Following 2 years of tepid growth, North America is poised to see an acceleration of exploration and production spending in 2014 as US operators move into full scale development of unconventional resource plays.
New research by Barclays Capital found that North American E&P spending is set to rise by more than 7% year-over-year to an estimated $199.2 billion in 2014, after increasing 2% in 2013 and 4% in 2012.
"In North America we're clearly seeing an acceleration in spending after a few difficult years," said James West, senior equity research analyst for Barclays.
Barclays Global 2014 E&P Spending Outlook is based on a survey of more than 300 oil and gas companies about their spending intentions for 2014.
The growth in North American spending is expected to be driven by a rise in service-intensive, multiwell horizontal drilling, and production growth.
Barclays said a modest pause in spending acceleration occurred in 2013 as operators focused on finding the most efficient drilling and completion practices in burgeoning shale plays and drilling single wells needed told hold leases.
During 2013, operators like Continental Resources in the Bakken-Three Forks tight oil play and Cabot Oil & Gas in the Marcellus shale have increased the number of wells drilled from a single pad and improved the efficiency of completions. The time to drill and complete a well declined for both operators, and their wells became more productive.
Barclays expects a renewed acceleration in E&P spending in 2014 as operators like Cabot and Continental move into full scale development across their acreage.
Total proved oil reserves in the US recently reached a 30-year high thanks, in large, to unconventional resource development.
The Energy Information Administration said proved reserves of crude oil and lease condensate in the US totaled 29 billion bbl at the end of 2011, a year-over-year increase of 15%. Proved reserves of natural gas rose 9.8% to 348.8 tcf.
Barclays said many US producers are sitting on years, and in some cases decades, worth of drilling inventory. "We expect the E&Ps—led by North American independents—to address the growing inventory of undrilled wells in the acreage by allocating additional capital to the US land market."
E&P spending in the US is on track to rise 8.5% this year to an estimated $156.1 billion as operators move into full scale development of unconventional resource plays.
Technology is expected to be a key factor in capital allocation as operators seek the most efficient service providers to complete and service the large inventory of wells expected online this year. Barclays figures some of the best companies positioned to capitalize on this trend are major integrated service companies and sophisticated smaller companies.
Producers are expected to focus spending on oil-directed drilling activity this year. The greatest spending growth is expected in the legacy Permian basin, which, according the Baker Hughes, accounted for 28% of US land drilling activity in December.
More technically complex horizontal drilling is becoming the main form of drilling in the basin as operators increasingly turn to exploit its unconventional reserves.
Barclays's survey found a number of large operators are expected to substantially increase Permian basin spending in 2014, these companies include Pioneer Natural Resources Co., Apache Corp., Anadarko Petroleum Corp., Devon Energy Corp., and Concho Resources Inc.
The Permian was a challenging basin for many service companies in 2013, Barclays said, as a supply glut of service equipment across multiple product lines placed downward pressure on prices. But the spending growth expected this year has led Barclays to predict that the region could experience net demand growth for horizontal rigs in the range of 50-70 units, a roughly 35% increase from 2013 levels.
"We think demand tied to these units would help fully rebalance the market for pressure pumpers and provide better utilization for coiled tubing units, wireline equipment and land rigs," Barclays said.
Other areas that Barclays expects will see sizable spending growth in 2014 are the Bakken tight oil formation, the Eagle Ford and Niobrara shales, and the Granite Wash.
Canada spending to rise
A modest uptick in exploration and production spending is expected in Canada. "After 2 years of declining spending driven by weak natural gas prices, wide oil price differentials, and challenged small-cap E&P balance sheets, Canada appears set for a return to growth," Barclays wrote.
E&P spending in Canada is expected to rise 3.2% to $43.1 billion in 2014.
Optimism is quietly building in Canadian gas plays. Barclays said that while the Canadian oil rig count was down 15% year-over-year in the second half of 2013, the gas rig count was 50% higher, on average, than year earlier levels. In British Columbia, the rig count was up 19% year-to-date in early December 2013 largely due to a ramp up in the Montney and Horn River basin gas plays.
Barclays expects majors and international oil companies will drive spending increases across Canada in 2014. The interest in Canada's vast resource base is evident in several large deals that have closed in recent years, including Petrochina Co. Ltd.'s partnership with Encana Corp. in the Duvernay shale, China National Offshore Oil Corp.'s acquisition of oil sands producer Nexen Inc., and ExxonMobil Corp.'s acquisition of gas-focused independent producer Celtic Exploration Ltd.
Canadian exploration and production companies specializing in natural gas production have seen their revenues reduced in recent years by the persistent weakness of Canadian gas prices and the wide discount that Canadian crude benchmark Western Canadian Select receives relative to West Texas Intermediate.
Buyers in recent merger and acquisition deals are better-capitalized than smaller exploration and production companies and have the capability to increase spending on exploration and development activity.
Barclays notes: "We believe the rise of the majors and [national oil companies] in Canada will lead to increased 24-hr operations, more pad drilling, and greater contract coverage, benefitting the biggest Canadian service and drilling companies."
CNOOC is leading the way in anticipated spending growth. The Chinese oil company is set to increase its Canadian budget by $600 million to roughly $2 billion in 2014. Also set to raise spending is Petronas, of Malaysia, which plans to hike its Canadian spending by $525 million to about $1.6 billion.
In the near term, Barclays said, Canadian gas producers face challenges in the form of growing gas production in the US—particularly from the Marcellus shale in the Northeast where production is above 13 bcfd.
Production growth from the Marcellus shale is pushing Canadian gas out of the US market, leading to lower prices. Barclays said Canadian gas production has been slipping since 2008 and now stands at around 13 bcfd.
Downward pressure on Canadian gas prices will likely persist until planned LNG export facilities open up new markets in Asia toward the end of the decade, Barclays said. Nine liquefaction terminals are proposed for Canada with a combined 10-15 bcfd of potential capacity. If even a few of those projects come online, it would raise demand and provide the impetus for production growth.
According to Barclays: "Even a fraction of that capacity of 5 bcfd coming to fruition could require a ~40% increase in [gas] production," setting the stage for higher Canadian E&P spending.