OPEC: Oil & Gas Exploration Investment to Drop by Half

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--There will be a significant cut in oil and gas exploration and production investment over the next two years, according to the latest information from the Organization of Petroleum Exporting Countries (OPEC).

The group said it expects investment for the 2016-18 period to reach around $40 billion, which is half the investment seen during the 2012-14 period.

"In 2016, cuts in global capital expenditures (capex) are expected to continue to be significant, negatively impacting the amount of new oil discoveries," OPEC stated in its Monthly Oil Market Report for May. "Some $290 billion is estimated to be cut from company's capex in 2015/2016. This would continue the declining trend in new discoveries started last year in which less than 3 billion barrels were added to the discovered oil, much less than in past years. Between 2016 and 2018, the industry is expected to invest around $40 billion per year in exploration and appraisal, less than half its investments during 2012 to 2014. Many pre-final investment decisions (FID) for projects have been deferred over the past year as the economics are no longer justifiable under the current oil price environment. Companies seeking to remain cash-flow positive are likely to continue to cut investments, leading to further project delays or cancellations."

OPEC stated that weak exploration is already leading to less output. Citing the U.S. as an example, it showed that oil output is expected to contract by 430,000 barrels per day (BBL/d) this year, following strong growth in the previous two years.

"Overall, non-OPEC supply in 2016 is expected to contract by 740,000 BBL/d, it added. "In addition to the US, declines are expected in China, Mexico, U.K., Kazakhstan and Colombia, while growth is projected in Canada, Brazil, Russia and Malaysia."

The predicted plunge in project investment comes at a time of recovery in oil prices. The OPEC Reference Basket averaged $37.86 per barrel (BBL) in April, a gain of $3.21 or 9.3%. This was 40% higher than the lows reached in the beginning of the year and was attributed to expectations for an improving market situation, despite the current persistent oversupply. Oil futures surged more than 8%, with ICE Brent up $3.55 to average $43.34/BBL, while NYMEX WTI rose $3.16 to $41.12/BBL.

The OPEC report reaffirms an ongoing decline in project spending. In February, the U.S. Energy Information Administration (EIA) revealed that mining and exploration investment declined 35% in 2015, the second largest year-over-year decline since the U.S. Bureau of Economic Analysis (BEA) began reporting the series in 1948. Most of that investment goes into petroleum exploration and development, but the category also includes natural gas, coal and other minerals. Last year, mining and exploration investment declined from $135 billion in 2014 to $87.7 billion in 2015.

Last month, Industrial Info reported a big drop in oil prices after the key members of OPEC failed to agree to freeze output at talks held in Doha, Qatar. For additional information, see April 22, 2016, article - OPEC: Oil 'Freeze' Talks Collapse, Prices Tumble.

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