Confidence has begun to flow back into the industry. Companies are shifting focus back towards growth, recognising that, maybe, the worst is over. A surge in M&A activity is one barometer, the rampant return of drilling rigs to the US tight oil basins another. Are there signs yet of an uptick in the world outside of the US L48?
The short answer is yes. More greenfield conventional oil and gas projects could be sanctioned in 2017.
Our view is that twenty two projects will achieve Final Investment Decisions this year, up from fourteen in 2016. If we are right, it will be the most since 2013.
The potential outcome though is fluid; we see operators globally vetting as many as forty in the collective 'hopper'.
The 'risking' we apply to get to twenty two reflects the challenges, high costs among them, that many projects have to surmount to achieve acceptable hurdle rates. Stretched finances are also dampening the appetite to commit to capital investment generally, but particularly to projects with long lead times. Any deterioration in oil and gas prices could also mean that twenty two FIDs proves ambitious.
Despite the uptick in numbers, investment in greenfield conventional projects is stuck at a low ebb. Capital expenditure on the slated 2017 FID projects totals US$65 bn, down marginally on the US$69 bn committed to FIDs in 2016. It's a country mile below the heights of US$200 bn p.a. during the glory years of 2011-13.
And not all of the headline investment will be made anytime soon. The 2017 forecast includes 'phased' projects, such as ExxonMobil's Liza in Guyana, where some capex is deferred for subsequent stages. Even so, investment in new projects in 2017, like 2016, should be above the 2014/15 trough of the cycle.
Falling costs show how the industry is adapting to lower oil prices, and getting more bang for buck.
Unit capex is US$11/bbl for the twenty two 2017 pre-FID projects, 25% below the 2011-13 average of US$15/bbl. Progress has been made in scoping and re-engineering projects, as well as capitalising on current overcapacity in the service sector to achieve hurdle rates.
The industry is tackling smaller scale projects in the current environment. The year of the 'big beast' was 2013, with average project reserves 1.1 bn boe, and the average cost US$9 bn. The 2017 crop averages 0.5 bn boe, with costs under US$3 bn – lower still than either 2015 or 2016.
Attitudes to spend are archly conservative, with incremental investment in existing projects favoured to maximise returns. Preferred characteristics of greenfield projects are similar – smaller and near infrastructure to be brought on-stream quickly. The flip side is that many bigger, stand-alone projects, whether deep water or LNG, simply are still uneconomic.
A big concern is that those green field projects being developed will not sustain the industry.
Oil and gas reserves total 19 bn boe in all projects FID'd in the three years of the downturn so far. This represents less than 20% of non-OPEC conventional production. However good 2017 proves to be, the ratio won't be much higher. This can't last forever – new large projects will be needed in the not too distant future.
The lengthening period of low investment is showing up in falling E&P growth rates. Some US tight oil and shale gas producers buck the trend. These 'haves' of unconventional resources – independents in low breakeven plays - can ramp up investment and deliver production growth at US$55/bbl Brent.
For 'have nots' – the conventional players - it's a ticking time bomb.
Some Asian NOCs have precipitous production declines ahead, a function of mature conventional assets and limited project hoppers. Many International E&Ps are also 'have nots', and predicted growth rates have dropped in the last two years. The Majors have so far held up well, but face an escalating challenge into next decade to avert declines in production.
Conventional players have more work to do to re-engineer projects and reduce costs to kick start a flow of bigger greenfield developments - viable say at US$60/bbl and competitive with unconventional resources. They'll be needed before too long. Otherwise, it'll take higher oil prices to make these projects fly.