As oil prices start to stabilize at US $65 to $75/bbl level and as the economic intervention by governments around the globe takes effect, oil and gas companies are expected to increase investments in 2010. However, the plans for 2010 and beyond are largely dependent on commodity prices, commodities demand/supply, and reduced costs of oil services.

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Oil & Gas Sector, Capital Expenditure Split by Company Type ($ billion) 2009 NOCs are contributing the most to the total, followed by the supermajors and majors. (Source: GlobalData)

The past year-and-a-half has seen significant volatility in the commodity prices and financial markets. Crude oil soared from around $100/bbl in the beginning of 2008 to more than $147/bbl in July 2008 before plummeting below $40/bbl in the beginning of 2009 and averaging around $57 per barrel year to date. This volatility has made long-term strategic planning difficult for E&P companies.

In 2008, commodity prices were at an all-time high, and oil and gas companies made significant revenues. However, deployment of cash varied substantially among these companies. Large oil companies used their cash on dividends, share buy-backs, debt repayments, and capital expenditures, while the smaller ones used external borrowing in either debt form or equity to supplement their internal cash flows to fund growth.

After surging from 2007 to 2008, capital expenditure of oil and gas companies has witnessed a significant decrease in 2009. In 2010, however, capex activity is expected to go up, driven mainly by large national oil companies (NOCs).

E&P spending drops

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Oil & Gas, Capital Expenditure and Growth, $ billion, 2009 (Source: Energy eTrack From GlobalData)

GlobalData’s analysis of the top 100 listed companies (based on oil and gas reserves) found that capex for these companies during 2007 and 2008 advanced 22% and 29.2%, respectively, driven by increased exploration and drilling activities and synergic mergers and acquisitions. Spending increased from $477.2 billion in 2007 to $616.8 billion in 2008, which was higher than expected. This was because ongoing projects and long-term contracts did not provide an opportunity for companies to adjust to deteriorating market conditions in the second half of 2008. There was also a time lag between the fall in commodity prices and a drop in the prices of oil services.

Bucking the uptrend, total investment in the oil and gas sector is projected to drop 16.6% year-on-year to $514.3 billion in 2009 as a result of a tight financial and economic environment and a drop in oil prices. Companies are struggling to make plans in this uncertain environment. Several companies announced delays in their normal budgeting process, and a number of others have reduced budgets from previous estimates.

If commodity and capital markets remain weak, additional budget cuts will be necessary to realign spending with internal cash flows and availability of external financing. Rising inventories, unstable demand, and anticipation of lower prices for oil services have forced companies to postpone new projects and renegotiate existing contracts. Even depreciating currency has affected spending plans.

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Oil & Gas Sector, Capital Expenditure Split by Company Type ($ billion), 2006-10 (Source: Energy eTrack From GlobalData)

Oil and gas companies registered wind-fall gains in 2008 as a result of high crude oil prices; however, the companies could not rapidly bring down costs as the commodity prices dropped. As a result, profit margins started contracting. Companies are facing challenges in bringing down their costs and are conservative about capital investments in the near future, though long-term fundamentals for the industry continue to remain strong.

Small companies are most affected by the economic downturn. These companies lowered their production as a result of volatile crude prices, reduced availability of capital, and tougher credit terms. This could lead to a potential supply crunch when the economy rebounds. Small cap oil and gas companies also face a challenge in terms of limited operating cash flow because they rely more on external debt to fund their growth.

Capital expenditure plans for 2009 are noticeably different in terms of the scope and strategy adopted by large companies. Even the ambitious investment plans are accompanied with cost-cutting measures. Also, uncommitted investment plans are being reviewed and revised in expectation of clinching a better deal in terms of lower raw material prices and service rates. Furthermore, the companies are reluctant to invest in mature basins.

IOCs reduce spending, NOCs invest

Almost all major international oil companies (IOCs) have reduced capex for 2009. Investments from supermajors and majors, which together contribute 49.9% to the total, are expected to decrease. Supermajor capex will drop 14.1% to $187.6 billion, and major capex will drop 37.1% to $69.3 billion in 2009.

Large, mid, and small cap companies, which together contribute approximately 9.4% to the total oil and gas capex, were significantly impacted by high costs and credit crunch. Their investments are expected to decline this year — large cap by 31.6%, mid cap by 57.8%, and small cap by 43.1%.

NOCs have continued to spend despite the economic downturn. Total oil and gas capex of NOCs is expected to witness a growth of 6.1% to more than $209.3 billion. Most NOCs have the necessary financial strength to fund capital-intensive projects even in adverse financial and economic environments.

Capex to rebound in 2010

GlobalData forecasts a 4.9% growth in oil and gas sector capex in 2010 and expects that the total capex, of the leading listed oil and gas companies, will exceed $539.7 billion, driven mainly by NOC investments. Total capex by the listed NOCs (for which the data is publicly available) is expected to register a 9.3% growth and exceed $228.7 billion in 2010.

PetroChina and Petrobras, together contributing around 35.8% to the total oil and gas capex in 2010, are expected to increase their spending by 38% and 16%, respectively, over 2009. OAO Gazprom, PdVSA, and PEMEX are also expected to spend significantly in 2010.

Capex from the supermajors is estimated to increase by 0.6%, while capex from majors will go up 4.1% to exceed $188.6 billion and $72.1 billion, respectively. These companies will look toward efficiently using resources as they continue to expand their operations.

Large, mid, and small cap companies collectively are expected to contribute $50.4 billion to the total oil and gas capex in 2010.

Downside risk to 2010 spending plans

GlobalData’s 2010 capex estimates rely on the largest NOCs keeping up with their aggressive capex plans. Projections assume stable commodity prices and a better global economic and financial environment in 2010. The other factors that can impact forecasts include exchange rates, global supply and demand, and raw material and service costs.

The negative impact of the economic downturn can be witnessed in the form of lower investments in 2009. However, NOCs with strong balance sheets and the support of their national governments will drive growth in capex in 2010. Driven by the objective of meeting their domestic energy requirements, these NOCs are expected to maintain or increase spending in the near future.

Despite certain economic hiccups, there are reasons to believe that long-term perspective of capital investments remains positive for the oil and gas sector.