WoodMac Sees Bumper Upstream Spend in 2017
Analysts at Wood Mackenzie see 2017 marking a turning point as the number of upstream projects reaching final investment decision (FID) could more than double compared with only 12 last year. Most though are brownfield developments or other derisked expansions as the oil price remains low.
Energy supply watchdog International Energy Agency (IEA) has warned that if this year was as bad as the last two in terms of upstream investment, then there could be a gaping hole in oil output from the end of the decade as field depletions are not backfilled while demand will grow.
In the first half of this year, the industry has already witnessed 15 project sanctions which equates to about 8bn barrels of oil equivalent (bn boe) of reserves, WoodMac said, mostly in brownfield projects. This is almost comparable to project sanctions in the whole of 2016, where 12 FIDs covered 8.8bn boe of reserves. It expects another 11 upstream projects to receive FID this year.
"These are positive signs that the upstream industry is continuing on the road to recovery and that the more competitive conventional projects are moving down the cost curve sufficiently to attract new investment," says WoodMac's orincipal analyst for Asia-Pacific upstream, Angus Rodger.
"Eleven of the 15 project sanctions year-to-date are either brownfield expansions on existing fields, satellite developments or subsea tiebacks. Not only are these projects less risky than greenfield developments, they also tend to be less capital-intensive and are quicker to bring onstream, offering a quicker payback and better returns on development dollars," says Rodger. The major exception was ExxonMobil's Liza oil field, sanctioned last month offshore Suriname in South America.
"On average, project capex is down to $11/boe versus $15/boe in 2015, and internal rates of return at 15% in 2017 versus 11% in 2015."says Rodger.
Eight of 15 project sanctions in 2017 are operated by the majors, and since 2015, they have accounted for just under 14bn boe of the 22bn boe total of commercial reserves sanctioned. By contrast, national oil companies have tightened their purse strings and been noticeably inactive on new project investments over the 2015 – H1 2017 period. They operate less than 1bn boe of the 22bn boe total of sanctioned commercial reserves and they "need to be on the lookout for investment opportunities as many face significant production declines post-2020."
The CEO of upstream group, the International Association of Oil & Gas Producers, Gordon Ballard meanwhile said July 11: “We are pleased to see that the IEA once again recognises the need for oil & gas even in a 2C scenario. It is important to secure today the investments necessary to meet tomorrow’s demand, especially as our current fields are depleting by 6% per year.”
William Powell