Following two years of tepid growth, North American oil and gas capex spending is primed for acceleration, led by the U.S., according to Barclays Research’s 2014 Global E&P Spending Outlook, released in mid-December.

The report, which surveyed 300 oil and gas companies worldwide, projects 7% growth in North America in 2014, up from 2% and 4% in 2013 and 2012, respectively. In the U.S., E&P capital budgets are anticipated to rise 8.5% in 2014, vs. 4% in 2013.

Globally, the report projects spending growth of 6%.

“Despite fears of capital spending peaking, capex will actually reach yet another record this year, surpassing the $700-billion mark for the first time,” said James West, Barclays senior equity analyst for oil service stocks, and the report’s lead author. “We believe the industry is in the early stages of a long, sustained and powerful global upcycle with steady spending growth in the international market, and a re-acceleration of growth in North America.”

Activity levels in the U.S. market are set to resume a steady upward trend in 2014. “Although North America has historically been a short-cycle market characterized by volatile swings in activity, the shift toward oil-directed and liquids-rich activity has significantly reduced the cyclicality in the region and will result in more consistent spending growth in North America to remain in the mid to high single digits through at least 2017,” the report said.

Shale Harvest

Increased spending associated with the rise in service-intensive, multi-well horizontal drilling and production growth is driving the trend, and should lead to further spending increases, according to the report.

“The next phase of the unconventional revolution in the U.S. will be characterized by full-scale development of the shale plays,” West said. “Well inventories are at the  highest levels ever for companies that drill in the U.S.”

Proven oil reserves in the U.S. have surged to the highest level in 30 years, and many of the North American independents are sitting on multiple years -- in some cases decades -- worth of drilling inventory, he said. “We expect E&Ps to address the growing inventory of undrilled wells in their acreage by allocating additional capital to the U.S. land market.”

Large independents with domestic budgets above $1 billion will lead the spending gain, although small E&Ps will follow suit.

Upstream spending will be dominated by oil-directed activity, with the Permian Basin the leading driver in U.S. land basins, said West, as it shifts to horizontal drilling. Activity levels in the Bakken, Eagle Ford, Niobrara and Granite Wash plays will also drive spending.

The Gulf of Mexico, too, looks to be a bright spot, with 17 additional floater rigs due to mobilize by first-quarter 2015.

The 2013 spending pause was a period of digestion, West suggested, caused by factors such as drilling efficiencies in the land market that enabled E&Ps to realize lower costs, and adjustments in capital deployment as operators assessed resource acreage and “began to position for the next phase of the unconventional revolution in North America.”

Capex Catalysts

Operators in North America are basing 2014 capital budgets on an average $89 West Texas Intermediate (WTI) oil price, and $3.66 per million Btu Henry Hub natural gas price.

These companies indicated they would increase spending beyond these levels if the average WTI price exceeded $107 per barrel in 2014, and wouldn’t reduce capex unless WTI fell below $74 per barrel on average. More than half of companies surveyed would likely increase spending if WTI prices held above $100. Barclays Research projects an average WTI price of $98 per barrel for 2014.

Likewise, operators would boost spending on natural gas projects for a sustained price of $4.57 per MMBtu, and not cut back if prices hold above $3.16. Barclays Research forecast natural gas prices will average $3.88 during the year.

“We believe conservatism on the part of North American E&Ps when budgeting for oil prices supports our view that the industry can withstand moderate commodity price volatility and a modest drop in prices over the next year without impacting upstream activity,” the report said.

Worse, this slowing of capital spending growth by the majors presents dangers to global oil markets, he warned. He points to the early to mid-2000s, another time when majors limited investments.

“We think this period of under-investment by the majors will lead to a period of underproduction, and could drive a structural leg-up in international oil prices.”

Underinvestment by the majors in 2002 (0.9%) and 2003 (0.3%) may have contributed to the 35% oil price appreciation in 2004 and 46% in 2005.

The retrenchment, however, is creating opportunity for resource-hungry NOCs, he said, which are planning an 11% spending growth year-over-year. NOCs “do not always adhere to principles of Western finance, and are happy to pick up additional acreage to fulfill ambitious domestic strategic agendas.”

Read the entire article in the January 2014 issue of Oil and Gas Investor.