Copyright of the Daily Oil Bulletin 2017
Companies Focused On Shale Oil And Gas In Canada, U.S. Will Increase Capital Upstream Spending
Companies focused on shale oil and gas plays in the U.S. and Canada will increase capital upstream spending this year by 60 per cent and 28 per cent, respectively, according to international energy consulting and intelligence firm Wood Mackenzie, with production increasing by 800,000 boe per day in the U.S. and 300,000 boe per day in Canada.
“In the U.S. the Permian-based producers lead the charge and in Canada it will be the Montney and Duvernay-focused producers,” said Houston-based WoodMac research analyst Roy Martin.
The forecast, based on an analysis of 2017 spending guidance issued during the fourth quarter reporting period, is focused on 40 U.S.-focused producers and 35 Canadian-focused producers, which WoodMac tracks on an ongoing basis.
WoodMac said the mood of U.S. and Canadian shale oil and gas-focused players is “quietly optimistic” while many companies “remain cautious.”
Martin said the cautious companies are ones with a more international profile, which are involved in costly offshore projects and the oilsands, although WoodMac does see oilsands spending rising slightly.
“(L)arger operators that are exiting current capital intensive phase of investment, such as Total S.A. and Chevron [Corporation] will see spend continue to trend down,” the firm says in the report.
WoodMac said it expects to see investment increase this year for 99 of the 119 companies that have so far announced their budgets, a reflection of the severe cuts made in 2016.
The 119 companies it tracks internationally slashed capital spending from US$500 billion in 2014 to US$340 billion in 2015, with a further cut down to $235 billion in 2016. WoodMac is forecasting they will spend $255 billion this year, up 11 per cent.
But some of the majors are still cutting spending.
“Those that are cutting capex are among the largest in the sector,” it said in its report.
“Those companies focused on the U.S. have booked the largest increase in planned spending, with budgets set to rise 60 per cent year-on-year, accounting for US$15 billion of additional investment,” WoodMac says, adding that the bulk of that spending increase will come from Permian-focused intermediates such as Pioneer Natural Resources Ltd. and EOG Resources Inc.
“[This underlines] the attractiveness of the Lower 48s shale plays, even at current prices,” WoodMac concludes.
It adds that upstream capital spending will also increase in Canada, part of Latin America (such as shale focused Argentina) and Russia.
Overall, it expects the 98 companies that have announced production guidance to produce a combined one million boe per day more than in 2016, a year-on-year growth of five per cent. It adds that some of that growth will come from acquisitions.
“The U.S.-focused group of companies [will] account for 800,000 boe per day of the total, a 15 per cent increase. Internationally-focused companies, however, have forecast overall production declines this year.”
WoodMac’s Martin said the Montney and Duvernay have become Canada’s Permian, with the 35 companies it follows that are active there planning to increase capital spending this year by US$4 billion.
With few exceptions, the companies active there are juniors and intermediates, with capital budgets starting at US$25-$30 million.
In oil and gas shale plays like Permian, the players are larger, with average expenditures of US$1 billion a year.
“The unconventional resource players in Canada and the U.S. are leading the charge,” said Martin. “The capital costs in those basins are much lower (than the offshore and oilsands) and they can get a decent return at oil prices in the US$40-$50 range.”
He pointed out that the publicly-listed shale-focused producers have seen their shares rise significantly, as oil prices have recovered from last year’s low.
“The market is rewarding growth,” he said.
WoodMac sees oil prices averaging Brent US$52 a bbl this year, hitting the mid $60s by 2019, while it sees Henry Hub natural gas prices this year at $3.34 per mcf (although it is likely to lower that forecast, said Martin).
The tight oil and gas focused U.S. producers spent US$15 billion on capex in 2016, but WoodMac sees that rising to $24.5 billion this year, an increase of 60 per cent.
“That’s much higher than we had expected,” Martin said, adding that the analysts had been anticipating a 15-20 per cent rise in spending.
The 35 companies it tracks in Canada, virtually all of which are shale oil and gas focused, will spend US$17 billion this year, up from US$13 billion in 2016. That’s an increase of 28 per cent. They will produce 300,000 more boe per day, the analysts forecast.
Martin said recent warnings from Saudi Arabian officials that it and other OPEC members are concerned about rising shale oil production in the U.S. need to be watched closely. OPEC members have reduced production to support higher oil prices, but a torrent of new shale oil production threatens to undermine that, he said.
However, counterbalancing that is the lower production by majors in the offshore and elsewhere, he said.
“Rigs are being added [in shale plays] faster than anyone had expected, which means the market balance is being delicately poised in 2017,” said Martin. “There is a risk of much more supply [from shale plays] in 2018.”
While the intermediates focused on shale oil and gas plays in the U.S. and Canada are ramping up production, state-owned Petroleos Mexicanos (Pemex) faces a difficult 2017, said Martin.
In 2016 the debt-plagued company spent US$13 billion on capex. That is expected to drop to US$9 billion this year.
WoodMac sees capital expenditures in Mexico rising substantially as the reform advances, which is now underway and is seeing many private sector entrants start production on former Pemex dominated onshore and offshore blocks. But Martin said it will take a few years for the new dollars to start flowing into the country’s oil and gas sector.