has slid steadily since 2008, and the country is producing roughly 13 Bcfd, down from 16 Bcfd in the last cycle. There are nine proposed liquefaction facilities, totaling 10 to 15 Bcfgd. Even a fraction of that capacity of 5 Bcfgd coming to fruition could require a roughly-40% increase in production. Three projects have received approval from the NEB and one, Douglas Channel, is approved and fully contracted.

NORTH AMERICAN INDEPENDENTS CONTINUE INTERNATIONAL EXODUS

A wave of shareholder activism, targeted at North American independents, has compelled this group to right-size international portfolios and look to un-conventional opportunities at home. As a group, spending by North American in-dependents, internationally, should drop in 2014, down more than 4% from 2013. The majority of companies appear to be shifting E&P expenditures to the U.S. The international exodus is being led by Hess (down 8%), Murphy (-18%), and Marathon Oil (-14%). Anadarko’s international spending is also expected to be down substantially in 2014. This is the second year that North American independents have chosen to lower international exposure, and this trend could continue, as increasingly-aggressive NOCs create a more competitive international landscape, Fig. 2.

Fig. 2. 2014 worldwide E&P capital spending by company type/region.

MIDDLE EAST: SAUDI DRIVES SPENDING

Middle Eastern spending is expected to increase 14% in 2014, led by continued strong growth in Saudi Arabia (Saudi Aramco should increase spending 20%) and in Kuwait (KOC is up 20%). Saudi Aramco is undergoing a period of rapid change and evolution, as Saudi Arabia looks to boost gas production, in an effort to export more oil. As a result, the operator is increasing its unconventional activities, and boosting its shallow-water rig count in the Red Sea (primarily deep gas).

While Iraq remains one of the largest E&P spending growth stories this decade, a return of civil unrest has made for a more challenging operating environment, and has compelled numerous western IOCs to venture north  (against  the central government’s wishes) to Kurdistan. The Syrian civil war and the ongoing Iranian nuclear crisis have turned Baghdad and Basra into proxy battlefields. We think there is continued potential for near-term disruptions in the country. However, longer term, we expect structural growth to help drive regional spending higher. 

LATIN AMERICA: STRONG GROWTH CONTINUES

Latin American E&P spending is projected to rise 13% in 2014. Spending gains will be led by significant pickups in activity in Mexico (Pemex up 14%), Venezuela (PDVSA up 50%), and Colombia and Ecuador (Pacific Rubiales up 37% and PetroAmazonas up 36%).

Mexico’s recent, historical constitutional change has opened its energy sector to outside investment, ending a nearly 75-year state monopoly. This is necessary for the country to boost production, through the development of deepwater and shale resources, to reach its goal of 3 million bopd by 2018. We think this reform could lead to additional drilling in early 2015.

Petrobras has been the driving force be-hind Latin American spending for the past several years, as well as worldwide offshore activity. However, we expect the quasi-state company to take a pause in 2014 (-2%), in an effort to lower leverage levels, and better balance spending and cash flow.

Behind Mexico and Venezuela, which could prove overly-optimistic, we think several smaller oil-producing countries will help fuel spending growth. We anticipate an uptick in activity offshore Peru, following CNPC’s recent acquisition of $2.6 billion in assets from Petrobras. Spending in Colombia will continue to trend higher in the coming years, following a slate of recent exploration successes by a range of players.

RUSSIA AND FSU: ARCTIC, UNCONVENTIONAL EXPLORATION

Spending for select Russian and FSU companies is expected to grow 11% in 2014, led by significant increases in E&P activity by oil-focused Russian players, including Rosneft, Lukoil and Gazprom Neft. Lifting costs in Russia continue to in-crease, as new greenfields are explored, and as horizontal drilling and other techniques at brownfields in Western Siberia are increasingly deployed.

We expect Rosneft to continue to assert itself in Russia, and to be the driving force behind Russian spending growth. The company is kicking off exploration in the western Barents Sea this summer with Exxon Mobil. While all eyes will be on Rosneft and Exxon’s Arctic program, there is an expected backlog of over 90 offshore Arctic wells to be drilled by 2020. As a result, we expect meaningful exploration to move forward in the Russian Arctic, regardless of this summer’s results, due to the strategic nature of the re-serves for Russia. Investments associated with developing the Russian Arctic have been estimated to be up to $100 billion, over the life of the projects.

EUROPE: SOLID OUTLOOK

Spending for select European E&P companies should increase 8% in 2014, led by OMV, expected to be up 49%, and Eni, up 10%. A number of smaller regional players are also anticipated to increase spending, including Cairn Energy and Det Norske. Statoil, which has been vocal about capital discipline and cost inflation in Norway, is expected to grow CAPEX 6%, to over $16 billion.

In Norway, exploration efforts targeting additional giant discoveries, will likely drive exploration spending through the remainder of the decade. In the aftermath of the recent parliamentary election, we are encouraged to see continued support for expanding offshore drilling in Norway, particularly in the Barents Sea. Interest in the central North Sea remains robust, as well. A focus on frontier sections of the region is elevated, including the West of Shetland area.

ASIA-PACIFIC: CHINESE SPENDING PAUSES

Spending for select companies in India, Asia and Australia is expected to increase by a modest 3% in 2014, a slowdown from three years of growth in the mid-to-high-teens. The spending pause is due to several factors, most notably the ongoing corruption probes inside Chinese state-owned enterprises (SOEs), particularly CNPC. As a result, we anticipate spending at Sinopec to be flat, Petrochina up roughly 1%, and CNOOC to be up 6%. Other regional players outside China are expected to de-crease spending, including BHP (-10%), PTTEP (-21%) and Inpex (-18%). We think the region will continue to be a ma-jor driver of spending growth through the remainder of the decade, and view 2014 as a transitory year.

The coming development of un-conventional gas in China will lead to a change in spending patterns there, acting as a driver of CAPEX in the coming years. While the country’s previously-stated goal of producing 6.5 Bcm by 2015, and 80 Bcm by 2020 (up from a minimal amount today), seems aggressive, we think substantial capital and outside expertise will be diverted to the challenge. Overall, the country has set a goal of boosting natural gas to 7.5% of domestic energy consumption by 2015, and 10% by 2020% (from 5% today). However, more than two-thirds of the increase by 2015 is expected to come from piped gas and LNG imports; leaving 30 to 40 Bcm coming from an increase in domestic production.

AFRICA: MINIMAL NEAR-TERM GROWTH

E&P expenditures in Africa will be flat in 2014. Investment has been slowing since the Arab Spring and, while the region is burgeoning with new opportunities in the east, some old challenges are reappearing, and growing, in the west and north. We expect solid spending growth in Angola (Sonangol up 10%) to be offset by lower CAPEX in Algeria (Sonatrach down 10%), and flat spending in Nigeria (by NNPC). Our analysis of spending for the region does not include spending by the supermajors, which are grouped separately. Many of these companies are attempting to sell African acreage, to limit political risk and focus on below-ground challenges.

Interest is waning somewhat in West Africa and the Gulf of Guinea, due to a return of piracy, continual administrative delays and skepticism over the Nigerian government’s ability to deliver a Petroleum Industry Bill. While exploration remains underway further north, most notably in Sierra Leone and Liberia, enthusiasm is waning. In North Africa, activity offshore Morocco should increase.

The impacts of a new, 1.3-billion-bbl discovery in Algeria remain unknown, as the effects of the In Amenas hostage crisis are still being felt. Questions over tax re-forms, and liberalization of the hydrocarbon industry, loomed over the country’s petroleum industry prior to the attack, and growth could remain nascent.

While major deepwater gas discoveries off Tanzania will continue to drive East African spending, operators are increasingly looking onshore, as well. Tullow and other international independents will likely continue to lead the way onshore. However, we expect an uptick in smaller, pure-play regional players in the coming years.

ACKNOWLEDGEMENT

This report is excerpted from the 2014 Outlook: The Mega-Cycle Reaches New Heights published on Dec. 17, 2013.