WoodMac: New upstream projects to double globally in 2017

Final investment decisions (FID) are expected to double globally in 2017 while exploration and production spending will increase for the first time since 2014, according to Wood Mackenzie Ltd.’s global upstream outlook.

The research and consulting firm sees confidence beginning to return to the industry, with E&P spending up 3% to $450 billion—though still 40% below the 2014 level—and costs are expected to decline marginally.

WoodMac notes that capital expenditure deflation has averaged 20% over the past 2 years. With service sector margins thin, the firm believes there’s now only room for small reductions and capital costs are expected to fall by an average of 3-7%.

US Lower 48 spending is set to rise 23% to $61 billion, with upside if oil prices rise markedly and US independents are emboldened by a Trump presidency. Tight oil and the Permian basin in particular is expected to lead the way, distinguished by low breakevens, scale, and flexibility.

WoodMac predicts the number of global FIDs will rise to more than 20 in 2017, compared with just nine in 2016. While it’s still short of the 2010-14 average of 40/year, the new projects are generally smaller and more efficient, with capex per barrel of oil equivalent averaging just $7/bbl, down from $17/bbl for the 2014 projects.

“Companies will get more bang for their buck as development incremental internal rates of return (IRR) will jump from 9% to 16%, comparing 2014 to 2017,” said Malcolm Dickson, a principal analyst for upstream oil and gas for WoodMac. “This is in part a result of a shift in capital allocation away from complex megaprojects towards smaller, incremental projects in the Canadian oil sands and deep water.

“Nowhere is the mantra ‘doing more with less’ more evident than onshore US,” Dickson added. “There has been a dramatic increase in efficiency in the sector, exemplified by the drillers, who are managing to complete wells up to 30% quicker.”

As the tight-oil sector heats up further, the specter of cost inflation looms in 2017, WoodMac says. But any increase in costs may be offset by further efficiency gains in earlier-life plays. For example, there’s still potential for a further improvement in drilling speed of 20-30% in some early-life tight oil plays.

Deepwater FIDs are expected to be a leading indicator the tide is turning, with the best development assets holding their own against tight oil, especially as more risk-averse tight oil operators start to screen opportunities under higher discount rates.

WoodMac notes that while projects slated for FID in 2017 are largely looking good, the longer-term deepwater pipeline is more challenged. Of the 40 larger pre-FID deepwater projects, around half fail to hit 15% IRR at $60/bbl.

“The industry has selected the best projects to optimize and take forward,” said Dickson. “In 2017 it will have to turn its attention towards optimizing the next wave of developments to get them sanction-ready.”

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