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IEA sees upstream spending revival

After investor confidence plummeted in the wake of crashing oil prices, upstream spending may finally be on the comeback trail

Global spending in the oil and gas upstream sector will continue to recover in 2018 as stronger prices and healthier oil demand growth encourage investment, according to the International Energy Agency.

After collapsing between 2014-16 by over 40% amid the downturn, an upstream recovery that saw 4% growth in 2017 will this year accelerate to 5%, accounting for projects worth $472bn, the IEA said in its World Energy Investment 2018 Report.

The US shale success story is driving much of the growth, the IEA said. Capital spending in the US shale patch is expected to increase by 20% in 2018 after a 60% jump last year, as shorter-cycle projects take precedence over offshore and oil sands ventures.

This growth will see shale's share of global total investment rise to 25% in 2018, while the main spending sector, onshore conventional resources, will see only a slight uptick to 40% of the total. In contrast, investment in offshore conventionals is expected to continue a nose-dive to its lowest figure since 2000 at just less than 30%, the IEA predicted.

"The United States shale industry is at a turning point after a long period of operating on a fragile financial basis," IEA Executive Director Fatih Birol said in a press release. "The industry appears on track to achieve positive free cash flow for the first time ever this year, turning into a more mature and financially solid industry while production is growing at its fastest pace ever."

The IEA noted that majors are increasingly raising their profile in the shale basin. Chevron and ConocoPhillips both boosted their production in the first quarter of this year by 250,000 barrels a day, an increase of 65% year-on-year and 18% y-o-y respectively. BP and ConocoPhillips also have unconventional resources and Shell has committed to investing $2-3bn a year through its 2018-20 programme.

However, the IEA also cautioned over downside risks for the US shale industry, citing above-ground constraints, an uncertain outlook for productivity gains and competition from other sources of oil such as deep-water projects.

In conventional oil and gas, the IEA noted that companies are also increasingly turning to brownfield sites to mitigate capital risk. The agency predicts that greenfield investment will fall to just one-third of total investment in 2018 as the industry tries to limit upfront costs. This will impact decline rates at mature fields. In 2017, the post-peak decline rate rose to an average of 7% from 5.7% in the period 2010-14.

"While brownfield projects boost production in the near term, effectively by bringing forward output, greenfield projects are needed to raise capacity over the medium and longer term," the IEA warned. With global oil demand on an upward curve, this trend could see tightening of supply and take several years for greenfield projects to get underway.

Playing safe

Funding for exploration was hit hard in recent years as global oil prices tumbled. This will not change in 2018, according to the IEA. Investment will total $51bn this year—a drop of 6% from 2017. More strikingly, exploration will only comprise 11% of the total upstream spending, the lowest share ever.

The agency said that reduced exploration spending is leading to a significant decline in majors' total oil and gas reserves, which fell to around 87.5 billion barrels of oil equivalent in both 2016 and 2017—the lowest since 2001 a nd 11% lower than the peak reached in 2013. But the IEA noted that areas which offer good fiscal terms and attractive geology will continue to dominate exploration investment, pointing to Mexico, offshore Brazil and Guyana, where large resources have been discovered in recent years.

Auctions in Mexico in January and March raised over $100bn from more than 70 different companies as reforms reduced the dominance of NOC Pemex. In Guyana, ExxonMobil has pumped $4.4bn into the Liza project—first oil scheduled to be produced by 2020.

Elsewhere, NOCs will continue to lead upstream spending, with their share of global financing set to remain at 44% for the third successive year—a record figure. Chinese NOCs in particular are expected to raise capital spending as the country targets natural gas to reduce dependence on coal.

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