A robust rebound in global exploration and production (E&P) activity is under way, with spending set to rise 8%, to $353billion, this year, according to analyst IHS Herold.
The just-published 2010 global upstream capital spending report, covering more than 110 of the largest publicly traded petroleum companies, reveals a marked turnaround from 2009, when spending slumped 22% when recession and tight credit markets made companies rein in upstream spending.
However, IHS Herold analyst Aliza Fan Dutt warned that, although the outlook for oil was strong, continuing near-term weakness in gas prices was making some companies shift focus from gas to oil.
While that observation is mostly aimed at the US market, it applies equally well in the North Sea, where gas prices are also weak and are predicted to remain so in the foreseeable future.
The overall bullish outlook is forecast despite the many issues that now surround deepwater drilling in the US Gulf of Mexico, which is forcing a number of US companies to consider greater focus on onshore US plays, plus greater international exposure.
“The uncertainty over the causes of the Deepwater Horizon oil blast and government restrictions on deepwater drilling will dampen activity in US offshore waters,” says Dutt.
While the potential long-term impact of the Deepwater Horizon incident on E&P capital spending will not be known for some time, Dutt says: “Regulatory and safety requirements will be heavily scrutinised, which will likely translate to higher oil service costs. These higher operating costs and, hence, increased capital spending, will likely occur gradually, though, over an extended period of time.”
There is no indication as to whether such cost impacts will spread to other offshore provinces such as the North Sea.
Integrated companies outside North America are expected to increase capital expenditures by 12% on stronger spending in Russia, Latin America and Asia. Offshore development will fuel a 23% rise in spending at Petrobras, for example.
In a separate index note, sister analyst IHS Cera says the cost of building and operating upstream oil&gas facilities is being to tick upwards again, following 2009’s steep fall.
Upstream steel costs stabilised and ultimately increased for the first time in 12 months as the result of higher raw material costs. Steel rose 3% from Q3 2009 to Q1 2010 after falling nearly 40% in the previous year.
Yards and fabrication costs turned upward and rose 4% after falling 13% in the previous six months.