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E&P spending to remain constrained in 2010

Upstream oil and gas capital expenditure (capex) will be flat in 2010 and won't start to grow again until 2011, says Wood Mackenzie

A report by the consultancy (The first hints of recovery in global upstream spending), predicts exploration and production (E&P) investment will amount to around $325bn next year – similar to the expected 2009 total – and down from 2008's five-year peak of $370bn. It will return to growth the following year, reaching around $350bn in 2012.

The report expects a few large capital projects to be implemented in 2010, such as Chevron's Gorgon in Australia, the Rumaila oilfield in Iraq, Blocks 17 (Total) and 31 (BP) in Angola and Imperial Oil's Kearl oil-sands project in Canada. But, overall, it expects such commitments to be balanced by the prevailing caution in the industry, as companies wait for convincing evidence that the recovery will be sustained.

There is plenty of evidence to back up these claims. ExxonMobil trimmed its capex this year, bringing it back in line with 2008 spending of $26bn. BP is keeping 2009 spending on a par with 2008, at $20-21bn – with lower spending in refining and marketing and alternative energy, while maintaining E&P investment. But Shell says it will be forced to cut $3bn from its planned 2010 capex to $28bn.

An examination of international and national oil companies' (NOCs) development spending plans, suggest trends will vary by region and sector. Says Iain Brown, Wood Mackenzie's vice-president of upstream energy research: "In some regions, operators are planning slightly more ambitious capex programmes than in 2009, reassured by the oil price remaining at around $70 a barrel and ready to exploit significant reductions in the regional cost base." But, he adds, prudence is the watchword in many other areas, especially where commitments are required to large-scale, long-lead projects, or where commercial or political risks are perceived to be high.

The majors, with their larger revenue streams, more diversified portfolios and greater presence in both upstream and downstream activities, have greater financial flexibility than their smaller rivals, but they still want to keep a tight rein on spending in difficult times. But the majors' spending reticence is not shared by the more cash-rich NOCs.

Brazil's state-controlled Petrobras will invest $18bn in E&P in 2009 – up by 20% from the previous year – out of a total $37bn of expenditure. Next year could see larger increases from other NOCs. Indonesia's Pertamina has announced a $4.2bn increase in 2010 capex, with $2.7bn – more than two-thirds – allocated to extending upstream developments.

Many of the areas where growth has been maintained in 2009 were underwritten by the larger NOCs, such as Saudi Aramco, Abu Dhabi National Oil Company and Petrobras. Wood Mackenzie forecasts that total NOC spending will remain steady at around $100bn a year (in real terms) over the next five years.

But while Middle Eastern and Asian oil companies are preparing for increased E&P spending next year, other regions will see more restrained outlays. Cutbacks are greatest in North America, which saw its share of global capital spend fall from 31% in 2008 to 24% in 2009. Wood Mackenzie attributes this to the large proportion of budgets in this region that are commonly discretionary, allowing greater flexibility in adjusting project schedules.

The sharp fall in natural-gas prices has precipitated deep cuts in capital spending. Chesapeake Energy, the largest US gas producer, will reduce exploration and development spending in the 30-month period from mid-2008 to end-2010 by $3.2bn – a 17% fall from previously planned spending.

Brown expects North America to recover to meet 27% of global spending in 2012, but will not fully recoup lost ground, reflecting residual concerns over the long-term viability of higher-cost resources such as Canada's oil sands and unconventional gas reserves.

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