May 10, 2018

Oil Prices Up, Spending Not So Much

Stratas Advisors

This is an example of a full report that is normally only available to subscribers of Stratas Advisors’ Global Upstream Project Analytics and Global Hydrocarbon Supply services. 

The industry downturn that started in the second half of 2014 forced oil companies take spending cuts and suspend, delay or cancel upstream development projects. This analysis reveals how much capital the industry has taken off, how much oil and gas production has been deferred, and what are the refreshed spending and production outlooks in the next five years as oil price recovers.

The industry was on the way to spend $620 billion in 2014 with Brent staying above $100 per barrel halfway through the year. The initial stage of the price collapse had little change on spending as companies’ annual budgets were mostly set at the beginning of the year. The price-collapse impact was mostly felt by US shale producers as their investment cycle was much shorter and because shale investment is more sensitive to short-term oil-price changes.

As Brent dropped to below $50 per barrel in January 2015, companies started making significant budget cuts. Cuts were about 23%, or $150 billion, from a would-be $650 billion upstream development budget for the year. The situation in 2016 became worse when the oil price bottomed below $30 per barrel in January 2016. Another $140 billion, or 45% of a would-be $650 billion budget, was cut to make the year’s spending $360 billion. The cuts were finally over in 2017 as the industry welcomed the oil price recovery with OPEC’s decision to curb supply. As a result, global development capital spending in 2017 increased to about $400 billion, mostly driven by recovered activities in US shale. As figure 1 shows, the accumulative total spending cuts on upstream field development reached more than $800 billion in the four-year period (2014-2017), and 2017 spending will be reset as the new reference, as the future spending will no longer come back to the original level set in 2014.

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The spending cuts did not show instant impacts on production because of the long-term nature of the investment cycle for conventional oil gas upstream developments. The short-term effect mainly sits on the slowdown of US shale production, as it has a much short term investment cycle than conventional developments. Figure 2 shows our production forecast outlook scenarios before and after the spending cut. Only a small amount of production was deferred in 2014 (about 240 Mboe/d, or about 0.2% of global oil and gas production). The deferred production gap widened in time, first being felt by US shale production and OPEC cuts, then by long-cycle investment projects such as Canadian oil sands and global deepwater developments, which would have been producing by 2019 if they were sanctioned without the downturn. By 2022, we see about 21 MMboe/d of oil and gas production being chopped off, or about 12% of the global production. 

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On the company level, spending cuts were deep. Figure 3 shows the magnitude of the cuts in the three-year period since the downturn started in 2014 on the selected top 15 companies (excluding NOCs).

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After about a 38% cut, or $14 billion, Shell (with the acquisition of BG) spent about $23 billion on upstream development on average in the past three years, the largest among all of the major IOCs. Exxon Mobil, who had a deeper spending cut (40%, or about $11 billion), is second with about $17 billion. Chevron and BP are close behind with each spending about $16 billion, after trimming their budgets above 30%. Total, with cuts of more than 40% (or $10 billion), spent about $14 billion. Petrobras’ spending-cut percentage is the lowest among the top companies with only 13%, or $2.1 billion. The company spent about $13.6 billion on average in the last three years.

Looking forward, as Figure 4 shows, Shell, ExxonMobil, Chevron, Total, ENI and ConocoPhillips are among the top companies whose spending in the next five years is expected to drop, while spending at BP, Petrobras, Statoil and Anadarko is expected to increase.

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The spending cut has more long-term impact on production than short-term because of the long investment cycle of conventional oil and gas developments. Shell is estimated to have 7.5% of current production being deferred (or about 350 Mboe/d). Exxon Mobil and BP are at a similar level with less than 5% of production impacted. Petrobras and ENI are among the top 10 companies that have more than 10% of production deferred.

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As shown in Figure 6, North America, driven by US Shale spending, will draw about one-third, or $800 billion, of total global investment in the next five years. The Middle East, Asia Pacific and Latin America will each draw about $340 billion, or 15% of total investment. Africa is the other high-growth region, growing from $35 billion in 2017 to $60 billion by 2022. It will take about 9% of the global total in the five-year period. Europe and Russia & CIS together will take about 12% of the global investment.

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