Global capex growth is slowing

Fig. 1. Global E&P capital spending 2005-2024E ($B).

North American (NAM) E&P spending is on track to increase 19.3% in 2023, slightly below the 20.6% growth projected in our mid-year survey, while international’s 8% growth is in line with our previous estimate, Fig. 1. Having contracted more sharply in 2020 and lagged the international upturn in 2021, NAM operators accelerated spending in 2022, driving 44% growth in that year. However, oil and gas sentiment took a sharp turn in 2023, as looming recession concerns, slower-than-expected growth in China, and deteriorating production economics caused E&Ps to revise their budgets.  

Oil and gas prices held up, as surprise OPEC cuts continued to lengthen, and energy security concerns still remained. International growth accelerated in 2022 but was impacted by contracting delays and rising service costs, as availability began to tighten. International capex increased 15% in 2022 and 8% in 2023. International growth will decelerate to 6% in 2024.

We expect NAM spending to increase for a third straight year in 2024 but anticipate growth decelerating from 19% in 2023 to 2.2% in 2024. Overall, NAM spending has improved 72% from new lows established during the pandemic and surpassed half of the historical peak in 2014. Canada is running at one-third of its historical peak, with spending likely permanently impaired by the rise of U.S. oil shale and an unfavorable political climate for oil and gas, Table 1.  

With declining well productivity and increasingly challenging geology limiting growth, production growth from U.S. shales has likely peaked. NAM operators are prioritizing capital discipline, limiting capex, and returning cash to shareholders. NAM spending is likely to remain structurally lower for longer. 

We foresee a shift in 2024, as capital spending leans more toward the international market, with strong momentum continuing in the Middle East and offshore markets, Table 2. Excluding Russia, the variance in international spending growth between 2023 and 2024 is narrower, with international spending growth of 10% in 2024 compared to 11% in 2023. Overall, E&P spending is on the rise across most regions, except for Russia/FSU. Key international regions are projected to experience low double-digit growth in 2024 including Latin America, India and Asia/Australia, while deceleration is expected in the Middle East, Europe and Africa. 

Cash flow is king. For eight consecutive years and nine of the past ten, cash flow has remained the primary driver influencing E&P spending decisions. While 73% of survey respondents identified cash flow as a key determinant in 2024, it marks a decline from the record high of 88% in 2023 and slightly below the previous peak of 80% suggested in our 2015 survey. In fact, cash flow has ranked 1 or 2 as the leading determinant of E&P spending in all but four of the past 25 years in our survey history, while oil price has ranked 1, 2 or 3 since 2009. 

Exploration activity. Approximately 33% of survey respondents increased their exploration budget as a percentage of their total E&P spending in 2023, although it decreased from a record 39% in 2022 and slightly below the prior record of 35% that increased in 2019. In contrast, 13% of survey respondents trimmed their 2023 exploration budgets as a percentage of their total E&P spend, slightly increasing from 9% in 2022. 

OFS pricing. Survey results indicate a shift in expectations for oilfield service pricing in 2024, with half of the respondents anticipating an increase, which is a decline from 68% in 2023 and a significant decrease from 85% in 2022. The remaining 50% of respondents expect pricing to remain stable, increasing from 32%. For the third consecutive year, labor is leading, with 75% foreseeing pricing increases in 2024, a slight decrease from 77% in 2023. However, geopolitical events, including the war in Ukraine, renewed Covid-related lockdowns and increased interest rates, have introduced economic risks, tilting the landscape toward a potential global recession. With rising economic concerns in 2024, respondents have become more cautious. Approximately 50% and 25% anticipate pricing declines for tubulars and fracturing, respectively.

Digital transformation. While digital technologies, including advanced data analytics, AI/machine learning and remote operations, continue to trail shale-driven fracturing/stimulation and horizontal drilling technologies in impacting 2024 E&P spending plans, we expect these technologies to increase in importance over the coming years. Operators are expected to maintain a steady pace in testing and adopting innovative technologies, albeit slightly trailing the record high of 30% set in 2020 and decreasing to 27%, compared to 2023. 

The period of lower oil prices and the pandemic-driven challenges prompted a temporary halt in the adoption of transformative technologies. Historically, the oil and gas industry has exhibited a sluggish adoption rate for new technologies, which likely reached its peak in 2022, with a majority (77%) of survey respondents expressing their intention to maintain a conservative approach in their decision-making processes regarding testing and adopting digital technologies.  

Commodity prices. Oil price expectations have increased to $77/bbl, with companies quoting a WTI price that is essentially at the current spot price but higher than the Evercore ISI forecast of $76/Bbl for 2024. Our survey participants expect oil prices in 2024 to trend at current spot levels, as ongoing OPEC+ production cuts will offset production growth from non-OPEC countries, driving a healthier supply-and-demand balance. 

The current spot price for natural gas of $3.32/MMBtu is 7% above our survey’s budgeted assumption of $3.10/MMBtu for 2024. Gas price expectations fell from our 2023 survey, with a 41% decrease in expectations from $5.07/MMbtu to $2.97/MMbtu as a result of relatively mild temperatures, record gas production and higher-than-average inventories. Natural gas budget assumptions have fluctuated between $2.80/MMbtu and $3.10/MMbtu over the past decade, due to an oversupply of associated gas from the U.S. shale oil boom. Evercore expects gas prices to average $3.75/MMbtu in 2024.

Industry consolidation. The second half of 2023 was monumental for oil and gas  companies, highlighted by two mega-mergers: 1) ExxonMobil's acquisition of Pioneer Natural  Resources and 2) Chevron's acquisition of Hess. These strategic acquisition deals were driven by robust oil prices, which substantially bolstered cash flow and profitability for the industry. These transactions offer opportunities to optimize capital efficiency, consolidate assets to boost production, generate synergies, and drive free cash flow generation. Approximately 66% of respondents anticipate an increased likelihood of industry consolidation in 2024, compared to 2023, while 33% believe consolidation levels will remain unchanged.  

REGIONAL BREAKDOWN 

North America. Expanding on the robust growth experienced in 2023, we anticipate NAM E&P spending to climb 2.2% in 2024, surpassing pre-Covid levels. The projected spending increase in the U.S. is 2.2%, while Canada is projected to climb 2.3%. In NAM, independents and private operators play a significant role, contributing 70% of the region's capex. Although private operators constitute 18% of estimated U.S. capex, they make up 53% of the rig count. This suggests that overall U.S. spending might exceed our estimations. 

Based on our analysis, private companies’ capex increased 14.4% in 2023 in the U.S. (a substantial drop from the 67.0% increase in 2022). This growth is expected to further slow down to a 6.8% increase in 2024, compared to +2.7% for independents. Majors in the U.S. are expected to show more restrained growth of 0.8%, while Canada is anticipated to experience accelerated growth of 25.6%. At a 2.2% growth rate, it would take over a decade for NAM's capex to reclaim its historical peak in 2014. 

Middle East spending increased 27.0% in 2023, accelerating from a 23% gain projected in our mid-year survey. This spending accelerated from 6% in 2021. However, we anticipate capital spending for 2024 will decelerate 13.5%. While some respondents are cautious, due to global recession concerns and the impact of high interest rates on liquidity and capital accessibility, several factors underpin our confidence in this growth trajectory.  

The sustained global need for oil and gas to address energy security issues, combined with relatively high oil prices, the resilient financials of companies in the region, and a robust demand outlook, will likely continue to drive spending growth in the Middle East. With 2023 expenditures surpassing the previous 2014 peak, our projections anticipate 2024 to establish a new spending record, reaching 22% above its historical peak. 

Saudi Arabia. Despite leading a 1.0-MMbopd cut in OPEC+ production quotas through the first quarter of next year, the Kingdom had consistently reaffirmed its plan to grow its oil production capacity by 1.0 MMbopd to 13.0 MMbopd by 2027. Saudi Aramco, the world’s largest oil-exporting company, previously announced that spending for 2023 was expected to range between $45 billion and $55 billion, the largest spend to date. 

However, on Jan. 30, the government instructed Aramco to halt its expansion plan. For the time being, Aramco will adhere to a maximum sustained production capacity of 12.0 MMbopd. That is 1.0 MM bopd below the target originally announced in 2020. 

Latin America. We estimate E&P spending by select Latin American companies will increase 8% in 2023,  

down from the 15% growth projected by our mid-year survey. A second straight year of accelerated growth in 2022 increased spending to 41% above the 2017 trough and 10% above 2016 levels, for a seven-year high. Last year was another solid year for Latin America, which is anticipated to grow by another 8%, followed by 9% in 2024. We note the 2024 capex in Latin America will be within 38% of the historical peak in 2014.  

NOCs including Petrobras, PEMEX and PetroEcuador are driving the increase in 2024 spending, while Independents take a pause after ramping up capex 60% in 2022 and further moderating in 2023. While we anticipate PDVSA to maintain its capex flat for 2024, the lifting of energy sanctions on Venezuela could increase capex spending over the next several years to stabilize global supply. However, on Feb. 2, the Biden administration said it would reimpose sanctions on Venezuela’s oil and gas industry in April, unless President Nicholas Maduro follows through on agreements to allow free and fair elections later this year.  

Spending in the region, otherwise, will remain robust, as majors and NAM independents are stepping up investments offshore Guyana, Suriname and Brazil. 

Africa. Spending by African companies is on track to increase 16% in 2023, which is slightly above the +14.0% growth projected in our mid-year survey. Our initial estimate for 2024 is for E&P spending to decelerate to 12%, followed by the third consecutive year of accelerating growth. Africa was severely impacted by Covid-19, with E&P collapsing to new lows 55% below the 2012 peak. However, three straight years of improvements increased capex to 54% beyond the 2020 trough, but spending remains 20% below pre-Covid 2019 levels and 32% from the historical peak.  

With growth of 12% in 2024, we forecast capex to increase 72% from the 2020 trough but remain 10% and 24% below the 2019 and 2012 levels. At the current pace of growth, spending could approach 2012 levels in 2027. The African Energy Chamber forecasts the continent to potentially spend a cumulative capex of $450 billion in Africa’s upstream sector. 

Asia/Australia. Spending by select Indian, Asian and Australian companies should remain flat in  

2023, in line with -1.3% deceleration projected in our mid-year survey. With little change from 2016–2018, spending by select operators held up well during the pandemic, down a modest 8% versus international’s -17% and NAM’s -44%. Spending quickly rebounded to pre-Covid levels in 2021 and is on track to recover to its highest level in nine years. With the projected 8% increase in 2024, we anticipate E&P spending could recover within 9% of the historical 2013 peak. Despite years of little-to-no growth in spending, the region will account for approximately 25% of total international E&P spending and 18% of global capex in 2024. 

Chinese demand remains strong. Projections from OPEC+ indicate Chinese demand will average 16.41 MMbopd in the first half of 2024, up 3.2% from 2023 levels. In contrast, the IEA forecasts Chinese demand to average 17.1 MMbopd, reflecting a 4% y-o-y increase. CNOOC began production at the Bozhong 19-6 condensate/gas field in the Bohai Sea, which is expected to reach a peak output of 37,000 boed in 2024. Additionally, the company announced first oil at the Penglai 19-3 area, which is projected to have a peak output of 29,800 bopd by 2027.   

Europe. Spending by European companies will increase 20% in 2023, relatively in line with the 22% growth projected in our mid-year survey. Three straight years of spending growth increased capex in 2023 10%, compared to pre-Covid 2019 levels, with an anticipated 11% increase in 2024 raising capex to 22% above 2019 levels and within 5% of the 2014 historical peak. At the current +10.5% growth rate, spending could top the historical peak in 2025.  

However, our 2023 and 2024 estimates could also revise lower, due to geopolitical uncertainty (conflicts in Eastern Europe and the Middle East), and the macroeconomic environment (especially in terms of interest rates and inflation) in addition to policy and regulatory initiatives. The EU reached a deal to place methane emission limits on Europe’s oil and gas imports from 2030, forcing oil and gas producers to regularly check for, and fix, leaks of emissions in their operations, which could result in uncertainty and lower investments. Nonetheless, the industry shows healthy cash flows, capital discipline, strong financial health and rapid technological advancements to reach the expected growth in 2024 and beyond. 

Norwegian gas producers maximized their production during 2022 in response to the war in Ukraine, delivering 122 Bcm, or an 8% increase, in gas supplies to Europe, positioning the country’s gas as key to safeguarding Europe’s energy security in the coming years. During the year, the Norwegian government approved development of 19 new oil and gas fields, resulting in $18 billion in investments.  

Most of those fields will be operated by Aker BP, Equinor, Wintershall Dea and OMV. Both Equinor and Aker BP have plans to maintain strong spending in 2024, with Aker BP moving ahead on $19 billion of new oil and gas field development projects from 2023 to 2028. This will result in an annual capex of $3.5 billion to $4.5 billion in 2023 and 2024, compared to $1.8 billion in 2022. 

Russia/FSU. Spending by Russian and FSU companies will decline for the first time in three years in 2023, falling 5%. While it has never been easy to obtain a clear picture of E&P spending and activity in Russia, Gazprom’s investment program for 2024 is expected to decline 20% to $17.8 billion, while the company affirmed that the approved financial plan will ensure that it covers its liabilities without deficit and in full. Recall that the Russian government relies heavily on O&G sales, which account for 33% of federal budget revenues.  

In 2021, Russia accounted for 27% of the EU’s oil imports and 45% of its natural gas imports (through cost-effective pipelines). After the start of the Russia-Ukraine conflict, the share of Russia’s crude oil exports to China and India increased to 70% from 20% (as of November 2022). E&P spending in the region contracted to a new cyclical low in 2020, and spending likely recovered to about 2016 levels, or 24% from the 2013 peak in 2023. Due to ongoing sanctions, we project E&P spending to decline -15.2% in the region during 2024.