The first signs of growth in the oil and gas industry can be seen, says analyst Wood Mackenzie. The firm's forecast shows a double growth in the number of final investment decisions in 2017, compared to 2016.
According to Wood Mackenzie's global upstream outlook for 2017, confidence will start to return to the sector, with exploration and production spend set to rise by 3% to US$450 billion. Though a corner is being turned, this is still 40% below 2014.
US tight oil, however, will lead the revival, says Wood Mackenzie. Costs will continue to fall in 2017, though only marginally. But for all the pain of the downturn, a leaner industry is starting to emerge.
Malcolm Dickson, a principal analyst for upstream oil and gas for Wood Mackenzie, said: "The global investment cycle will show the first signs of growth in 2017, bringing the crushing two-year investment slump to a close. 2017 will demonstrate how efficient the oil and gas industry has become; showing projects in better shape all round."
Capex cost reduction has averaged 20% over the past two years. With service sector margins wafer thin, Wood Mackenzie believes there’s now only room for small reductions and capital costs are expected to fall by an average of 3% to 7%.
The key themes of Wood Mackenzie's global upstream give five things to look for in 2017 in its report, which include:
US tight oil, and the Permian basin in particular, will lead the way, distinguished by low breakevens, scale and flexibility. US Lower 48 spend is set to grow by 23%, to US$61 billion, with upside if oil prices rise strongly and US Independents are emboldened by a Trump presidency.
Wood Mackenzie predicts the number of FIDs will rise to more than 20 in 2017, compared with nine in 2016. This is still well short of the 2010-2014 average of 40 a year. But, these are generally smaller, more efficient projects, and capex per barrel of oil equivalent (boe) averages just $7/bbl, down from $17/bbl for the 2014 projects.
"Companies will get more bang for their buck as development incremental internal rates of return (IRR) will jump from 9% to 16%, comparing 2014 to 2017," said Dickson. "This is in part a result of a shift in capital allocation away from complex mega projects towards smaller, incremental projects in the Canadian oil sands and deepwater."
Deepwater will spring back to life in 2017, but more cost cutting is needed in the long run.
Deepwater FIDs will be a leading indicator the tide is turning. The best development assets will hold their own against tight oil, especially as more risk-averse tight oil operators start to screen opportunities under higher discount rates.
According to Wood Mackenzie's global upstream outlook, projects slated for FID in 2017 are largely looking good, but the longer-term deepwater pipeline is more challenged. Of the 40 larger pre-FID deepwater projects, around half fail to hit 15% IRR at $60/bbl.
"The industry has selected the best projects to optimize and take forward. In 2017, it will have to turn its attention towards optimizing the next wave of developments to get them sanction-ready," said Dickson.
Graham Kellas, senior vice president of global fiscal research at Wood Mackenzie, said: "Some governments will be tempted to increase tax rates, but those with uncompetitive fiscal regimes will have to make changes to ensure they can attract still-scarce new capital. Getting the risk-reward balance right will be a critical factor in attracting scarce investment capture in 2017, even for resource-rich hotspots such as Iran and Mexico."