Increased spending in the oil and gas sector is likely in the coming years in view of a better price outlook, BMI Research has said.
The Fitch Group company sees a 2.5%-7.5% increase in capital expenditure (capex) in the global energy industry this year and in 2017 depending on the speed of price recovery and rates of asset divestment. It forecasts a further rise of at least 7% in 2018.
The oil price is a key driver of capital expenditure levels in the oil and gas sector, and the fall in price since mid-2014 will result in two consecutive years of reduced spending in the industry over 2015 and 2016 – the first time since 1986-87, BMI Research said.
The global oil and gas industry will have seen two consecutive years of capital expenditure (capex) cuts in 2015 and this year as companies react to the fall in oil price initiated in mid-2014. This has not happened since 1986-1987, when oil prices fell some 65% from late 1985 and remained low, BMI Research said.
Since August 2014, BMI Research said a similar drop in the value of oil occurred, driving companies to explore their business models and significantly alter practices to prepare for operations in a lower price environment.
Lower revenues have forced companies to play closer attention to the balance sheet, whether to manage high levels of debt or maintain attractive dividends. Over the last two years, oil companies across the globe have been actively cutting outgoings through cancelling and delaying projects, it said.
“Efficiencies have been sought through simplifying project designs, using better equipment and optimising processes. As a result, companies will become leaner and more efficient, resulting in less spending having a greater impact,” BMI Research said.
Nonetheless, both BMI’s assessment of capex plans across the world’s largest companies, and its outlook for an improvement in the oil price in 2017, support the outlook for increased spending in the oil and gas sector.
Shorter-term planning and capital efficiency have driven an increased focus on lower-cost and shorter-cycle projects such as shale, which can be invested in on a well-by-well basis depending on cost dynamics; near field tie-backs that leverage existing underutilised infrastructure to keep costs down; lower-capital projects are also being pursued, with only six major projects having received final investment decision (FID) in 2016. This is resulting in; an onshore over offshore focus, to lower costs and lower risk; expansions over greenfield developments, to leverage existing infrastructure and supply chains and re-engineering concepts, simplifying and optimising designs to lower cost.
BMI notes that cost-deflation has played a significant role in lowering project cost structures over 2015 and 2016, and that there are limitations on how much further this can be stretched.
As such, 2017 is likely to be a good year in which to take advantage of maximum cost deflation and negotiate the most competitive service costs for new developments. More major projects are therefore expected to be sanctioned in 2017, BMI Research added.
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