Following an unprecedented year of oil price volatility, production cuts and demand shattered by a global pandemic that continues to wreak havoc, E&P spending worldwide is expected to inch up by 1% to nearly $296 billion in 2021, according to a Barclays survey released this week.
That’s up from a 29% drop in spending seen in 2020 when every region tracked saw double-digit spending declines, led by North America where E&Ps cut spending by 44%.
Calling 2021 a “transition year” for the oil and gas industry, Barclays analysts forecast international markets will drive spending growth with Russia and Latin America at the helm.
In the U.S., spending is on course to drop 6% this year as companies exercise capital discipline and consolidate, reinvesting less into the business from cash flows, according to the survey.
“Overall, we view 2021 as a transition year for the industry, exhibited by conservative spending plans amid great macro uncertainty,” Barclays analysts said in the survey. “Although most budgets are using a $40-$50/bbl oil price, the timing of a global oil demand recovery is a significant variable for the pace of spending in 2H 2021.”
The outlook was based on a survey, conducted from Nov. 11 to Dec. 16, of more than 200 oil and gas companies’ 2021 spending intentions along with announced guidance and forecasting models.
Barclays E&P spending survey was released Jan. 5, the same day the OPEC and non-OPEC ministerial meeting ended with another lifeline being tossed to the market for stability. Saudi Arabia volunteered oil output cuts of 1 MMbbl/d in February and March above its current quota as coronavirus ushered in another round of lockdowns in the U.K. and other parts of the world. Barclays survey shows Middle East spending could fall by 4% this year, compared to 14% last year.
As part of the OPEC+ deal, Russia—where the survey showed spending could rise 16% to more than $33 billion this year following a 17% decline—is among the countries allowed to pump more. Steering growth are Rosneft and Gazprom, which Barclays said it believes “should be a positive read-through for Schlumberger in particular.”
Latin America is another international region that could see a double-digit spending increase, potentially jumping by 19%. “But it comes with caveats,” Barclays said.
Analysts disregarded Pemex’s 2021 budget increase of 20%, pointing to a “closed market” with the current administration shutting out international producers and suppliers. They also questioned Petrobras’ expected 19% hike, saying spend typically goes to FPSOs or engineering and construction rather than E&P.
The survey delivered a mixed bag for anticipated spending in North America.
Spending is projected to decline by 4% this year, far less than the 44% drop seen in 2020. However, Barclays analysts cautioned that only about a third of the U.S. E&Ps have unveiled capital guidance—more news is expected in February—and privates are underrepresented in the survey. Analysts said they relied on an online survey to gauge spending by privates.
Recovering from a brutal year, U.S. land spending is expected to fall by 6%, the survey showed. That’s an improvement from a 46% drop in 2020.
Investors’ push for continued capital discipline coupled with market consolidation are factoring into spending patterns. At less than 60% of cash flow, reinvestment ratios are projected to be the lowest seen in the past 20 years or longer, Barclays said.
In North America, majors are expected to cut spending more than others—down 6% compared to 5% for large-cap E&Ps and 4% for smid-cap E&Ps, according to Barclays.
Of the majors and IOCs, the survey showed Exxon Mobil Corp. spending was expected to fall the most in North America at 29% with Chevron Corp. spend down 8% and ConocoPhillips Co. and Murphy Oil Co. flat.
Stressing a commitment to cost reduction and prioritized spending on “advantaged assets with the highest potential future value,” Exxon Mobil said in November it would cut its overall spending to between $16 billion and $19 billion. Part of its strategy included removing from its portfolio “less strategic assets,” including some dry gas assets in Appalachian and Rocky Mountains, Arkansas, Louisiana, Oklahoma, Texas and western Canada.
“Assuming global oil demand rebounds in 2H 2021, we believe the U.S. onshore market will ultimately recover to stabilize at about 70% of 2019 levels by 2023,” Barclays said.
Canada appears to be the only positive in terms of spending growth in 2021 for North America.
Canadian E&Ps are expected to increase spending by 11% this year, though Barclays said it makes up only 6% of North American spend.
“The switch to growth is driven by more stable prices and curtailments lifted, resulting in Canadian E&Ps to allocate incremental capex to shorter-cycle developments,” Barclays said.
Canadian Natural Resources Ltd. leads the pack in spending growth with an anticipated 131% rise compared to last year’s 66% decline.
“The company has been nimble in the past to changing market conditions and can quickly adjust our targeted capital expenditure levels or reallocate capital to our highest returning assets,” Canadian Natural’s President Tim McKay said in December. “Our 2021 plan will be no different, targeting capital of approximately $3.2 billion, delivering targeted production of approximately 1,225,000 boe/d, with disciplined growth of approximately 62,000 boe/d from forecasted 2020 levels.”
However, a ramp-up in spending offshore doesn’t appear likely based on the survey, which forecasts spend falling for the seventh straight year.
“Optimism for a deepwater recovery at the beginning of  came to a screeching halt and the floating rig count fell from 131 rigs in March to 103 today,” Barclays said. “We expect a trough of 75 rigs to be reached by year-end 2021 as continued macro and oil price uncertainty weighs heavily on the sector.”
The survey shows offshore spending could drop by about 4% this year based on day rate trends, FID activity, rig contracting levels and service cost projects. That, however, is better than the 15% spending drop in 2020.
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