In a survey of 225 companies for the annual Barclays E&P Spending Outlook, upstream oil and gas companies plan to reduce spending by 15% globally in 2016, following a 23% decline in 2015. This represents only the second time spending has fallen in consecutive years in the 31-year history of the survey. The first “double-dip” decline was back in 1986-87.
However, falling oil prices present downside risk as budgets generally assume oil prices will average $50/bbl for Brent and $45/bbl for West Texas Intermediate vs. current oil prices of about $30/bbl. If oil prices hold at $40/bbl for both Brent and WTI, global spending could be closer to a 20% decline, Barclays said.
Following a 35% decline in 2015, North America budgets will fall 27% this year, according to the survey. But considering most E&Ps try not to make commodity bets and instead generally use the forward curve, North American upstream spending could be down 40-50% if current futures prices hold at $34-35/bbl, Barclays said.
“With only 15% of North America E&Ps having officially announced budgets and large-cap E&Ps only hedged on 13% of production, more than ever, oil prices will dictate spending in North America,” Barclays said.
Barclays survey shows international markets once again holding up much better than North America, indicating international upstream spending will decline 11% in 2016 after a 17% decline in 2015.
Spending by Russia and the former Soviet Union is expected to increase 3.6% in 2016, while following a difficult 2015 in which E&P spending collectively declined 20%. The ruble has devalued further to all-time lows against the dollar, which actually helps Russia’s oil companies as it sells oil in dollars with costs in rubles, so upstream spending could hold up.
Middle East spending is projected to tick higher in 2016 by 6% after a 6% decrease in 2015. Despite oil prices forcing cuts to state budgets and curtailments of subsidies, upstream budgets don’t appear to be impacted with Saudi Aramco (+5%) and ADNOC (+2%) activity levels largely unchanged.
On the other hand, national oil companies in Latin America are expected to cut spending by about 18% in 2016, following a similar rate of decline in 2015, as Brazil’s Petroleo Brasileiro SA, Venzuela’s Petroleos de Venezuela SA, and Argentina’s YPF struggle to generate enough cash to support upstream activity.
Offshore spending is poised to fall 20-25% as international oil companies slash exploration budges and cut frontier programs.