Oil & Gas Project Spending Plans Still Robust, but Changes Are Expected

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Planned project spending on North American Oil & Gas projects remains quite robust, despite the recent collapse in crude-oil prices, according Industrial Info's North American Industrial Project Database. Many companies are adjusting their capital spending plans to prepare for the release of fourth-quarter earnings. Therefore, downward revisions to Industrial Info's data are likely. Right now, however, Industrial Info is tracking 1,279 active projects that are scheduled to kick off between March 2015 and March 2016. The total investment value of those projects is about $127 billion.

Planned project spending on Oil & Gas Production is garnering the largest slice of planned capital spending over the coming year: 520 projects valued at $85.9 billion. Pipeline owners have scheduled work to begin on 393 projects worth $34.3 billion between March 2015 and March 2016. Terminals owners plan to begin work on 366 projects valued at $6.9 billion over that same period.

Click on the image at right to see planned project spending for Oil & Gas companies for the March 2015-March 2016 period, contrasted to planned project activity for the March 2014-March 2015 period.

By contract, between March 2014 and March 2015, Oil & Gas producers, pipeline owners and terminal owners had planned to begin construction on 565 projects valued $65.4 billion. Producers planned to spend $42.2 billion on 238 projects over that time, while pipelines had scheduled work to begin on 229 projects valued at $17.8 billion. Terminals owners had planned to kick off work on 98 projects with TIV of $5.4 billion.

Prices for West Texas Intermediate (WTI) crude oil have dropped from a high of about $110 per barrel last June to about $45 now. Industrial Info doesn't expect all planned projects to begin according to schedule. Some companies already cut capital budgets in the face of steep crude-oil price declines during the fourth quarter. Industrial Info expects capital spending plans to be volatile this year until crude oil prices firm. However, Industrial Info has noted that crude-oil production is not expected to fall in lock-step with capital budgets, as companies capture operating efficiencies that allow them to get more oil and gas out of formations with fewer capital outlays. For more on this, see January 14, 2015, article - Crude-Oil Price Collapse Leads to Cutbacks in Capital Spending, but Efficiency Gains Should Keep Production Levels High.

As companies in these industries establish their capital budgets for 2015, low crude-oil prices are expected to lead to an increase in the number and dollar value of projects that are cancelled or placed on hold. To date, however, project delays and cancellations for the March 2015-March 2016 period still trail cancellations and delays for the March 2014-March 2015 period.

So far, asset owners have cancelled or postponed the start of 112 projects valued at $23.1 billion that were scheduled to kick off between March 2015 and March 2016. By contrast, for the comparable year-earlier period, asset owners cancelled or postponed 207 projects valued at $36.6 billion.

Click on the image at right to see a graphic comparing project cancellations and postponements for the March 2015-March 2016 period with the March 2014 to March 2015 period.

"I expect we will see a lot of dynamism in project starts, project delays and project cancellations in the next few months," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "The critical questions are, how low will crude-oil prices go and how long will they stay there? We're at a six-year low for crude-oil prices, and that is forcing companies to reassess project priorities and capital budgets. We expect to see a lot of portfolio rotation over the next few months, as assets some companies deem peripheral will be sold to other companies. All of that will drive planned project spending."

Davis is one of several Oil & Gas subject-matter experts who will be on hand at Industrial Info's upcoming 2015 Industrial Market Outlook, where strategic trends and industry spending will be discussed. The event takes place January 29 in Houston, Texas. Registration is complimentary, but it is recommended that attendees reserve their spots today. Last year's Outlook event in Houston was attended by more than 900 people.

Despite a collapse in global crude-oil prices, and weak prices for natural gas, consultants ICF International Incorporated (NASDAQ:ICFI) (Fairfax, Virginia) predicted U.S. natural gas production would continue growing over the next 20 years. "Long term market dynamics are not affected by short-term changes in oil prices," consultants Ananth Chikkatur and Kevin Greene wrote in a late-December "Quick Takes" research note. "Rather, it is the expectation of future prices that will drive drilling and infrastructure decisions."

In the ICF report, "Impact of Lower Oil Prices on Natural Gas Markets," Chikkatur and Greene specifically looked at how U.S. gas demand, supply and prices are expected to change in response to dramatically lower crude-oil prices. They note many oil-dominant plays, including the Eagle Ford and Bakken shales and the Permian Basin, "have become significant sources of gas supply, due to increased oil production. Therefore, lower oil prices affect not only North American oil production, but also natural gas supply and demand, and natural gas liquid (NGL) market dynamics."

The consultants projected how West Texas Intermediate (WTI) crude-oil prices at three levels--$60 per barrel, $80 per barrel and $100 per barrel--would affect combined U.S. and Canadian gas production over the next 20 years. In the "low" crude-oil price scenario ($60 per barrel), U.S. and Canadian gas production would rise slowly from its current level of about 90 billion cubic feet per day (Bcf/d) to about 100 Bcf/d in 2024 and about 116 Bcf/d in 2035, the last year of the forecast. But if average oil prices returned to their highs of $100 per barrel, the ICF report predicted combined production of about 100 Bcf/d in 2019 and about 130 Bcf/d in 2035. The prices used in the ICF model are measured in real 2012 dollars after 2017.

Chikkatur and Greene noted there were three ways declining crude-oil prices would affect natural gas prices:

• Reduced crude-oil production would lower production of associated natural gas (gas found with oil), thus lowering overall gas supply. Associated natural gas currently makes up about 17% of overall North American gas production.
• Lower oil prices might make oil more competitive with gas for both fuel and feedstock uses, reducing demand for gas.
• Lower oil prices will affect oil-indexed liquefied natural gas (LNG) prices, reducing demand for LNG exports from North America.

Lower oil prices not only impact gas supply, but also reduce gas demand in substantial ways, such that gas prices will not be significantly affected over the long term due to lower oil prices, the ICF report predicted. The firm used its proprietary Gas Market Model to make its projections.

Not all producing areas will be affected the same by lower gas prices. ICF predicted gas production from the Marcellus and Utica shales will continue growing strongly over the next two decades, even if oil prices average $60 per barrel. The firm has predicted that gas production from those two formations will reach about 34 Bcf/d by 2035, up from about 25 Bcf/d currently. Some parts of the Marcellus produce predominately "dry" gas, with little oil, and wells in the Utica have largely been gas-oriented as well. As these wells don't produce a lot of associated gas, production is therefore not directly affected by declines in crude-oil prices.

Exports of LNG could be significantly affected by prolonged low natural gas prices, the report noted. If oil prices stay low, "demand for LNG exports will likely decline, as international buyers (particularly in Asia) have less incentive to deviate from their current oil-indexed contracts. There will be less appetite among infrastructure developers and financiers for expanded LNG exports from North America."

Recently, spot LNG prices have fallen to about $10 per million British thermal units (MMBtu), down from $16 per MMBtu or more, in some Asian markets. Falling crude-oil prices could rekindle an appetite in those markets for oil-indexed LNG prices, which have long been an industry practice. As domestic gas prices have fallen in recent years, but overseas prices rose, some companies developing LNG export terminals in the U.S. moved away from oil-indexed LNG prices in favor of specific contract prices.

The ICF report projected how low oil prices could affect U.S. LNG exports. If oil was priced at $100 per barrel, LNG exports would total about 13.5 Bcf/d by 2025. But if oil fell to an average of $80 per barrel, LNG demand for gas would fall by about 2.5 Bcf/d. And if oil prices averaged $60 per barrel, only those terminals on the Gulf Coast that are actually under construction would get built, and exports would average about 4 Bcf/d.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.