In April, OGJ published its annual oil and gas capital spending outlook, which reported a cut in spending worldwide (OGJ, Apr. 27, 2009, p. 26). This contraction in spending plans was brought on by the rapid decline in global oil demand and the resulting fall in oil prices.
A new analysis, however, finds that substantial spending will still take place this year, in spite of the economic downturn. Ernst & Young has released an analysis that looks at investment plans and concludes that the world’s largest national oil companies (NOCs) and the supermajors plan to invest more than $375 billion this year, despite ongoing concerns surrounding demand.
The level of uncertainty about the path of future demand is probably now at its highest in decades, driving most oil and gas producers to monitor their spending commitments closely, writes Andy Brogan, global oil and gas transaction advisory services leader for E&Y. Brogan warns that when future demand becomes more certain, spending plans could change very quickly and materially from those currently public, but many companies appear wary of having to play catch-up when the upturn materializes.
In 2009, the largest NOCs collectively plan to invest more than $275 billion on hydrocarbon development at home and abroad, according to E&Y’s report, which concedes that because many state-owned oil companies keep their spending plans private, the actual level of investment is likely to be higher.
The analysis finds that many supermajors—ExxonMobil Corp., Royal Dutch Shell PLC, BP PLC, Chevron Corp., and Total SA—collectively plan to invest as much as $100 billion in oil and gas activities this year. This compares with the $122 billion invested in 2008, but with better terms now available for equipment and services, oil companies may find that they get more for their investment.
Cautious investments
Oil and gas producers are being more cautious with investment in some subsectors and regions. When internal business units compete for capital, higher-cost or riskier projects will struggle to win approval in the current economic climate, according to Brogan. The regions most likely to see a decrease in investment in the short term include mature basins where costs are typically higher, countries with unstable fiscal regimes, and countries or regions where security concerns raise operating costs.
Reduced availability of capital and tougher credit terms will impact the ability of smaller producers to fund ongoing operations and bring assets into production. Many smaller, independent companies, making significant reductions in their planned investment for 2009, are prioritizing their most advanced or promising projects to minimize investment risk and increase revenue streams.
And because independent oil and gas companies typically own or control reserves in countries where large international oil companies (IOCs) are not active or have a limited presence, cutbacks in spending by independents could impact the longer-term viability of oil and gas production in less-developed regions, the report says.
Cost-control keys
Brogan says that in light of economic turbulence and oil price volatility, cost containment has become a strategic priority for companies, and companies that achieve successful project results are likely to possess some key attributes that keep costs in check.
One key is an effective risk-management process with a clear line of sight between project, portfolio, and strategic risk management such that strategic objectives are supported by tactics that address operational, business-specific, and macroeconomic threats.
Also, companies must undertake rigorous portfolio management, give greater scrutiny to project selection, and provide more certainty during the feasibility phase to project costs and human resource requirements. In a challenging environment, companies need to consider more carefully where best to allocate finite resources.
A third key to cost control is to invest wisely in enabling technology, processes, and systems to deliver a seamless, effective global operation and knowledge transfer. Also, standardized processes and systems will help underpin greater governance and enhanced oversight, enabling improved transparency and allowing strategic hubs to control worldwide projects without jeopardizing quality, cost, or schedule, according to the E&Y report.
Organizations also will need to have active stakeholder management plans, Brogan says. At the highest level, these plans address relationships between NOCs and IOCs and influence how they effectively interact with governments, local communities, joint venture partners, and the supply chain in a manner that not only supports successful project execution but also promotes a responsible corporate brand image.