North America tight oil spending to drop 40-50% from 2014 to 2016

North American upstream capital spending to drop by 32% from 2014 to 2016, led by declines in unconventional activities, according to IHS' 1Q2015 North American Upstream Spending Report.

Total North American upstream capital spending (CAPEX) reached $311 billion in 2014, an 8.8% rise over 2013 levels, and a massive 123% gain from the trough in 2009. Operating expenditures (OPEX) rose to a total of $127 billion in 2014. CAPEX on new projects is currently seeing large declines, but is expected to recover and reach $347 billion in 2019. This is based on a bottom-up analysis of many thousands of data points from the extensive IHS North American wells database.

US spending in unconventional plays reached USD $106.5 billion in 2014. The spending decline in 2015 and 2016 is expected to be deep, in particular for tight oil plays, with declines of 40-50%. The collapse in activity has forced contractors to lower costs of services by more than 30% for certain service categories. This, and continued technological and efficiency improvements, is significantly lowering breakeven costs of many plays. These lower breakeven costs and improved margins are expected to drive a very strong rebound in unconventional spending once oil prices start to recover and operators move to maximize margins with activity in lower cost plays. Spending in unconventional plays may recover back to 2014 levels by the end of 2017. The Eagle Ford and Bakken will remain the main plays for forward investment, with the Permian basin being the main growth play.

For shale gas plays, spending has not been as severely impacted recently as it has been for tight oil plays as natural gas prices have only seen modest declines. But we also see spending on gas plays reduced, both directly as the value of NGLs drops, and also indirectly, as the oil price drop forces operators to make cuts across the board.

Offshore has been hit hard by the collapse in oil prices, with many new projects being pushed back. There are currently a large number of ongoing projects in the Gulf of Mexico and also several in offshore Canada, which will maintain relatively high activity and spending levels for the region during 2015-2016. We are seeing reductions in exploration spending, FEED (front end engineering and design) contract awards, and new projects being sanctioned across North America, which will impact spending through the remainder of this decade. The current spending forecast for 2019 is nearly 30% lower than what had been forecast for the period at the beginning of 2014.

By Bjorn Hem May 18, 2014.

Learn more about the IHS North America Upstream Spend Report, download a sample and download the brochure.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.