Worldwide E&P expenditures will climb 9.3% in 2008, according to Citigroup’s 26th annual E&P spending survey. Some 247 public and private operators were polled. In aggregate, they plan spending increases of 6.5% in the U.S., a moderate rise compared with growth of 17.9% seen in 2007.
Expenditures are estimated to rise with greater strength, by 12%, in the international arena, but to decline 3.1% in Canada.
When final 2007 numbers are reported, actual spending is expected to have risen 18.9% over 2006, significantly above Citi’s initial estimate of a 7% rise as shown in its 2007 survey.
“A pattern of overspending initial budgets continued for the eighth consecutive year with moderating cost inflation likely to support overspending in 2008,” says oilfield-service analyst Geoffrey Kieburtz in New York.
Of the total $355 billion of upstream expenditures planned for 2008 by survey respondents, more than two-thirds will be directed at projects outside North America and 24% is directed to the U.S.
Only 8% will be spent in Canada, reflecting the slowdown in natural gas drilling there.
U.S. plans
Of the 145 E&P companies surveyed that have U.S. operations, nearly 47% plan to increase spending in the coming year, to an aggregate $58.9 billion, a 1.4% increase. Those planning to boost 2008 spending overwhelmingly cited increased development activity in unconventional resource plays as the primary reason.
The largest U.S. spending increases in the coming year are projected by three players devoted to unconventional gas plays such as shales: EnCana ($600 million), Devon Energy ($380 million) and EOG Resources ($269 million). Among the largest declines are those anticipated from Newfield Exploration (down $400 million) and Nexen (down $385 million).
On a percentage basis and consistent with 2007, the largest increases by far emanate from the smallest independents.
In the U.S., operators are projecting increased development through horizontal drilling and intensive activity in unconventional resource plays. In fact, horizontal and directional drilling technologies have become the most influential factor in their E&P spending, Kieburtz says, with positive implications for a number of oilfield-service firms.
These drilling technologies edged out seismic to be cited as most important for the first time in 2006. This is consistent with the shift to drilling unconventional resource plays, he reports.
“Fracturing technology again came in third in frequency of mentions, down only modestly from 2006.”
The rate of offshore spending growth will likely be limited by deepwater capacity constraints. The survey indicates large integrated companies are voicing increased concerns about the availability of personnel, while access to drilling rigs has fallen on the list of worries.
Overspending
Operators appear to have adjusted well to the rising costs of oilfield services and to higher oil and gas prices. They have maintained a disciplined approach that, in Kieburtz’s view, “reduces the risk of a severe correction and prolongs the cycle (of overspending their budgets).”
Higher-than-expected oil prices have been a major theme for six years, often exceeding planning assumptions, the prior-year futures strip—and the price threshold at which companies said they would increase their budgets 10% from their original projections.
“The gap between the oil price used for planning and the current strip widened in the latest survey to over $20 per barrel, by far the largest in absolute and relative terms that we have on record,” he says.
Oil and gas price-deck assumptions have moved higher in 2007 to approximately $70 for oil and $7.25 for gas.
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