The belt keeps tightening, Upstream Industry Trends in first half of 2016

Cuts and postponements hitting the service sector hard while oil supply slowly rebalances

IHS Costs and Technology teams published their most-recent quarterly reviews of Global and North America upstream spending and the semi-annual IHS Upstream Industry Trends report, which provide a detailed overview of the past few months and forecasts for the future.

Below is the executive summary from the Upstream Industry Trends report. This report provides a comprehensive overview of the Supplier/Contractor markets to the oil and gas industry, and an outline of key drivers across the industry as well as any major diversions from the norm.

Upstream Industry Trends

• Operators continue to cut spending and push back projects. The number of major project sanctions has kept declining during 2016. Few new project sanctions are expected in the near term, as the number of projects entering the FEED stage remains very low. However, as oil prices stabilise at a higher level and break-even costs come down, we do expect to see a gradual increase in both project sanctions and investments from 2017 onwards.
• The overall forecast capex in 2015-19 has been reduced by USD2.1 trillion from its forecast level before the collapse in oil prices, as industry costs have come down and field development projects have either been pushed back or cancelled. IHS expects global upstream exploration and production (E&P) capital expenditures (capex) for 2016 to be USD380 billion, down 22% year on year, following a 32% drop in 2015. Operating expenditure (opex) for 2016 is expected to be USD426 billion, down 18% from its 2014 levels, as new fields coming online partially offset the cost declines and cuts made by operators.
• As a result of the slowdown in spending and development activity, the order intake for the main industry contractors has been weak in the past year. The total order intake during the first quarter of 2016 was USD9.6 billion, down 27% from the first quarter of 2015, in fact the lowest intake since the first quarter of 2009.
• The backlog for the surveyed companies was USD196.3 billion at the end of the first quarter of 2016. This represents a decline of 8.7% quarter on quarter and 19.5% year on year. The current backlog is at its lowest level since December 2011 and we expect backlogs to continue to decline as the spending in the upstream industry remains under pressure.
• During 2015, the workforce among 21 of the larger oil service contractors declined by 130,000 people, down 16% year on year. As we expect the effect of this current downcycle to be prolonged, we also expect workforce reductions to last through 2016 and most likely into 2017.
• As the industry downturn continues, we expect to see increasing financial challenges among the oil service companies. As a result, we also expect to see major restructuring of the supplier markets in the next couple of years.

Visit the IHS Online Store to purchase the full Upstream Industry Trends report.

Read the summaries from previous quarterly Upstream Spending reports here.

Posted on 14 July 2016.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.