Oil capex to see first 2-year drop in 30 years

OREANDA-NEWS. September 10, 2015. Global upstream spending will decline by 20pc this year over last and by another 3-8pc in 2016, the first two consecutive years of decline since 1986-87.

The forecast by bank Barclays in its latest upstream spending survey adds to growing expectations that the fall in crude prices to six-and-a-half year lows is forcing producers to further pullback drilling plans as cash flows get squeezed. Companies such as Chevron, ConocoPhillips and Continental Resources have already said they plan to further lower spending and cut workers.

The steepest cuts will be among the North American producers, which are expected to reduce their spending by 35pc in 2015. Those cuts could go deeper if prices drop back to around \\$30/bl. Spending may fall by another 10-15pc in 2016, assuming the Nymex WTI contract stabilizes in the \\$50-\\$60/bl range.

That's in contrast to expectations in May that spending was to increase modestly in 2016. That view was "reasonable" given that spending had not fallen for two consecutive years for almost 30 years, Barclays said.

"However, that expectation has moved materially lower in recent months with oil prices taking another leg down," the bank said. "North America is the most cyclical energy market globally, so it comes as no surprise that it has been hit hardest during this downturn."

Many exploration and production companies based their 2015 budget on a \\$50-60/bl for WTI, which is much higher than current levels.

Large producers have spent an average of 113pc of cash flow in the past three year in North America, versus 91pc in 2009. Small to medium-sized companies have spent an average of 169pc over the same period, and 61pc of smaller producers plan to spend at or above cash flow in 2015, slightly less than the 69pc forecast in January.

In a survey of North American oil producers, Barclays said many expect services costs to fall further. Overall onshore costs have declined 20pc or more since the beginning of the year, according to 70pc of the responders. But 78pc of them believe pressure pumping prices will decrease by more than 5pc in the next six months.

Despite the fall in services costs, smaller producers have indicated they are not expecting to increase spending until oil prices rise materially, with 67pc requiring \\$70/bl or higher.

The bank is forecasting the US land rig count will average 860 in 2016 and rise to about 900 by year-end. The count fell by 13 last week to 864, in its second straight week of declines, according to oilfield services provider Baker Hughes.

For non-US companies, the bank expects spending to decline 14pc this year and by about 0-5pc in 2016. Offshore spending may fall by about 20-25pc in 2016. Companies don't breakdown offshore spending, but the bank expects it to be about 19pc of total E&P spending in 2015.

Barclays surveyed 175 oil and gas companies worldwide, in a four-week exercise from 10 August to 2 September.