Following two years of tepid growth, North American oil and gas capex spending is primed for acceleration led by the US, according to Barclays Research's 2014 Global EP 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 US, EP capital budgets are anticipated to rise 8.5% in 2014, versus 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 US 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.

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 US 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 US”

Proven oil reserves in the US 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 EPs to address the growing inventory of undrilled wells in their acreage by allocating additional capital to the US land market.”

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

Upstream spending will be dominated by oil-directed activity, with the Permian Basin the leading driver in US 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 EPs 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.”

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 forecasts natural gas prices will average $3.88 during the year.

“We believe conservatism on

the part of North American EPs 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.

After two years of declining spending precipitated by low natural gas prices and wide oil-price differentials, Canada appears set for a return to sustained growth as well.

“We forecast upstream EP spending in Canada to be $43 billion in 2014, up 3.2% from $41.7 billion in 2013.”

While modest, the gain should derive from midstream infrastructure additions, capital infused from national oil companies (NOCs) and majors that have taken positions, and the anticipation of an expanding liquefied natural gas (LNG) export market.

West said the survey likely under-represents the impact of foreign spending, estimated at 5%, with CNOOC and Petronas leading the pack in Canadian spending growth. CNOOC plans to invest an additional $600 million this year, to $2 billion, and Petronas an additional $525 million, to $1.6 billion.

While oil differentials have pushed as high as $42 a barrel recently, dampening oil exploration, optimism is building around Canadian gas plays. The best hope for Canadian gas producers is the supply-demand dynamic for LNG export to Asia, the report said. Nine proposed liquefaction

facilities have a combined capacity of 10- to 15 billion cubic feet per day.

“We believe Canada will push forward rather aggressively with LNG exports. Even a fraction of that capacity of 5 Bcf per day coming to fruition could require a 40% increase in production,” West said.

Several of these projects are slated for 2017 and 2018 starts, but “we believe some incremental LNG-related activity could materialize in the latter part of 2014 as operators delineate their acreage in the key LNG gas plays.”

Capex related to LNG begins to stairstep up in 2014, he believes, but “the most significant growth will be in 2015 and 2016 in preparation for exports in 2017 and 2018.”

Globally, EP spending is projected to reach $723 billion in 2014, a new record, up from $682 billion in 2013.

EP spending outside of North America is forecast to reach a record $524 billion in 2014, up 6%, compared to $496 billion in 2013, up 10% from 2012. Investments by operators in the Middle East, Latin America and Russia are fueling the growth, offset somewhat by near-flat growth by the majors, and corruption probes into Chinese NOCs resulting in stagnation.

Buoyed by Brent prices projected to average $108 over 2014, the Barclays' analysts predict the industry is in the early days of a prolonged global growth cycle.

“We continue to believe we are in the midst of a multi-year, double-digit growth spending upcycle internationally characterized by increased drilling in complex geologies on land and exploration and development of traditional and emerging deepwater basins,” West said. “Sustained high oil prices, the sanctioning of major projects, and the delivery of a large number of offshore rigs in both 2014 and 2015 are driving the increases in spending.”

Oil price remains the “overwhelming determinant” of EP spending, cites the report, with 60% of overall respondents claiming it as a key factor in establishing 2014 budget plans. International operators based 2014 budget decisions on a $98 average Brent price.

Conversely, North American independents are increasingly pulling back capex from abroad in the wake of shareholder activism, NOC competition and unconventional opportunities back home. Barclays anticipates international spending by North American EPs to drop by 4% this year, which would be the second year of declines. Hess Corp., Marathon Oil, Murphy Oil and Anadarko Petroleum lead the international exodus with expected retractions this year.

Contrary to the growth upcycle, international oil companies (IOCs), which represent 22% of worldwide EP spending, are pulling in their budgetary horns and practicing capital constraint. Barclays estimates spending growth by the majors at “an anemic 3%” for 2014.

“Following several years of investor preference for production growth over cash-flow growth, the pendulum has recently swung the other way, creating a period of soul-searching for the super-majors.”

Activist shareholders of IOCs, skittish over cost overruns and lackluster cash returns, are pushing them to focus on returns and cash-flow growth and could result in large projects being postponed or scrapped, West said.

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

“We think this period of underinvestment 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.”