Ejiofor Alike
The latest report by Wood Mackenzie forecasts that the investment cycle will show the first signs of growth in 2017 since 2014, while Final Investment Decisions (FIDs) will double, compared with 2016.
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 three per cent to $450 billion.
The report added that tough a corner is being turned, this is still 40 per cent below the heady days of 2014.
The report predicted that costs will continue to fall in 2017, though only marginally.
But for all the pain of the downturn, Wood Mackenzie stated that a leaner industry is starting to emerge, stressing that at the forefront of the revival will be US tight oil.
Wood Mackenzie noted that capital expenditure (Capex) deflation has averaged 20 per cent 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 three to seven per cent.
A Principal Analyst for Upstream Oil and Gas for Wood Mackenzie, Malcolm Dickson, said: “2017 will demonstrate how efficient the oil and gas industry has become; showing projects in better shape all round.”
Speaking on the need to improve fiscal terms to attract scarce investment
Senior Vice President of Global Fiscal Research at Wood Mackenzie, Graham Kellas, said: “Some governments will be tempted to increase tax rates, but those with uncompetitive fiscal regimes will have to make changes to ensure they can attract still-scarce new capital. Getting the risk-reward balance right will be a critical factor in attracting scarce investment capture in 2017, even for resource-rich hotspots such as Iran and Mexico.”
Wood Mackenzie predicted a 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,” Dickson said.
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 $7 per barrel, down from $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 nine to 16 per cent, comparing 2014 to 2017. 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,” Dickson explained.
Wood Mackenzie also noted that as the tight oil sector heats up further, the spectre of cost inflation looms in 2017.
But any increase in costs may well be offset by further efficiency gains in earlier-life plays. For example, there’s still potential for a further improvement in drilling speed of 20 to 30 per cent in some early-life tight oil plays.
Deepwater FIDs will be a leading indicator the tide is turning as the best development assets will hold their own against tight oil, especially as more risk-averse tight oil operators start to screen opportunities under higher discount rates.
According to Wood Mackenzie’s global upstream outlook, projects slated for FID in 2017 are largely looking good, but the longer-term deepwater pipeline is more challenged. Of the 40 larger pre-FID deepwater projects, around half fail to hit 15 per cent internal rate of return (IRR) at $60 a barrel.
