BAKU, Azerbaijan, Jan.23
By Leman Zeynalova – Trend:
Spending by the global integrated oil and gas majors will increase to $116 billion in 2020, after the $109 billion spent in 2019, Trend reports with reference to the Fitch Solutions Macro Research (a unit of Fitch Group).
The company believes that the increase is driven in large part by strong profitability following a push to reduce project costs and optimize portfolios, which has seen the divestment of low-margin fields and increased focus on investment in higher-margin growth opportunities.
“This has enabled majors to return to their strengths of larger-scale greenfield projects, however, with lower breakevens due to cost deflation, standardisation and the adoption of less complex development plans. Despite this, we believe the group will see a lower level of spending through 2021 due to increased capital efficiency and a stronger focus on shareholder returns and a diminishing supply of high margin projects,” reads the outlook published by Fitch Solutions.
Fitch Solutions said that investments in mega-projects outside LNG look less unlikely and with a renewed focused on short-cycle projects including shale production and incremental expansion at existing fields and tiebacks making up the bulk of capex.
“2019 saw spending fall slightly from early year guidance to $560 billion with final growth at 5.5 percent y-o-y, which is below 2018 rates of 7.5 percent. Assessing a basket of 112 of the world's largest oil and gas companies, our latest capex guidance collection indicate a 2.5 percent y-o-y increase. The moderation in 2020 growth rates, for a total global capex spend of $575 billion this year, signals growing conservatism around oil prices and continued capital discipline across the industry. Positive growth signals broad stability for 2020 and 2021, however, we note that reductions in capex seen in 2019 could carry over into 2020 if the macro-economic picture weakens and oil prices turn lower,” reads the report.
Fitch Solutions expects that the $14 billion growth in spending will be largely attributed to the global integrated majors along with NOCs, particularly in Asia and Latin America.
“Company guidance also indicates further declines in North America, driven by US E&P's onshore pivot in strategy to focus on shareholder returns over production growth. Declining capital investment will be seen in two additional markets Russia, and Europe and Africa. Nonetheless, capital spending among the world's largest oil and gas companies is set for a third consecutive year of growth in 2020,” reads the report.
Renewed but tentative confidence in the health of the oil market has helped support spending plans across companies globally, said Fitch Solutions.
“Although, oil prices averaged $64.2 per barrel for 2019, this was still 10.5 percent lower than 2018 prices, which in turn saw several companies curtail capex during the year. Uncertainty around future crude demand has tempered near-term expectations of a return to higher oil prices. Companies have therefore doubled down on fiscal discipline and improved profitability. Cost cutting measures and streamlining of operations has led to continued record profits, however, declines in oil prices tempered those gains in the second half of the year leading to tempered capex guidance for 2020. Prudent fiscal discipline looks set across the industry as firms target lower breakeven prices for new investment. However, the pipeline of projects that meet the heightened criteria appears to be thinning as new exploration finds fail to keep up and exploration investment remains low.”
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