You can think about the future of capital expenditures in the oil and gas industry by considering the recent past.
A first observation: The industry has bigger capex budgets and spends a lot more money when times are good than when prices fall and cash is scarce.
In 2016, oil and gas companies shelled out an estimated $400 billion in capital spending for upstream projects, according to Bank of America-Merrill Lynch. That’s a significant amount, but a huge drop from the industry’s 2014 capex total of around $700 billion.
Overall, the industry cut about $1 trillion from capital spending plans in the post-2014 downturn, most of the reduction affecting near-term outlays.
Adam Sieminski is James R. Schlesinger chair for energy and geopolitics at the Center for Strategic and International Studies in Washington, D.C. His previous job was administrator and head of the U.S. Energy Information Administration (EIA), a post he held for four and a half years.
Sieminski recalled reading through projections of future spending needs for various parts of the global oil and gas industry.
“If you add those up, you need something like $750 billion a year in investment,” he said.
High Capital, By Nature
A second observation: The oil and gas industry requires an enormous amount of capital investment, and will continue to have high capital spending needs in the future.
One role of the oil economist is to remind geologists that technology and prices really do matter, Sieminski noted. The industry often gets squeezed for cash when prices fall, but a rebound eventually happens, sooner or later.
“Capital has always been available – it’s not like it didn’t get done. But it’s very big numbers,” he noted. “When prices go up, the capital moves. Some things happen because companies have their own internal cash generation. Exxon can fund a lot out of its cash flow.”
Oil and gas companies are not much different from households or governments. When they have money, they spend it. When they don’t have enough to spend, they borrow it.
Sieminski said he’s confident banks will provide adequate funding for the industry as conditions improve and they see the chance for a favorable return.
“These (future capital expenditure) numbers are big, but I’m not alarmed,” he said.
Renewables and Unconventionals
Two long-term shifts will affect the industry’s capital spending pattern in the coming decades. First is the growth of spending on renewable energy sources. Renewables will shift future energy investment but not dominate it, according to Sieminski.
“There are some people who believe most of the marginal increase will be coming from renewables, but I’m not seeing that in the numbers I work with,” he said.
In Tulsa last October, Sieminski presented the EIA’s longer-term outlook to 2040. While renewables gained percentage share in the energy mix, crude oil and coal still accounted for well over half the future energy supply.
A third observation: Oil and gas aren’t going away. They will be part of the energy picture for decades to come, even if crude and coal provide a smaller portion of overall energy production. But changes will dictate that a larger share of the energy supply is provided by renewable sources.
“Some of those can happen just for economic reasons. Hydro is a renewable resource and we’ve been building hydroelectric dams for a long time,” he observed. “The capital and the operating costs of a new gas plant are better than a coal plant. Part of that is because you don’t need as much air pollution equipment on a gas plant.”
“We have consistently been moving toward cleaner and more convenient fuels. Now we’re moving toward renewables, and the share of renewables will go up,” Sieminski said.
The second shift reflects increased spending on unconventionals, a change already under way.
“Unconventional spend in the U.S. is booming, but elsewhere capital and balance sheet preservation remain priorities and as a result, most forms of upstream spend have a fairly muted outlook,” said Angus Rodger, research director of Asia-Pacific upstream research in Singapore for industry consultancy group Wood Mackenzie.
As unconventionals draw more activity and capital funding, other sectors like conventional onshore and shallow-water offshore plays look set for a longer-term decline, he said.
“The level of spend in deepwater does appear relatively healthy in the near-term, staying steady at between $55 billion and $62 billion in the period 2017-20, or around a fifth of total conventional upstream spend,” he said. “The overall outlook for deepwater is for costs to continue to drift lower, which will support long-term investment.“
Rodger said that outlook is supported by Wood Mackenzie’s forecast of major investments in the Gulf Of Mexico (Mad Dog Ph2, Appomattox, Shenandoah, North Platte, Anchor), sub-salt Brazil, Mozambique (Coral FLNG, Areas 1 and 4) and new projects in Guyana (Liza), Senegal (SNE) and Israel (Leviathan).
“Deepwater will also continue to be the primary source for world-class conventional discoveries --of our top 15 wildcat wells to watch in 2017, almost all are in over 400 meters of water. It is where the majority of the conventional volumes in recent years were discovered,” he said.
“Alongside relatively flat investment in other conventional themes, this all keeps the upstream ship relatively steady and on an even keen until 2020,” Rodger noted. “After that period, investment in deepwater, LNG and oil sands maintains some strength but in other more mature sectors, such as onshore and shallow-water conventionals, we begin to see a steep decline kick in.”
A positive trend in this “muted outlook” is the industry’s efforts at cost-cutting and operational efficiencies, Rodger said.
“We are just not seeing a return to the levels of spend we saw over the previous decade, both in terms of existing assets and sanctioning large new projects,” he observed.
“That said, some of the resource themes that have been particularly unloved over the past two years – deepwater and Canadian oil sands in particular – have taken the necessary steps over that time to reduce costs and be more competitive,” he said.
Recent activity by BP in Egypt and Mauritania/Senegal, and Total and Statoil in Brazil, indicate a tentative but rising confidence in deepwater’s future and show demand for high-quality deepwater assets that can move portfolios down the cost-curve, Rodger said.
“Nonetheless, it is not all good news for the deepwater industry. Overall, with less operators in the sector – following the exit of many independents – alongside longer-term capital constraints, we will see a deepwater sector that is smaller than in the past,” Rodger predicted.
“Although costs are drifting lower, most basins are still enduring a sustained pause in new investment. The outlook for new FIDs is challenging, but reworked Gulf of Mexico fields that have slashed breakevens below $50/barrel is proof it can be done,” he said.
The Coming Century
Looking outward to the rest of this century, you can expect the industry to have a continuing high need for capital investment. Oil and gas companies will approve bigger capex budgets in good times, smaller budgets when prices fall.
Renewables and unconventionals will soak up an increased share of investment, while the percentage share for conventional onshore and near-shore spending declines. Hydrocarbons will continue to meet a significant part of the world’s energy needs.
And at some point, an advance will probably happen that turns everything upside-down.
“In the next 50 years, I’m pretty sure there will be some technological breakthroughs that change things,” Sieminski noted.
“It would be nice to have cold fusion,” he said. “But before we get there, we’re going to have a big need for geologists.”