Despite the gloomy global economic picture, analysts say underlying demand for oil and gas will justify a continuing boom in Exploration & Production spending in 2012
2011 will go down as a momentous year for the upstream oil and gas industry, especially in the Middle East. A high oil price has been sustained despite worsening economic data from many net oil importing countries.
The year went beyond a more normal framework in which oil prices react to events, which then filters into the upstream sector. Geopolitical developments, disasters and structural changes came to pass that will profoundly change the industry.
In the medium to long term, huge investment in energy infrastructure is needed to meet energy demand which OPEC sees growing by 51% between 2010 and 2035. The International Energy Agency, which represents oil importing advanced economies, believes $38 trillion of investment is needed to 2035 to meet this demand, including $10 trillion on oil and $9.5 trillion on natural gas.
The industry is responding to demand, buoyed by sustained $100-plus a barrel oil prices through 2011 to approve ambitious and costly developments as the economics of advanced recovery projects improve. Analysts predict this growth trend will continue in 2012.
E&P SPENDING
Barclays Capital says exploration and production spending with reach $598 billion in 2012, up 10% from 544% billion in 2011. This signals a massive recovery from 2009 lows, when IHS Herold 2011 Global Upstream Performance Review says industry-wide spending slumped to $380 billion.
In its “Global 2012 E&P Spending Outlook,” BarCap says spending will be “mainly driven by emerging markets,” which will see an 11% increase in spending next to an 8% increase in North America.
Middle East spending is slated to rise by 12% from $21.5 billion to $24.2 billion, with a sizeable portion of supermajor’s projected global outlay of $97.5 billion and revenue from other sources likely to be spent in the region. The region’s low watermark came in 2010, when investment topped out at $18 billion.
Middle East
Iraq, Saudi Arabia and Kuwait are set to lead the pack in spending, says BarCap.
“We continue to view Iraq as one of the largest market opportunities for oil service and drilling companies this decade,” says the report.
“In Saudi Arabia, the country continues to move forward with plans to increase its rig count to roughly 118 rigs, up from 104 currently. Activity levels in Kuwait are also expected to increase meaningfully in 2012 as the company continues to deploy its 5-year $25bn budget set at the end of 2010.”
Stock Picking
If oil prices maintain current levels of around $110 a barrel, BarCap says, there could be “considerable upside” to the estimate, which was predicated on conservative price averages of $87 for WTI and $97 for Brent.
As a result, the investment bank sees oilfield service companies, equipment providers and drilling outfits “significantly outperforming broad equities benchmarks in 2012.” The investment bank picks Halliburton and Weatherford as the service companies with the biggest potential ‘upside’ in share price, with Cameron and NOV top picks among capital equipment firms at current stock price levels.
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Dark Horizon?
While the regional E&P outlook is rosy, the general macroeconomic picture offers some uncertainty. As parts of the industry learned in 2008, while the upstream industry – and GCC national oil companies and supermajors in particular – has historically been able to see past short-term panics, sudden downturns can scupper best-laid plans.
There is also a real danger that the current economic problems in advanced economies could usher in a protracted period of weaker-than-expected demand for oil, though historically lower levels of oil stocks – which now need replenishment – will mute any demand shock somewhat.
OPEC assumes 2012 GDP growth of 2.5% in OECD countries, 6.2% in developing countries and 4.2% in what it calls ‘transition economies,’ including Russia, after numerous downgrades to its economic outlook throughout 2011.
In its World Oil Outlook for 2012, the producers’ cartel says “Uncertainties over economic growth, in the short-, medium- and long-term, have very important implications for the evolution of oil demand.”
“Slowing economic growth and the uncertain outlook for the global economy in the coming year highlight increasing risks facing the oil market in 2012,” says OPEC. “This underscores the need to closely monitor the factors driving crude oil prices – not only developments in supply and demand, but also non-fundamental factors such as macro-economic sentiment and speculative activity – to ensure that the market remains stable during this challenging period for the world economy.”
OPEC predicts global demand growth for oil of 1.1 million barrels per day, still 100,000 barrels per day above the outlook of Bank of America/Merill Lynch (BoA), which predicts demand growth of just 1 million bpd and an average oil price over the year of $108 per barrel through the year.
“Unlike 2010, when demand shocked to the upside, 2011 will be remembered as the year of consecutive and consequential supply shocks,” says BoA. “With the exception of the US and Russia, oil production in every other non-OPEC country from Brazil to Norway to Azerbaijan to China came short of expectations.”
The other side of an economic slump in the US, UK or Europe could be looser monetary policy, which tends to drive up the price of commodities, including oil. “Quantative Easing resumption or global growth upside surprises may lead oil to be around 10% higher than current spot levels, while a global downturn would bring oil prices to settle around US$80/bbl on average on OPEC cuts,” says BoA.
GAS
BoA sees LNG prices supported by strong Asian demand, driven by re-gas capacity growth in China and India, on top of ongoing maintenance in Qatar. “The lack of major supply additions until 2015 will likely keep markets tight,” says BoA.
The other side of tight supply will be a reduced gas boom in the gulf’s LNG suppliers. A recent IMF report says Qatar’s economic growth could slow by two thirds as weakening gas prices on the back of softened demand and an end to gas capacity expansion begin to bite. The IMF says Qatar’s GDP will grow by 6% in 2012 against 18.7% in 2011.
