World’s largest oil companies to deliver over US$375bn of investment this year despite oil demand concerns
Prague 7 August 2009 – The world’s largest National Oil Companies (NOCs) and supermajors are planning on delivering in excess of US$375bn of ambitious investments through the down cycle, despite ongoing concerns around oil demand, according to new report “Investing for the upturn”, from Ernst & Young. Almost 70% of total investment in 2009 will come from NOCs in Asia and South America.
Based on current estimates by 2015 the largest NOCs will have invested around US$600bn in their hydrocarbon sectors. The supermajors have also committed to substantial investment in oil and gas activities this year – around US$100bn.
Andy Brogan, global oil and gas transaction advisory services leader at Ernst & Young and author of the report, says, “NOCs and the supermajors continue to show a real determination to push ahead with their major capital expenditure plans this year, at least for now. 2008 was a record year for capital investment by the sector and 2009 is shaping up to be another record year. Companies are wary of finding themselves in a position where they have to play catch-up on investment when the upturn materializes.”
He adds that despite the International Energy Agency's (IEA) current estimates for oil demand, investment is still required in production capacity enhancement projects to offset falling output due to natural field depletion. “Most oil and gas companies have indicated that they will spend more than half of their capital investment on upstream operations.”
China and Brazil emerging as powerhouses
The economic slowdown, a dramatic fall in oil prices and investors’ flight from risk have left many reserve rich state-owned oil and gas companies less able to finance projects with surplus cash flows. Some NOCs are looking at cost-cutting measures, while countries such as Indonesia are introducing stimulus packages to aid the sector. Many reserve holders’ ambitions to expand overseas are also being scaled back in order to prioritize domestic projects. However, substantial financial commitments are still being made for oil and gas projects in China and Brazil.
Brazil is set to become a major producer following pre-salt discoveries by Petrobras, which plans to invest US$28bn in pre-salt areas as part of its US$174bn business plan to 2013 – around 90% of its total investment will be targeted at projects in Brazil.
The investment allocated by Petrobras for 2009 represents 38% of the planned US$91bn expenditure by South American NOCs this year, according to the Ernst & Young, with Asian NOCs collectively to invest more than US$98bn, almost half (US$42bn) of which has been allocated by China’s CNPC.
Africa, CIS and Middle East have less capital to invest
By comparison the capital expenditure of NOCs in Africa, CIS and the Middle East is a fraction of that of their Asian and South American counterparts. The report calculated that the NOCs of Africa announced US$21bn of investment this year compared to US$36bn for the CIS and US$29bn for the Middle East.
It is these regions that face potential budget shortfalls which could lead them to seek out foreign investment in order to maintain or boost their oil production levels.
Opportunities for International Oil Companies (IOCs)
“When the NOCs had easy access to capital they were in a position to dictate terms with their IOC partners, but the volatility in financial markets means that IOCs with sufficient liquidity will be able to offer potential partners not only technological and operational expertise but also access to much needed capital,” says Brogan.
He concludes, “In the long-term, the overall structural issues surrounding location of reserves and achievable levels of production have not changed. When the global economy recovers the same pressures evident last year will resume. Any renewed appetite from NOCs for IOC participation will be short-lived – and therefore opportunities available now should not be wasted.”
