James D. Crandell, James C. West, Anthony Walker, Zachary Freedman
and Zachary Sadow, Barclays Capital
Barclays Capital’s Oil Service and Drilling team issued the results of its semi-annual E&P spending survey on Dec. 15, 2010. The 30-page report includes responses from 402 companies analyzing spending for 2010 and planned expenditures for 2011. The report focuses on the US, Canada and regions outside North America. The data includes 37 tables and figures with Barlcays Capitals’ comments, survey findings, the survey process and results, as well as company observations.
“The Original E&P Spending Survey” attempts to include every meaningful spender on exploration and production throughout the world, which encompasses integrated oil companies, independents and national oil companies (NOCs).
The survey forecasts that 2011 global E&P expenditures will increase by 10.8% to $489.5 billion from $441.8 billion in 2010. The increase is led by spending gains in Latin America, the Middle East/North Africa and Southeast Asia. Unlike in recent years when NOCs accounted for the majority of the spending gains, for 2011 the supermajors are likely to show the largest increases.
Capital spending budgets outside North America are forecast to rise by 12% in 2011 to $363.3 billion, from $324.1 billion in 2010, according to 141 companies surveyed. This planned increase provides strong evidence that another upcycle is underway following a 6% gain estimated in 2010.
In the US, E&P expenditures by 210 companies surveyed are indicated to rise by 8.1% to $93.6 billion from $86.6 billion in 2010. The sequential increase in spending reflects a shift by many US operators toward oil- and liquids-rich drilling activities and away from conventional, dry gas drilling.
In Canada, budgets for 126 companies surveyed are slated to rise by 4.8% to $32.6 billion in 2011 from $31.1 billion in 2010. We believe this is due in part to an increased focus on drilling-related extraction of hydrocarbons from oil sands (versus traditional mining techniques), which is expected to offset reduced gas drilling. The forecast spending increases for 2011 in the US and Canada are less steep than in 2010, which saw an estimated 20% increase in E&P spending in the US and an estimated 36% expansion in Canada (exclusive of movements in currencies).
2011 BUDGETS FORECAST UP 8.1% IN THE U.S.
US upstream capital spending budgets are indicated to rise by 8.1% in 2011 to $93.6 billion. The vast majority of the incremental spending is expected to be directed toward conventional oil plays, liquids-rich reservoirs and oil shales. Traditional dry gas drilling, particularly outside of shales, is expected to decline. We believe the natural gas rig count could decrease by as many as 150 rigs in the first half of 2011, although this is expected to be mostly offset by an increase in the oil-directed rig count over the course of the year.
Of the 210 companies surveyed with spending in the US, the largest increases in 2011 are expected from companies that spend under $50 million (up 63% year over year). However, these companies (107 in total) only represent 2% of total 2011 estimated spending. As company size grows larger, the magnitude of the increase lessens. Those companies that spend over $1 billion are indicated to increase capex this year by just 5.2%. These 28 companies represent roughly 71% of 2011 forecast US E&P spending.
Among the larger companies that we estimate will have significant E&P budget increases in the US during 2011 versus 2010 are ConocoPhillips (up 60%), Hess Corporation (up 43%), Pioneer Natural Resources (up 26%), EOG Resources (up 21%), Noble Energy (up 13%), Plains Exploration and Production (up 11%) and Petrohawk Energy (7%), all of which are expected to spend $1 billion or more. Conversely, large companies that we estimate will reduce their 2011 US capex budgets include Encana (down 21%), Southwestern Energy (down 12%), Devon Energy (down 10%), Williams Companies (down 8%) and Range Resources (down 6%).
| 2010–2011 selected US spending budgets, $ million |
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MODEST 2011 INCREASE FOR CANADA
Canadian E&P spending in 2011 is expected to increase only modestly from 2010 levels. We believe this is primarily due to lower natural gas prices and reduced vertical, dry gas drilling, offset by increased drilling-related extraction of hydrocarbons from oil sands and shales. In 2011, Canadian E&P capital expenditures are is slated to increase by 4.8% to $32.6 billion from $31.1 billion in 2010, according to 126 companies. In contrast to prior years, we expect the exchange rate between US and Canadian dollars to have only a minimal impact on this year’s spending increase (roughly 1%).
As is the case in the US, the smallest of the companies are planning the largest increases. Among the larger companies forecast to have the greatest budget increases are Suncor (up 198%), Nexen (up 64%), ConocoPhillips (up 18%), Cenovus Energy (up 14%), Penn West Energy Trust (up 12%) and Imperial Oil (up 10%). Large companies that we estimate will cut their 2011 Canadian capex budgets include Encana (down 21%), Devon (down 16%), Talisman Energy (down 13%) and Husky Energy (down 11%).
| 2010–2011 selected supermajor international budgets, $ million |
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INTERNATIONAL SPENDING TO LEAD THE WAY
E&P spending outside North America is forecast to rise by 12% this year to $363.3 billion from $324.1 billion in 2010, by 141 companies surveyed. The supermajors and selected large Latin American (Pemex and Petrobras), Asian (ONGC, Pertamina and Petronas), Middle Eastern and North African (KOC, NOC and Sonatrach) companies are estimated to show some of the largest increases internationally.
| 2010–2011 US E&P expenditures, $ million |
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Supermajors. We anticipate significant E&P spending increases for the supermajors this year, with the big six expected to increase international spending by about 17% in the aggregate. This follows a year in which spending for the group was virtually unchanged from 2009 levels. BP, Total and Conoco-Phillips are expected to show the largest increases in spending. The substantial increase in E&P capital budgets for 2011 is due in part to engineering- and construction-related spending for several large LNG projects expected to move forward this year, as well as rising spending in Iraq and an increase in deepwater activity.
Latin America. We estimate that E&P spending in Latin America during 2011 will be up significantly, and see the region as leading the way globally, driven by increased expenditures from Pemex in Mexico and Petrobras in Brazil. In Mexico, we estimate Pemex will increase its budget by 30% year over year, reflecting an underspending of its budget in 2010 and efforts to curb declining production from several of its major oil fields. Gains should occur both onshore (Chicontepec, Veracruz, Burgos and Villahermosa) and offshore. In Brazil, Petrobras is expected to move forward with a significant expansion in deepwater activity, headlined by the development of Tupi Field.
Middle East and Africa. Spending by Middle Eastern and African companies is set to expand by 11% in 2011 compared to 2010 levels. The Kuwait Oil Company, Sonatrach (Algeria) and National Oil Corp. (Libya) are expected to lead the way. The latter two companies are believed to have significantly underspent their budgets in 2010. In addition, spending in Iraq is estimated to be up substantially as major oil companies begin their efforts to increase production. West Africa is estimated to be flattish in 2011 as modest increases in Angola offset a decline in Algeria.
Asia–Pacific. Trends for state-owned and international oil companies based in Asia and Australia are somewhat mixed, but overall we forecast a meaningful increase in capex this year (9%) for these companies. Although we forecast declines for some companies, such as Australia’s Woodside Petroleum, BHP Billiton and PetroVietnam, significant increases are expected for India’s ONGC, Malaysia’s Petronas and Sinopec in China. Likewise, spending by Pertamina in Indonesia and by PTT Exploration and Production in Thailand is expected to increase significantly.
Europe and Russia. Most European-based companies are expected to increase exploration and production spending this year (up 12% in aggregate), led by growth in expenditures for Hungary’s MOL Group (91%), Spain’s Repsol-YPF (60%) and CEPSA (42%), and Sweden’s Lundin Petroleum (81%). Spending for larger companies such as Eni and Statoil is forecast to rise more moderately, 7% and 10%, respectively.
E&P spending in Russia is forecast to increase only modestly in 2011 (up 3% in aggregate), although this is somewhat skewed by reduced spending on the part of Gazprom (estimated to decrease 6% year over year). Spending is anticipated to increase for Novatek, Rosneft, TNK-BP, Lukoil, Gazprom Neft and Surgutneftegaz.
International spending by North America-based firms. We forecast spending for a group of leading North-America-based independents (and smaller integrated companies), to rise 4% in 2011. Apache, Marathon, Noble Energy and Occidental Petroleum are estimated to increase budgets meaningfully, while Canadian Natural Resources, Hess, Nexen, Suncor and Talisman Energy are expected to reduce their E&P spending this year.
| 2010–2011 selected North American independents’ international budgets, $ million |
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| 2010–2011 Canadian E&P expenditures, $ million |
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FINDINGS OF PARTICULAR INTEREST
We asked the companies in our survey a number of questions about their budgets. The results of these questions follow:
• Roughly 45% of respondents expect to spend a greater share of their capex on exploration in 2011 versus 2010; 32% spent a greater proportion of capital spending on exploration in 2010. This is a positive for seismic companies and also bodes well for the major oil service companies.
• The overall E&P spending increase in 2010 was slightly below the growth forecast in our midyear 2010 survey. We estimate that total spending rose by 10% in 2010, primarily due to lower-than-forecast spending internationally, partially offset by stronger results in Canada and, to a lesser extent, the US.
• Companies are basing their 2011 E&P budgets on an average crude oil price of $77.32/bbl (West Texas Intermediate), greater than the $73.56/bbl indicated in our midyear survey and the $70.16/bbl in last year’s survey. The most frequently cited price that would result in a further increase in E&P budgets is $90/bbl for oil (WTI).
• The average natural gas price associated with 2011 E&P budgets is $4.27/Mcf (Henry Hub). This compares to an average gas price assumption of $4.65 indicated in our midyear survey and $5.21 in last year’s survey. The gas price at which many respondents would begin to cut budgets is $4.00/Mcf, and a larger percentage are prepared to cut budgets at $3.50/Mcf.
• The majority of companies surveyed (66%) expect to spend within their cash flow during 2011. This represents a modest increase versus the previous year; during 2010, 64% of companies expected capital expenditures to be within cash flow.
• The most important determinant of E&P spending this year is expected to be cash flow (42%), followed by oil prices (39%) and gas prices (34%). The percentage of respondents citing capital availability as a key determinant decreased meaningfully (to 21%, from 35% in 2010 and 29% in 2009) and gas prices declined from the No. 1 spot as a response, reflecting the growing importance of crude oil.
• Exploration economics outside North America continued to be viewed as best among the regions in our survey, although the outlook for exploration in Canada improved significantly from last year’s survey.
• For the third consecutive year, fracturing/stimulation was the most commonly technology cited among operators as having the greatest impact on their business, followed by horizontal drilling. Given that stimulation is the main technology used in unlocking shale plays, this is not surprising.
| 2010–2011 Canadian E&P expenditures, $ million |
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Editor’s note: It is not statistically accurate to compare total estimates with those from prior years because the companies surveyed vary from year to year. 
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