DnB NOR Global E&P Spending Report: Growth Continues

The 65 oil companies covered in DnB NO’s fifth annual E&P spending report expect a spending increase of 14% in 2011, 8% in 2012 and 7% in 2013. For 2011 we expect activity growth in line with last year; however, service costs are increasing and expected to contribute one third of the total growth rate. We believe that this, combined with fundamentals such as an organic Reserve Replacement Ratio of 87% and increased focus on deepwater and challenging areas, will lend good support to earnings for the oil services industry in the years to come.
The fifth annual E&P spending report covers oil and gas companies’ spending on exploration and production (E&P) based on our survey of 65 oil and gas companies worldwide, ranging from oil majors to small-cap independents, providing insight from all the purchasers of oil services into current expectations and how they have changed YOY. The focus is on oil companies exposed to the offshore side of E&P. Our key conclusions are:
Based on the companies covered in our report, DnB NOR expects E&P spending to rise by 14% in 2011. All segments are expected to increase their spending. The majors indicate that their spending is expected to increase by 11%, 9%-points higher than in 2010. The small- and large-cap independents expect to raise their spending by 22% and 21%, respectively. The NOCs suggest an increase of 13%.
For oil companies to significantly reduce E&P spending, the survey shows an average oil price of $65/bbl is required. On the upside an oil price of $100/bbl is indicated as an inflection point for significantly higher spending.
According to the report, oil companies are planning to ramp up activity and prices for oil services are expected to increase. Drilling and subsea constructions and equipment are the segments in which oil companies plan to increase their capacity the most. Short-term demand for capacity is expected to be met in all segments, although the three aforementioned segments show some signs of undersupply in the coming years.
Oil companies are forced into deeper water and harsher environments as most of the world’s easy oil is either depleted or in the hands of highly regulated nations. According to the report, the focus on the deepwater segment seems to be unaffected by last year’s Macondo accident. The outlook of a stable high oil price and new technology developments have made oil companies reassess mature fields.