Report: E&P Capital Spending to Rise 12% in 2011

Capital spending on exploration and production (E&P) by 139 publicly traded oil and gas companies is expected to rise by 12 percent to $406 billion in 2011. Spending growth this year is largely fueled by strong oil prices and builds on gains of 19 percent in 2010, according to a new report by IHS.

While the increase is less than the 19 percent increase seen last year, oil and gas companies, which spent considerably less during the economic downturn of two years ago, are continuing to increase their upstream portfolio investments, particularly for oil-weighted projects, said Aliza Fan Dutt, senior analyst at IHS and author of the IHS Herold Global E&P CAPEX Review.

"Despite recent volatility and a wobbly economy recovery, oil prices remain relatively strong, which supports higher capital spending. In addition, investments in oil and unconventionals continue at a rapid clip, which conventional gas outlays remain relatively depressed."

The shift to drilling on oil and liquids-rich properties that began in 2010 accelerated through the year and continues today, according to the report. According to Fan Dutt, "those companies that shifted their portfolios earlier will benefit more than those that moved more slowly." Fan Dutt cited EOG Resources as an example of such a company. EOG, a natural gas producer, shifted to the oil side much earlier than most of its peers. AS a result, oil now contributes 60 percent of the company's revenues; EOG is posting strong earnings growth."

"Cost inflation will continue to be a key issue, with more companies competing for oil services and equipment during a time of elevated oil prices," said Fan Dutt. "Cost containment will be particularly important for natural gas-weighted producers as they struggle to achieve strong margins amid weak natural gas prices."

Mid-size U.S. E&P companies should increase spending by 25 percent, while U.S. integrated oil companies are expected to reduce their spending rate to 14 percent this year. However, as a group, integrated oils are planning to continue their massive investments in oil and gas projects worldwide.

Marathon Oil Corp., the most aggressive of the integrated U.S. companies, is ramping up spending by 37 percent as it drills on expanded U.S. acreage in the Anadarko Woodford play, the Niobrara play in the Denver-Julesberg Basin in Colorado and Wyoming and in its Bakken shale position.

The largest North American E&Ps will increase capital outlays by only three percent, which will be buttressed by spending on unconventional resources in shale basins, according to the report. "For example, Pioneer is increasing its spending by 53 percent, with its expansive holdings in the Spraberry field and Eagle Ford shale play, where it was an early entrant."

Global integrated oil companies will continue to make massive investments in oil and gas projects worldwide with a "muted" nine percent spending increase, down slightly from last year. Canadian integrated oil companies are slightly more eager to spend with a planned increase of 13 percent. Husky Energy leads this group with a 44 percent increase on operations mainly in Western Canada and offshore Canada's east coast.

Spending by integrated oil companies outside North America is expected to rise by 13 percent in 2011, the same growth rate seen last year. IHS attributed the increase to strong spending in Latin America and Russia. Colombia's state-owned oil company Colombia will spend 56 percent more this year on top of a 34 percent increase last year. Brazil's state energy company Petrobras also continues to invest heavily on its upstream portfolio with an estimated 24 percent increase. Additionally, Russia's Lukoil is expected to spend 55 percent more this year.

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