Comments: Better Days for E&P
Authors: Donnelly John 
Published: October 2018

Editor's column
After years of reined-in spending, major operators are beginning to cautiously loosen their E&P budgets. The crash in oil prices that began in 2014 caused operators to tighten capital spending across the board, but particularly on large upstream projects. Those cuts led to many prospective developments being delayed, downsized, or canceled.
The largest publicly listed companies slashed spending by 40% after the downturn began. The reduction was so drastic that it caused the International Energy Agency (IEA) and some consultancies to warn that the world could face a supply crunch just a few years out because of the impact. Supply growth would stall if E&P spending by operators did not increase, the IEA warned in a report last year, and spare production capacity would drop to its lowest level since 2008 within 2 years.
But now that oil prices have apparently stabilized, upstream spending is on the rise. In its latest US Oil and Gas Reserves Study, published this year, consultancy EY notes that the 50 largest US operators are increasing capital expenditures this year for the first time since 2014, and not all of it on shale. Spending is 32% higher than in 2016 and 5% higher than in 2015. Proved oil reserves for these companies increased 21% last year. In 2017, 32 major new developments were given the go-ahead, according to consultancy Wood Mackenzie, and 18 had received approval by mid-year this year.
National oil companies (NOCs) as well are seeing some budget relief with rising oil prices. But, as international oil companies have to hurdle the barriers of Wall Street, NOCs often face pressure from their governments for increased revenue when times improve. As did private companies during the downturn, NOCs slashed spending, sharpened efficiency, and cut costs during the downturn, leaving them in good shape to take advantage of current conditions. Both Saudi Aramco and Kuwait Petroleum Corp. (KPC) have announced sizable upstream budget increases for this year. Many Middle East NOCs are investing heavily in the downstream as well. Saudi Aramco, KPC, Adnoc, and Qatar Petroleum are investing in refinery and petrochemical projects at home and abroad, particularly in Asia, to ensure long-term demand for their hydrocarbons.
A boost to upstream confidence has been recent major discoveries. More than 2.5 billion bbl of recoverable reserves have been found in the deepwater Atlantic margin, says Wood Mackenzie. Among the largest are ExxonMobil’s Guyana development, discoveries in the US Gulf of Mexico by Shell and Chevron, and Eni’s find on the Mexican side of the Gulf of Mexico. The Liza complex alone in Guyana accounts for 15% of total conventional oil found since 2015. In addition, the Dorado-1 well in Australia has turned out to be a major gas and oil find. Another source of confidence is coming in the form of merger and acquisition activity. Transocean’s $2.7 billion bid for Ocean Rig in September could be a sign that the ultradeepwater outlook is picking up.
US shale remains a bright spot, although infrastructure constraints are capping activity. Both Schlumberger and Halliburton warned in their second-quarter earnings reports that lack of infrastructure could hurt their activity and revenue in the region. Recent news reports indicate that those restraints may not be resolved until next year.