Hey 2017 – get you. Straight out of the box and it’s delivered some prestantious news, in the form of a Wood Mackenzie report. We don’t know how you feel, but we can’t get enough of the phrase:
“The global investment cycle will show the first signs of growth in 2017, bring the crushing two-year investment slump to a close.”
With its author Malcolm Dickson swiftly becoming our Man of the Month, let’s look more closely at what WoodMac’s predicting.
“Companies will get more bang for their buck,” reckons the company’s principal analyst for upstream oil and gas. “Development incremental internal rates of return will jump from 9% to 16%, comparing 2014 to 2017.”
Ironically, this is partially brought about by the fact that companies have swung from the mega-projects when they were flush to simpler incremental options, with WoodMac highlighting projects in the Canadian oil sands and deep water.
Already over the past two months, things have become a lot rosier. There’s been a jump of more than 20% in benchmark crude process since the OPEC deal in November. Although we’re still far below the E&P spend in 2014, it is due to rise by 3% in 2017 – to $450bn. It’s not just WoodMac feeling good about the state of things either. Barclays release survey results last week that sees a case for a hike too,” With OPEC putting a floor on oil prices, operators have greater confidence to drill … although the early stages of the recovery will be uneven.”
Those who invested in efficiency measures – whether they chose it or not – are doing best. “Nowhere is the mantra doing more with less more evident than onshore US. There has been a dramatic increase in efficiency in the sector, exemplified by the drillers who are managing to complete wells up to 30% quicker… There’s still potential for a further improvement in drilling speed of 20% – 30% in some early-life tight (mainly shale) oil plays.” It forecasts an increase in production to 4m bpd, a hike of around 300,000 bpd in the US alone and indicates an increased spend here of 23% to $61bn.
Outside the US, there have been reductions in the cost of field development. Rates have fallen and engineering plans made simpler. Dickson believes the drop of 20% since 2014 is something we’ll continue to see, with an additional 5% predicted this year. The Norwegian Petroleum Directorate attribute their high level of oil production to the “various efficiency measures which led to substantial reductions in operating and exploration costs.”
The NPD is also predicting good things. “Investments are expected to rise gradually following a minor drop from 2017-2018… The start-up of a number of new projects both on fields currently in operation as well as new field developments, is expected to contribute to greater investments starting in 2019.”
That’s echoed by WoodMac which is confident that the number of final investment decisions for projects with resources larger than 50m barrels of oil equivalent will more than double in 2017 – going as high as 25, when there was only 9 in total in 2016.
This is not to say the future is challenge-free, and here WoodMac comes in with sage advice, urging the industry to play the smart game. Dickson urges business to pick their projects and “turn .. attention towards optimising the next wave of developments to get them sanction-ready”. Graham Kellas the company’s senior VP of global fiscal research notes that though there will be a sore temptation faced by governments to increase tax rates, they can’t become too punitive: “Those with uncompetitive fiscal regimes will have to make changes to ensure they can attract still-scarce new capital” i.e. ‘We’re on the right path folks, just don’t feed the greed machine.’