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Wood Mackenzie predicts upstream growth

January 13 - Wood Mackenzie is forecasting that the investment cycle in the upstream oil and gas industry 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 upstream 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 upstream outlook for 2017, confidence will start to return to the sector, with exploration and production spending set to rise by 3 percent to USD450 billion. Though a corner is being turned, this is still 40 percent below the heady days of 2014. At the forefront of the revival will be US tight oil. Costs will continue to fall in 2017, though only marginally. But for all the pain of the downturn, a leaner industry is starting to emerge. 

Capital expenditure (Capex) deflation has averaged 20 percent over the past two years. With service sector margins wafer thin, Wood Mackenzie believes there is now only room for small reductions and capital costs are expected to fall by an average of 3 percent to 7 percent. 

The key themes of Wood Mackenzie's Global Upstream: 5 things to look for in 2017 report are:

• Global investment will rise, reversing two years of severe decline

• FIDs will double and deep water is back on the agenda

• Costs will bottom out as an efficiency boom takes hold, but more work is required

• Fiscal rules need to improve to attract scarce investment

Dickson added that US tight oil, and the Permian basin in particular, will lead the way, distinguished by low breakevens, scale and flexibility. 

Wood Mackenzie predicts that 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, it adds.

"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 percent quicker," Dickson added. 

The report says that deepwater exploration will spring back to life in 2017, and deepwater FIDs will be a leading indicator that the tide is turning. 

"The industry has selected the best projects to optimise and take forward. In 2017 it will have to turn its attention towards optimising the next wave of developments to get them sanction-ready," said Dickson.

www.woodmac.com

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