In its latest report, titled 'The first hints of recovery in global upstream spending,' the independent global research firm Wood Mackenzie, predicts that investment in the upstream sector will return to growth by 2011, reaching around US $350 billion in 2012, although caution remains.
The report stresses that upstream spend will be restored on a modest upward trend in 2011. In 2010, investment will remain at levels similar to 2009, at around US $325 billion, down from a five-year peak of US $370 billion in 2008, although there will be some notable exceptions: "There will be a few, major new capital projects implemented through 2010, such as Gorgon in Australia, Rumaila in Iraq, Blocks 17 and 31 in Angola and the Kearl project in the Canadian oil sands sector. But, overall, we expect such commitments to be balanced by the prevailing caution in the industry, as companies await convincing evidence that the recovery will be sustained."
Wood Mackenzie's examination of international and national companies' development spending plans, reveals that trends will vary by region and sector. Iain Brown, Vice President Upstream Energy Research for Wood Mackenzie explained, "In some regions, operators are planning slightly more ambitious capital programs than in 2009, reassured by the oil price remaining at around US $70/bbl, and ready to exploit significant reductions in the regional cost base. However prudence is the watchword in many other areas, especially where commitments are required to large-scale, long-lead projects, or where commercial or political risks are perceived to be high."
The report finds that many of the areas where growth has been maintained through 2009 have been underwritten by major National Oil Companies (NOCs), such as in Saudi Arabia, Abu Dhabi and Brazil, and Wood Mackenzie forecasts that total NOC spend will remain steady at around US $100 billion per year (in real terms) over the next five years.
Cutbacks on investment were greatest and quickest in North America, which saw its share of global capital spend fall from 31% in 2008 to 24% in 2009. Wood Mackenzie attributes this to the large proportion of budgets in this region which are commonly discretionary, allowing greater flexibility in adjusting project schedules. In Canada, several oil sands developments were cancelled or postponed, resulting in a 50% drop in year-on-year capital spend. Brown expanded, "We expect that North America will recover to provide 27% of global spend in 2012, but will not fully recover the lost ground, reflecting residual concerns over the long-term viability of higher cost resources such as oil sands and unconventional gas."
Wood Mackenzie says the impact of the recession has been severe in established producing provinces elsewhere, with overall expenditures in Europe and Russia falling by around 20%.
Brown explains what is at stake when investment levels fall: "Countries such as the US, Canada, Russia, China and Nigeria must secure consistently high levels of investment year on year to maintain their supply capacity. In the case of the UK, Norway and Indonesia, capital budgets of between US $6-15 billion per year serve only to constrain the pace of overall capacity decline."
"Mexico is an example of a country which is failing to maintain capacity growth, despite a huge reserve base and recognized prospectivity. A combination of cumbersome industry bureaucracy, the limitations of the NOC and a particularly difficult recession, have caused production capacity to drop steadily since 2004. The continuing absence of significant international investment has dispelled hopes of a reversal of this situation in the near future," warned Brown.
Brown concluded, "Given the economic shocks experienced by the industry in the past 18 months, we anticipate that companies will demonstrate a preference for low political risk and fiscal stability, such as those offered by high-cost provinces like the US, Canada, Australia and parts of Europe, which continue to offer compelling value propositions and attract high levels of external investment."
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