World E&P spend on trend
  from: Offshore Engineer
  by: Darius Snieckus
  Friday, April 04, 2008

With the days of the crude price/exploration capital expenditure ‘disconnect’ now behind them, operators are demonstrating they have very deep pockets when it comes to deepwater and, more widely, international E&P. Darius Snieckus looks at the latest Lehman Brothers’ E&P spending survey.

Another year, another double-digit jump in worldwide exploration and production expenditures. According to the latest Lehman Brothers Original E&P Spending Survey, oil and gas companies – or at least the 344 polled – plan to ratchet up their spending to $369 billion this year, up more than 11% on 2007’s $332 billion, and the sixth year running that E&P;has witnessed capex increases on this scale.

Stoked by spending offshore, and specifically in deepwater, international E&P expenditures are at the core of budgets that will grow by an expected 16% in 2008 to $267 billion from $230 billion last year.

If the rate of growth in E&P spending is in line with recent years, however, what is changing is the spread of spending, with a ‘variety of sources’ challenging the 2007 primacy of Russia oil and gas quasi-monopolies and Middle East and North Africa national oil companies, as lead author of the Lehman Brothers survey, James Crandell, notes.

‘Growth trends are similar in direction to those we saw in last year’s survey,’ he states. ‘Gains continue to be driven by strong increases in international spending. Moderate spending growth is expected in the US, but reductions are forecast in Canada. Growth is estimated to be more balanced than in 2007. Whereas last year, the growth was the strongest from Russian oil companies and from Middle East and North African NOCs, this year the strong gains are coming from a variety of sources. The 16% growth could be understated.’

Among international regions, Russia is nonetheless forecast to see ‘very strong’ progress in 2008, with spending by its six largest companies – Gazprom, Gazpromneft, Lukoil, Rosneft, Surgutneftegaz, and TNK – up 21% to $28.5 billion. Latin American companies are expected to boost spending this year bolstered by Mexican state oil concern Pemex’s plans for a 23% increase in E&P capex. Together with Brazil’s Petrobras, which is estimating an 8% rise, and Venezuela’s PDVSA, which foresees spending 19% more, this trio will enlarge their international E&P budgets by 16%.

In the Middle East/Africa region, several companies, including Angola’s Sonangol, the Nigerian National Petroleum Corporation and Algeria’s Sonatrach, are submitting plans for exploration spending increases of better than 30%, while E&P capex for the region in toto came in at an average of 25%.

The one black spot on the global E&P spending map is Canada. Canadian capex budgets are expected to be further reduced this year to $20.3 billion from $23.2 billion in 2007, a 12% drop. The largest cuts in spending are linked to companies investing more than £1 billion on exploration, while midsize operators – those spending between $100 million and $1 billion – are curbing upstream spending by 8% in 2008, and only the small independents planning to raise capex, by 7%.

Capital spending in the US for 2008 is budgeted to increase by a modest 3.5% to $81 billion from $78 billion last year, driven by ‘those companies that spend less than $100 million annually, with a forecast 23% gain, and those companies spending over $1 billion, particularly the majors’, says Crandell. Among majors with the highest expected growth in the US are BP (up 21%), Chevron (+7%), Hess (+15%), Shell (+15%), and Total (+25%).

It is these same companies that continue to show ‘solid growth’ internationally, with BP ramping up spending by 11%, Chevron by 19%, Shell by 15%, and Total by 25%. Other frontrunners include ConocoPhillips, planning a 19% rise in its exploration budget, and ExxonMobil, investing 10% more this year than last on E&P.

International affairs

North American independents are putting their money on international E&P too by shifting funds away from their domestic operations. Anadarko is doubling its international spending to $1 billion this year, as is Nexen, and Noble Energy, Talisman Energy, Apache, and Canadian Natural Resources are boosting their capex in regions outside the home patch by 33%, 27%, 15% and 13%, respectively. Among European operators, Britain’s BG promises to increase spending by 40%, Italy’s Eni by 13%, Austria’s OMV by 13% and Norwegian combine StatoilHydro by 5%. Only Spain’s Repsol expects to cut its international E&P investment, by 16%.

State-owned and international oil company spending in Asia continues to be in the ascendancy, with Lehman Brothers forecasting ‘relatively moderate’ growth in the E&P budgets of China’s CNOOC, PetroChina and Sinopec, and ‘large’ capex increases from big spenders such as Indonesia’s Pertamina and India’s ONGC.

Deepwater continues to be the favourite son of offshore E&P around the globe, for all and sundry.

‘For companies with both onshore and offshore operations, 43% expected a larger share of the 2007 budget to be dedicated to offshore spending than was the case in the prior year. In 2008, 28% expect the proportion to increase,’ offered Crandell. ‘Deepwater spending continues to increase relative to overall offshore budgets; 85% of companies forecasting a shift intend to focus more on deepwater in 2008, up from 81% in 2007.’

Industry-wide, the percentage of operators which believe that the economics of exploration are ‘good’ or ‘excellent’ has fallen in Canada and the US – with a ‘particularly notable decline’ in Canada where just 36% now describing exploration economics in the region as ‘good or ‘excellent’ compared to 53% last year, and 14% now see economics in Canada as ‘poor’. Not so international regions. Some 23% of operators feel the economics of E&P outside North America is ‘excellent’, up from14% in 2007, while 27% view it as ‘good’.

Most apparent from the Lehman Brothers study is the stabilisation of oil companies’ capital exploration plans that has emerged in recent years, a trend reflected in the fact that while over the course of 2007 spending rose 14% on the back of sustained high crude prices, 2008 looks unlikely to be a repeat performance, with 37% of the companies surveyed saying they expect capex to exceed total cash flow. OE

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