WOODMAC: NEW PROJECTS IN THE
UPSTREAM INDUSTRY TO DOUBLE IN 2017
Wood Mackenzie forecasts the investment cycle
will show the first signs of growth in 2017 since
2014 and final investment decisions (FIDs) will
double, compared with 2016.
Malcolm Dickson, a principal analyst for Up-
stream Oil and Gas for Wood Mackenzie, said:
“2017 will demonstrate how efficient the oil and
gas industry has become; showing projects in
better shape all round.”
According to Wood Mackenzie’s global up-
stream outlook for 2017, confidence will start to
return to the sector, with exploration and produc-
tion spend set to rise by 3% to US$450 billion.
Though a corner is being turned, this is still 40%
below the heady days of 2014. At the forefront
of the revival will be US tight oil. Costs will con-
tinue to fall in 2017, though only marginally. But
for all the pain of the downturn, a leaner industry
is starting to emerge.
Capex deflation has averaged 20% over the
past two years. With service sector margins wafer
thin, Wood Mackenzie believes there’s now only
room for small reductions and capital costs are
expected to fall by an average of 3% to 7%.
According to Wood Mackenzie, the five things
to look for in 2017 are:
• Global investment will rise, reversing two years
of severe decline.
• FIDs will double and deep water is back on
• Costs will bottom out as an efficiency boom
takes hold, but more work is required.
• Fiscal rules need to improve to attract scarce
• Rise in global investment in 2017 after two
years of severe decline
“The global investment cycle will show the first
signs of growth in 2017, bringing the crushing
two-year investment slump to a close,” said
US tight oil, and the Permian basin in particular,
will lead the way, distinguished by low breakevens,
scale and flexibility. US Lower 48 spend is set to
grow by 23%, to US$61 billion, with upside if oil
prices rise strongly and US Independents are
emboldened by a Trump presidency.
Number of project FIDs to double
Wood Mackenzie predicts the number of FIDs
will rise to more than 20 in 2017, compared with
nine in 2016. This is still well short of the 2010-2014
average of 40 a year. But these are generally
smaller, more efficient projects, and capex per
barrel of oil equivalent (boe) averages just US$7
per barrel, down from US$17 per barrel for the
“Companies will get more bang for their buck
as development incremental internal rates of
return (IRR) will jump from 9% to 16%, comparing
2014 to 2017,” said Dickson. “This is in part a
result of a shift in capital allocation away from
complex mega projects towards smaller, incre-
mental projects in the Canadian oil sands and
A leaner industry has emerged from the
“Nowhere is the mantra ‘doing more with less’
more evident than onshore US. There has been
a dramatic increase in efficiency in the sector,
exemplified by the drillers, who are managing to
complete wells up to 30% quicker,” he added.
Wood Mackenzie says as the tight oil sector
heats up further, the spectre of cost inflation
looms in 2017. But any increase in costs may well
be offset by further efficiency gains in earlier-life
plays. For example, there’s still potential for a
further improvement in drilling speed of 20% to
30% in some early-life tight oil plays.
Deepwater will spring back to life in 2017,
but more cost cutting is needed in long run
Deepwater FIDs will be a leading indicator the
tide is turning. The best development assets will
hold their own against tight oil, especially as more
risk-averse tight oil operators start to screen opportunities under higher discount rates.
According to Wood Mackenzie’s global upstream outlook, projects slated for FID in 2017
are largely looking good, but the longer-term
deepwater pipeline is more challenged. Of the
40 larger pre-FID deepwater projects, around half
fail to hit 15% IRR at US$60 a barrel.
“The industry has selected the best projects
to optimize and take forward. In 2017 it will have
to turn its attention towards optimizing the next
wave of developments to get them sanc-tion-ready,” said Dickson.
Fiscal terms will need to improve to attract
Graham Kellas, senior vice president of global
fiscal research at Wood Mackenzie, said: “Some
governments will be tempted to increase tax
rates, but those with uncompetitive fiscal regimes
will have to make changes to ensure they can
attract still-scarce new capital. Getting the risk-re-
CHEVRON TO SELL
Chevron Corp. subsidiaries have entered into
a sales and purchase
agreement with Star
Energy Consortium to
sell Chevron’s Indonesian
and Philippines Geothermal assets.
In Indonesia, Chevron
subsidiaries operate the
Darajat and Salak geothermal fields in West
Java. In the Philippines,
have a 40% equity
interest in the Philippine
Co. Inc., which operates
the Tiwi and Mak-Ban
geothermal power plants
in Southern Luzon.