LONDON/HOUSTON/SINGAPORE, 11 January 2017 — Wood Mackenzie forecasts the investment cycle will show the first signs of growth in 2017 since 2014 and final investment decisions (FIDs) will double, compared with 2016.
Malcolm Dickson, a principal analyst for Upstream Oil and Gas for Wood Mackenzie, said: "2017 will demonstrate how efficient the oil and gas industry has become; showing projects in better shape all round."
According to Wood Mackenzie's global upstream outlook for 2017, confidence will start to return to the sector, with exploration and production spend set to rise by 3% to US$450 billion. Though a corner is being turned, this is still 40% below the heady days of 2014. At the forefront of the revival will be US tight oil. Costs will continue to fall in 2017, though only marginally. But for all the pain of the downturn, a leaner industry is starting to emerge.
Capex deflation has averaged 20% over the past two years. With service sector margins wafer thin, Wood Mackenzie believes there’s now only room for small reductions and capital costs are expected to fall by an average of 3% to 7%.
The key themes of Wood Mackenzie's Global Upstream: 5 things to look for in 2017 report are:
• Global investment will rise, reversing two years of severe decline.
• FIDs will double and deep water is back on the agenda.
• Costs will bottom out as an efficiency boom takes hold, but more work is required.
• Fiscal rules need to improve to attract scarce investment.
Rise in global investment in 2017 after two years of severe decline
"The global investment cycle will show the first signs of growth in 2017, bringing the crushing two-year investment slump to a close," said Dickson.
US tight oil, and the Permian basin in particular, will lead the way, distinguished by low breakevens, scale and flexibility. US Lower 48 spend is set to grow by 23%, to US$61 billion, with upside if oil prices rise strongly and US Independents are emboldened by a Trump presidency.
Number of project FIDs to double
Wood Mackenzie predicts the number of FIDs will rise to more than 20 in 2017, compared with nine in 2016. This is still well short of the 2010-2014 average of 40 a year. But these are generally smaller, more efficient projects, and capex per barrel of oil equivalent (boe) averages just US$7 per barrel, down from US$17 per barrel for the 2014 projects.
"Companies will get more bang for their buck as development incremental internal rates of return (IRR) will jump from 9% to 16%, comparing 2014 to 2017," said Dickson. "This is in part a result of a shift in capital allocation away from complex mega projects towards smaller, incremental projects in the Canadian oil sands and deep water."