IHS Herold: E&P spending to rise 8% this year

Marilyn Radler
OGJ Senior Editor-Economics

HOUSTON, June 15 -- Upstream spending this year among more than 110 of the world’s largest publicly traded oil and gas companies will rise by 8% to $353 billion, according to the latest IHS Herold Global Upstream Capital Spending Report.

An IHS Herold study of 65 companies issued in February had predicted a 7% increase in such outlays.

The spending analysis, which excludes acquisitions, shows a turnaround from last year’s 22% contraction, as the global recession and tight credit markets made companies rein in upstream capital expenditures.

Steadier oil prices over the past few months combined with continued uncertainty over the near-term outlook for natural gas prices are driving some producers to shift their focus to oil from gas, said Aliza Fan Dutt, senior equity analyst at IHS Herold.

“However, this shift comes with a caveat, since following the (Deepwater Horizon) explosion and oil spill in the Gulf of Mexico, there is growing uncertainty in the industry over possible changes in government regulations and taxation relative to oil and gas drilling,” Dutt said.

As a result, Norwalk, Conn.-based IHS Herold expects some shifts in exploration and production spending toward onshore US and to a lesser extent toward plays outside the US due to increased risks associated with drilling in the deepwater Gulf of Mexico. In addition, uncertainty over the causes of the Deepwater Horizon blowout and resulting government restrictions on deepwater drilling will dampen US offshore activity, Dutt said.

Most E&P companies are touting their exposure to liquids production, the report finds. While many natural gas-focused producers are shifting to oil drilling or are highlighting their exposure to liquids-rich unconventional gas, conventional gas development is being severely cut back. Shale gas plays such as the Marcellus and Haynesville continue to drive spending among many E&P companies, according to the analysis.

Spending by group
Upstream spending among the US integrated oil and gas firms is slated to rise 13% this year, primarily due to brightening prospects in North America. These companies’ E&P spending declined 26% in 2009.

Hindered by the weak credit market, capital spending by the small US-based E&P companies fell 61% last year. This year’s improved economy has opened up new sources of capital, which should result in a 62% increase in spending for these small companies, according to the IHS Herold report.

Integrated companies based outside North America will increase capital expenditures by 12% in 2010 on stronger spending in Russia, Latin America, and Asia.

Capital budget rationalization from the merger of Suncor Energy Inc. and Petro-Canada is the primary reason for the expected 8% drop in upstream spending among the Canadian integrated companies, IHS Herold said. The Canadian E&P trusts should boost capital spending by 44% this year, a reversal of last year’s 5% decline. All companies in this group are expected to increase spending.

The only group to boost spending in 2009, the E&P firms based outside North America, should increase capital spending by 9% this year, according to the report. Spending by China National Offshore Oil Corp. Ltd. remains strong as it explores in new areas, such as the Philippines and Vietnam.

Meanwhile, decreased spending over the last couple of years has meant that demand for equipment has declined, which translated into a 15-20% reduction in oil field services since the peak prices and demand experienced in 2007 and 2008, IHS Herold found.

Lower oil service costs should help oil and gas companies stretch their dollars even further, although with increased upstream spending in 2010, rig prices could increase, which means producers must spend more as the year progresses in order to keep up with reserve replacement rates, the report noted.

Contact Marilyn Radler at marilynr@pennwell.com.

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