The world’s largest national oil companies (NOCs) and supermajors are planning to deliver more than $375 billion in investments through the down-cycle, despite ongoing concerns about oil demand, according to a new analysis from Ernst & Young.

The report, “Investing for the Upturn,” was launched at the NOC Congress in Abu Dhabi in June and calculates that the largest NOCs are on course to invest more than US$275 billion in the development of their businesses at home and abroad in 2009. Almost 70% of the total investment is coming from NOCs in Asia and South America. Based on current estimates, by 2015 the largest NOCs will have invested around US$600 billion in their hydrocarbon sectors. The supermajors have also committed to substantial investment in oil and gas activities this year, of some US$100 billion.

Ernst & Young global oil and gas transaction advisory services leader Andy Brogan says, “NOCs and the supermajors continue to show a real determination to push ahead with their major capital expenditure plans this year, at least for now. 2008 was a record year for capital investment by the sector and 2009 is shaping up to be another record year. Companies are wary of finding themselves in a position where they have to play catch-up on investment when the upturn materializes.”

Brogan adds that despite the International Energy Agency’s current estimates for lower global oil demand, investment is still required in production-capacity-enhancement projects to offset falling output due to natural field depletion.

“Most oil and gas companies have indicated that they will spend more than half of their capital investment on their upstream operations.”

The economic slowdown, a fall in oil prices and investors’ flight from risk have left many state-owned oil and gas companies less able to finance projects with surplus cash flows. Some NOCs are looking at cost-cutting measures, while countries such as Indonesia are introducing stimulus packages to aid the sector. Many reserve holders’ ambitions to expand overseas are also being scaled back in order to prioritize domestic projects. Substantial financial commitments are still being made for oil and gas projects in China and Brazil.

Brazil is set to become a major producer following pre-salt discoveries by Petrobras, which plans to invest US$28 billion in pre-salt areas as part of its US$174-billion business plan through 2013—around 90% of its total investment will be targeted at projects in Brazil.

The investment allocated by Petrobras for 2009 represents 38% of the planned US$91-billion expenditure by South American NOCs this year, according to Ernst & Young, with Asian NOCs collectively to invest more than US$98 billion, almost half (US$42 billion) of which has been allocated by China’s CNPC.

By comparison, the capex of NOCs in Africa, the Commonwealth of Independent States (former Soviet Union) and the Middle East is a fraction of that of their Asian and South American counterparts. The NOCs of Africa announced US$21 billion of investment this year compared to US$36 billion for the CIS and US$29 billion for the Middle East. These regions face potential budget shortfalls that could lead them to seek foreign investment to maintain or boost oil production levels.

Brogan says, “When the NOCs had easy access to capital they were in a position to dictate terms with their IOC partners, but the volatility in financial markets means that IOCs with sufficient liquidity will be able to offer potential partners not only technological and operational expertise but also access to much-needed capital.”

He concludes, “In the long-term, the overall structural issues surrounding location of reserves and achievable levels of production have not changed. When the global economy recovers the same pressures evident last year will resume. Any renewed appetite from NOCs for IOC participation will be short-lived—and therefore opportunities available now should not be wasted.”

—Stephen Payne