Upstream spending cuts continue in 2016

US oil and gas companies will cut upstream capital spending by an average of 24% this year, to around $90bn, according to US consultancy Cowen’s survey, as reported in Petroleum Argus. Canadian upstream spending will drop by a similar 22%.

The US onshore rig count should fall to an average of 666 in 2016, a 29% drop from the average in 2015. The US rig count fell to a 16-year low of 698 in early January, oil service provider Baker Hughes says, reflecting depressed energy prices coupled with the usual end-of-year slowdown in oil and gas development.

Global upstream spending will fall by 17% to $447bn in 2016, according to Cowen. Latin America stands out as an area of weakness in 2016. Mexico is likely to see the steepest cuts because state-owned Pemex is forecast to reduce spending by about 40%. Spending by Venezuelan state-owned PdVSA is expected to fall by nearly 30%, while Brazilian state-controlled Petrobras is forecast to cut spending by 23%. Colombia’s state-controlled Ecopetrol should see a moderate decline in expenditure after last year’s large drop, and Argentinian state-controlled YPF’s spending should fall relatively moderately because of continued horizontal drilling.

Only the Middle East is expected to see slight growth in upstream capital expenditure (capex) in 2016, of 1% from a year earlier, as state-run companies lead countercyclical investment through the downturn to reinforce pursuit of OPEC’s market share strategy. Russian upstream capex is expected to fall by just 1%, as the weaker rouble allows firms to keep up spending in the local currency.

The estimated drop in spending in 2015–2016 is forecast to be the worst of any two-year decline in the history of the survey, which began in 1982. The only other two-year period to rival the current drop is the 1986–1987 downturn, when prices dropped sharply. The falls in spending in the US at that time are comparable with those in the current decline, but are less in Canada and internationally.

Cowen assumes that oil prices are likely to remain under $50/b during 2016 and that they will not match the $48.50/b average on which North American company budgets are based. As a result, the declines in upstream spending could be greater than estimated, particularly in North America.

Oil companies would require a sharp turnaround in crude prices to increase spending from their original budgets. The majority say they would need US benchmark WTI crude prices of at least $60/b to boost spending.

Table 1: Upstream spending survey (in $bn, estimated)

Source: Cowen