Global upstream activity continues to recover, according to oilfield contractors, but the risk of under-investment in new projects still hangs over the oil industry as capital discipline and the transition to lower-carbon energy weighs on development spending.
Citing new research, energy consultants Wood Mackenzie said Wednesday it believes the current upstream recovery is slower than in previous cycles with development spending expected to increase just 5% this year, after a 2% rise in 2017.
As a result, oil and gas producers will need to boost their development budgets by around 20% to meet future demand growth and ensure they can sustain production into next decade, Wood Mac warned.
"Companies will need to start investing again to sustain their business. But decision-making will be fraught with uncertainties, the oil price and energy transition not least among them," Wood Mac's director of upstream oil and gas Malcolm Dickson said in a statement.
The comment came as two more oilfield service companies noted a further uptick in upstream orders during the third quarter but were cautious on the overall scale of the spending recovery.
Despite a slip in revenues in the third quarter, Italian oilfield engineering group Saipem said Wednesday it sees signs of a "gradual" market turnaround compared to a spending slump in the wake of the 2014 oil price crash.
"The market context in which the company operates seems to confirm some signs of a gradual trend reversal compared to the last few years, supported also by good visibility of commercial opportunities, in particular in certain Engineering & Construction segments," Saipem said in a statement.
During the first nine months of 2018, Saipem said its new orders amounted to Eur6.12 billion ($6.98 billion), up 30% from Eur4.72 billion in the year-ago period.
Norwegian oilfield contractor Aker Solutions was equally cautious on the spending recovery, saying that while upstream activity is picking up, the market remains "competitive."
Also reporting Q3 earnings Wednesday, Aker said, while its order intake more than doubled versus a year ago in the quarter, overall revenues are expected to close 10% higher year-on-year in 2018 and end 2019 just "slightly up" from 2018.
On Tuesday, Aker's offshore-focused rival Kvaerner predicted further growth in regional upstream spending after its order intake also doubled in value during the third quarter.
SPENDING CONSTRAINTS
Oil service companies were the hardest hit in the oil industry from the price downturn after producers slashed billions of dollars in planned investments to conserve cash.
As a result, conventional oil and growth inventories have shrunk and global pre-FID conventional reserves now only cover two years of global oil and gas production, Wood Mac believes.
While spending on new developments is expected to rise from a low of $460 billion in 2016 to just over $500 billion in the early 2020s, the total is still well below the $750 billion peak in 2014, it said.
In the short term, upstream spending will likely be constrained by ongoing strict capital discipline by producers and fears over the pace of future oil and gas demand through the next decade, Wood Mac believes.
"Many companies will justifiably be concerned about committing substantial capital to long-term projects with peak oil demand and energy transition risks within the investment horizon," Wood Mac's senior vice president of corporate research Tom Ellacott said. "There's also a prevailing mindset of austerity designed to appease shareholders."
The ongoing capital restraint will mean producers continue to favor short-cycle, higher-return opportunities such as some US shale projects, he said.
MEGA-PROJECT WAVE
Aker said it remained upbeat, however, over industry spending as industry efficiency measures continue to lower break-even costs and spur project sanctions.
"There are increasing signs of a recovery amid lower break-even costs and higher oil prices," the contractor said.
Aker's new orders in the third quarter include subsea production system and related services for Petrobras' Mero development off Brazil, modifications and
maintenance for BP off Angola, and power systems for CNOOC's Liuhua oil fields in the South China Sea.
Indeed, some analysts have predicted a new wave of oil and gas mega-projects over the next 18 months fueled by planned giant, capital-intensive LNG plants and new deepwater oil developments.
Last week, US oilfield services giant Schlumberger said it expects to see double-digit revenue growth from its international division next year, driven mostly by higher spending and project approvals from national oil companies and global independents.
Oil majors are widely expected to report higher profits and further improvement in free cash flow generation next week when they report Q3 earnings.
