Capital spending in US, Canada to rise led by pipeline investment boom

March 4, 2013
Led by an investment boom in pipeline construction, capital expenditures for oil and gas projects in the US will increase 10% to $348 billion in 2013, following a 7% increase in spending last year.

Conglin Xu
Senior Editor-Economics

Led by an investment boom in pipeline construction, capital expenditures for oil and gas projects in the US will increase 10% to $348 billion in 2013, following a 7% increase in spending last year.

In response to a dramatic expansion of US pipeline construction and increased labor and material costs, pipeline expenditures this year will zoom to $38 billion from $8 billion the previous year, according to OGJ's annual capital spending outlook. Exploration and production spending in the US is likely to fluctuate little this year.

Canadian spending will climb 6% to $78 billion (Can.) this year, according to OGJ estimates. Pipeline expenditures will surge to $5.7 billion (Can.) from $2.5 billion (Can.) last year. Total upstream oil and gas spending will be $67 billion (Can.) this year, compared with $68 billion (Can.) last year.

International upstream spending will jump in 2013. Latin America, Australasia, and the Middle East are expected to lead.

US upstream spending

Capital spending in the US for upstream oil and gas projects in 2013 will total $288 billion, compared with $286 billion a year ago. This total includes outlays for exploration, drilling, production, and Outer Continental Shelf (OCS) lease payments.

OGJ expects drilling to decline this year in North America. A total of 42,156 wells are to be drilled in the US this year, down from an estimated 43,669 wells drilled in 2012 (OGJ, Jan. 7, 2013, p. 37).

Meanwhile, US drilling costs, measured by the Producer Price Index for Drilling Oil and Gas Wells from the US Bureau of Labor Statistics, remain historically high. The costs have been driven up by increased deepwater activity, tight oil and unconventional drilling activity, and high demand for oil field goods and services.

OGJ forecasts US drilling-exploration expenditures this year at $240 billion—roughly the same level as last year. Capital outlays for oil and gas production are forecast to remain at $45 billion.

In 2012, the US Bureau of Ocean Energy Management (BOEM) held two Gulf of Mexico lease sales (Nos. 222 and 229) that generated a total of $1.8 billion in bonus bids.

On Aug. 27, 2012, the 2012-17 5-Year OCS oil and gas leasing program took effect, which offers a total of 218.94 million acres in Alaska and the Gulf of Mexico. As of press time last week, BOEM has two Gulf of Mexico lease sales scheduled for 2013 (Nos. 227 and 233). OGJ projects that the two 2013 lease sales will generate a combined $2.1 billion in high bids.

Firms' upstream spending plans

Among companies that have disclosed spending plans, Chevron Corp. announced that its 2013 capital budget will total $36.7 billion, a 12% increase from 2012 outlays. About 90% of the company's planned spending is earmarked for exploration and production, including major natural gas projects. Planned US upstream spending is $7.5 billion, up from $6.2 billion last year.

ConocoPhillips's 2013 worldwide capital budget is $15.8 billion, similar to spend levels in 2012. In the Lower 48 states, the company expects to focus on liquids-rich unconventional drilling and infrastructure development in the Eagle Ford, Bakken, Barnett, and Niobrara plays, as well as conventional and unconventional plays in the Permian basin.

Marathon Oil Corp. announced a $5.2 billion capital budget for 2013, compared with $4.8 billion for 2012. As in the previous year, 65% of the budget is targeted to liquids-rich assets.

Hess Corp. announced a $6.8 billion budget for 2013, down 18% from 2012. Nearly all will be for E&P, as the company exits from the downstream business. Hess plans to dedicate $2.7 billion to developing unconventional shale resources in the Bakken formation and Utica shale. North American dry gas plays will continue to receive minimal funding.

US downstream spending

OGJ forecasts that capital spending for US refining and marketing will decrease to $12.7 billion from $13 billion a year ago. Petrochemical expenditures are expected to climb as companies take advantage of new supplies of cheap natural gas feedstock.

After completing larger growth projects, Valero Energy Corp. will cut spending by $1 billion in 2013. Valero reported in January that it will further reduce operations in its Aruba refinery and reorganize the site as a refined products terminal.

Tesoro Corp. reported that it will halt refining operations at its 93,700-b/d Kapolei refinery in Hawaii during April and convert the refinery to an import, storage, and distribution terminal. The company's consolidated capital spending for 2013 is set at $530 million, down from $559 million last year. Income project spending will slump 20% to $305 million.

Hess will exit the refining business after closing the 70,000-b/d fluid catalytic cracking unit at Port Reading, NJ. It also plans to sell its US terminal network.

HollyFrontier Corp., Dallas, said in an investor presentation that its 2013 projected capital budget will increase 27% to $350 million. Maintenance capital this year will be $200 million. The estimated capital spend for expansion of the refinery at Woods Cross, Utah—including Phase 1 and potential Phase 2—will be $625-725 million.

Western Refining's 2013 capital expenditures will total $206 million, up from $162 million last year. Its growth opportunities include potential expansion of a diesel hydrotreater at its El Paso refinery and crude oil logistics projects.

Among petrochemical producers, Chevron Phillips Chemical Co. plans $1.1 billion of investment, including several growth projects planned or under construction, such as its US Gulf Coast petrochemicals complex and 1-hexene plant.

Pipelines, other US transportation

The pipeline construction boom, like much US spending, results mainly from the surge in activity related to shale and other low-permeability formations. Capital spending for oil and product pipelines and pump stations in the US are estimated at $23 billion, a steep climb from $4 billion last year.

OGJ's Worldwide Pipeline Construction report this year projects completion of 4,121 miles of crude and product pipelines, compared with 834 miles projected at the same time last year (OGJ, Feb. 6, 2013, p. 98).

Spending for natural gas pipelines and associated compressor stations this year will increase to $15 billion, with plans calling for the construction of a total of 2,216 miles. This compares with last year's projections for a spending of $4 billion and 760 miles.

TransCanada began construction on the 485-mile pipeline known as the Gulf Coast Project in August 2012. The 36-in. pipeline between Cushing, Okla., and the US Gulf Coast is to be in service late this year. Total cost of the project is $2.3 billion, of which $300 million will be spent for the 47-mile Houston Lateral pipeline.

Enbridge Energy Co. Inc. proposes to build the Flanagan South Pipeline Project, a 600-mile, 36-in. crude oil pipeline between Flanagan, Ill., and Cushing, crossing Illinois, Missouri, Kansas, and Oklahoma. The Flanagan South line will open in mid-2014 with initial capacity of 600,000 b/d, expandable to 800,000 b/d.

Capital spending for other transportation this year is expected to increase substantially, thanks to LNG plans and increased railroad deliveries of crude oil and petroleum products. According to the Association of American Railroads, crude oil and petroleum products transported by US railways in 2012 increased 46% over 2011 and will continue to grow in 2013.

Canadian E&P, oil sands

Capital outlays for conventional oil and gas exploration, drilling, and production in Canada this year will total $41 billion (Can.), a 4.7% contraction from 2012 and the first decline since 2009. (All monitary figures that follow are in Canadian dollars).

OGJ's estimates 11,317 oil and gas wells will be drilled in Canada this year, down from 11,880 in 2012. According to the Canadian Association of Petroleum Producers (CAPP), there were 11,141 well completions in Canada in 2011.

Spending on oil sands projects, including outlays for in situ, mining, and upgrading, will post a 4% increase this year to $26 billion, after a 10% increase last year. CAPP reported that 2011 oil sands capital spending is $22.7 billion, up from $17.2 billion in 2010.

Upstream capital spending dips in tandem with weakening bitumen values of the wellhead, slowing demand growth, and delays in the sanctioning of oil sands projects.

Suncor Energy Inc., Calgary, plans $7.3 billion in capital spending this year, aimed at an increase of 8% in overall production from last year. Of Suncor's budget, $3.3 billion will go towards growth projects, nearly half for advancing E&P projects including Hebron, Golden Eagle, and East Coast Canada asset development. The remaining $4 billion is targeted to sustaining existing operations.

Suncor will cut its 2013 oil sands spending to $4.2 billion from 2012 outlays of $5 billion. The early commissioning of Firebag Stage 4 will reduce in situ growth capital as compared with prior years. Suncor also delays sanction of major oil sands projects, including the Voyageur upgrader project.

Husky Energy Inc. announced a $4.8 billion capital speding program for 2013, of which $4 billion is directed to upstream work. Spending for oil sands projects will be reduced from $600 million in 2012 to $500 million this year.

Canadian Natural Resources has tagged $6.9 billion in 2013 spending, including $3 billion on conventional projects and $3.85 billion on oil sands. Spending on the Horizon oil sands project will rise to $2.5 billion in 2013 from $1.7 billion in 2012.

Total capital expenditures for Syncrude will be $3.3 billion this year, up from $2.8 billion in 2012.

Other Canadian capital outlays

Expenditures for crude and products pipelines and pump stations will total $4 billion this year, up from $1.2 billion last year. Spending on natural gas pipelines and associated compressor stations in Canada will rise to $1.7 billion from $1.3 billion last year.

OGJ's Worldwide Pipeline Construction report shows that 273 miles of gas pipelines are to be completed this year in Canada vs. 144 miles projected last year. Plans also call for the construction of 1,000 miles of crude and products lines this year compared with 348 miles forecast a year ago in Canada.

Progress Energy Canada Ltd. selected TransCanada to design, build, own, and operate the $5 billion Prince Rupert Gas Transmission project in British Columbia. This proposed pipeline will transport natural gas primarily from the North Montney gas-producing region near Fort St. John, to the recently announced Pacific Northwest LNG export facility in Port Edward near Prince Rupert. It is the second major natural gas pipeline for TransCanada proposed on Canada's West Coast.

TransCanada said it also plans to extend its existing NOVA Gas Transmission system in northeast British Columbia to connect the new pipeline to the additional gas supply from North Montney. That project is expected to cost $1-1.5 billion.

Kinder Morgan announced an update to its proposed Trans Mountain pipeline expansion. The pipeline capacity will be expanded to 890,000 b/d from 750,000 b/d, with a required capital investment of $5.4 billion.

Refining and marketing expenditures in Canada will surge to $3.9 billion this year. The North West Redwater Partnership, a joint venture of North West Upgrading and Canadian Natural Resources, will start construction of the first phase of the Sturgeon refinery project in spring 2013. The 3-year project will cost $5.7 billion.

Suncor will spend $730 million on refining and marketing, a 22% increase from $600 million last year. Husky Energy will spend $700 million on refining and upgrading, up from $500 million last year.

Spending in Canada for petrochemicals is to experience a sizable increase this year. Other transportation spending will also go up as Canada seeks to transport LNG to Asia. The $4 billion Kitimat LNG project has secured all regulatory approvals from the government of Canada. Meanwhile, Canadian rail deliveries of oil and petroleum products increased 30% during 2012.

Spending elsewhere

Driven by the sanctioning of major projects and the delivery of a large number of offshore rigs, E&P spending outside the US and Canada are forecast to rise 9.2% to a record of $460 billion this year, according to Barclays' Global 2013 E&P Spending Survey. Latin America, Australasia, and the Middle East are expected to lead.

"Spending in the Middle East is expected to increase by 11% next year by a pickup in activity in Abu Dhabi (ADNOC expected up 33%). Growth is also expected to be driven by Saudi Arabia (expected up 4%) and in Oman (expected up 17%)," the Barclays survey said.

In Mexico, Petroleos Mexicanos' 2013 capital budget is $25.3 billion, up from 2012 capital outlays of $23.6 billion. The company has allocated 79% of the total to upstream projects, including maintenance expenditures.

In Brazil, Petroleo Brasileiro SA (Petrobras) reported a $236.5 billion budget over its 2012-16 business plan with an average of $47.3 billion/year. Over the 5-year period, $141.8 billion will be allocated to E&P and $65.5 billion will be allocated to downstream activities.

The Asia-Pacific region is expected to deliver strong growth in 2013. PetroChina and Sinopec's upstream expenditures are to climb by double digits with accelerated ventures in Chinese shale gas. CNOOC expects to invest $12-14 billion in 2013, up from $11 billion in 2012, with increased spending on deepwater drilling offshore China.

Inpex Corp., Japan, will spend $8 billion in major projects, up from $3 billion last fiscal year. During 2013-15, Inpex plans to invest $30 billion in existing projects. Spending on the Inpex-operated Ichthys LNG project offshore Australia will also grow substantially this year.

Upstream spending in the North Sea will increase as well, fueled by active exploration activity and new fields coming on stream. Statoil plans to invest around $19 billion in 2013 and expects to complete around 50 wells.

Meanwhile, some US-based firms also have released their international spending plans for 2013. Chevron's spending in 2013 includes developments in Australia, Nigeria, Kazakhstan, Angola, and Congo (Brazzaville). Hess plans to spend $3.1 billion in Europe, Africa, and Asia, down from $3.3 billion last year. ConocoPhillips's major international projects include continued development of the Eldfisk projects in the Norwegian North Sea, offshore developments in Malaysia, and the Australia Pacific LNG joint venture.