2022 Forecast: Global capex growth to accelerate
Our initial take for 2022 is for global E&P capex spending to increase 16%, with North America (NAM) and international both rising for the first time since 2018, Fig. 1. International spending accounts for a near- record 80% of global capex, and growth is expected to accelerate from 7.4% in 2021 to 14.9% in 2022.
However, for the first time in four years, international growth is projected to lag NAM, which has contracted for three straight years. We believe spending in NAM is poised to increase 20.6% in 2022 and lead the global recovery, Table 1. The U.S. could see total E&P capital spending increase 23.5% in 2022, led by privates, +42%, and independents, +26.5%. Combined with Canada’s 7.7% growth, North America leads all geographic regions.
International capex gains will be led by the Middle East, +19.5%, while Latin America and Africa come off a low base at more than 40% below their 2014 peak, Table 2. In contrast, spending in the Middle East has held up remarkably well and is only 13% from peak. Asia remains the largest international market at 27% of the mix, followed by Russia at 17%, while the Middle East and Latin America tie for third at 14%, each. However, this excludes spending by the majors, which account for 11% of all international capex while NAM independents are a modest 1%. For 2022, E&P spending is expected to increase in all regions and across all operator classes, although independents are trimming capex in select regions.
An improved outlook for 2022 is predicated on new Covid variants being contained, plus effective rollout of vaccines and boosters. It is also predicated on continued resurgence in global demand and restrained global supply growth. Cash flow and oil price remain dominant drivers of global E&P spending, and at current levels, commodity prices merit increased investments.
Offshore resurgence. Majors and NAM independents will increase focus on offshore prospects and projects in 2022. The supermajors were noticeably absent during the last mini-upcycle (2018-2019), having largely abstained from both international and the U.S. shale growth until near the end. While some supermajors became key players in the Permian basin, they have scaled down their North American aspirations. Shell is divesting its Permian assets to ConocoPhillips and stepping up buybacks, highlighting the shift in corporate strategies.
For 2022, international spending is accelerating for all operator types except independents, who will trim to 9.7%. Majors will accelerate spending 17.1%, while NOCs increase 15.5% and NAM independents jump 41.6%. We believe higher international spending reflects higher offshore activity, particularly in Latin America, as new projects progress offshore Brazil and Guyana.
Privates play oversized role. We have analyzed financial and strategic documents for approximately 270 oil and gas companies to assess the outlook for the industry. This figure is slightly larger than in past years, as we have sought out more private companies to participate in our survey. Private E&Ps make up 60% of the U.S. land rig count but only about 15% of our U.S. capex estimate, suggesting the U.S. market is larger than we may think. Directionally, our sample of private operators increased capex 20% in 2021, versus total U.S. spending of -6% and are poised to increase capex by more than 40% in 2022.
Digital transformation on hold. Operators have historically been slow to adopt new technologies, and this will likely remain true, with approximately 77% of respondents planning to retain their same decision process toward testing and adopting new technologies. Those more likely to try new digital solutions surprisingly dropped from 30% in 2020 to 22% in 2021. This highlights an eagerness to accelerate production, using tried and proven methods rather than risk delays in testing and deploying a novel approach. However, we expect advanced data analytics, AI/machine learning and remote operations technologies to increase in importance over the coming years.
Capex for renewables. The worldwide spending increases are encouraging, but will competition from renewables hamper oil and gas development in 2022? We are less concerned about the competition for upstream dollars from renewable energy, as it won’t be the first time this has occurred. Europe has been investing in renewables for decades, and in the U.S., the DOE has distributed billions in clean energy stimulus over the past several decades. Some companies may be allocating 10% of their capex to renewables and low-carbon resources, but oil and gas are widely perceived as the primary fuels to power the economy. Moreover, we believe traditional oil and gas companies will be fundamental to the success of the energy transition and are encouraged by a confluence of events that are driving digitalization of the oil field and the energy transition.
Unprecedented growth. Evercore ISI economist Ed Hyman has tracked more than 600 stimulus initiatives from the beginning of the Covid outbreak and believes this massive and unprecedented amount of stimulus remains underappreciated. The U.S. economy may be stronger than any of us realize. The Fed’s balance sheet has nearly doubled in less than two years and a near-$2 trillion reconciliation package might still follow the $1 trillion Infrastructure Bill. Evercore ISI forecasts GDP growth to remain elevated in 2022.
Demand at pre-pandemic levels. OECD crude and product inventories drew down in October, despite lower refining runs on the back of strong demand across geographies, driving oil prices to a seven-year high of $84.57/bbl on Nov. 9. Despite lagging jet fuel demand, which remains 1.5 MMbpd below the 2019 average, global oil demand is on track to return to pre-pandemic levels of about 100 MMbopd. We forecast global oil demand to increase by 3.8 MMbopd to 100.1 MMbopd in 2022.
Commodity prices. E&Ps are using $70/bbl WTI and $3.90/MMbtu Henry Hub decks for 2022 budgets. Commodity price expectations have generally improved since our mid-year 2021 update, but they then slipped with the emergence of the Omicron variant. As this latest variant has begun to subside, oil prices have jumped noticeably higher, to well above $80/bbl, which is in excess of the $75/bbl level, at which budgets would reset higher. Natural gas budgets are unlikely to be materially revised unless prices fall below $3/MMbtu or increase above $5.50/MMbtu.
Cash flow is king. For the sixth consecutive year and seventh time in eight years, cash flow leads as the key determinant of E&P spending for a near-record 77% of our survey recipients. The oil price and natural gas price continue to rank two and four, respectively, but the oil price slipped slightly while gas increased, suggesting a subtle shift in operators’ hydrocarbon targets. Capital availability dropped to seven from three, reinforcing that E&P balance sheets have largely been repaired.
Exploration activity. Exploration spending increased unexpectedly by a three-to-one margin in 2021 versus initial plans for exploration spending to decrease on a net basis for a second consecutive year. Higher oil and gas prices throughout 2021 clearly improved the economics of exploration in the U.S., Canada and internationally, as one in four of our survey respondents plan to increase their exploration budgets for 2022.
OFS pricing. Having experienced broad pricing concessions in 2020, operators entered 2021 expecting oilfield services pricing to remain stable. The majority, 31%, detected no change in service costs, but 23% experienced a slight change in pricing for select product lines, such as completion and downhole tools. For 2022, the overwhelming majority (85%) expect service pricing to broadly increase, led by labor, tubulars and transportation, but also fracturing/stimulation, drilling and other services.
North America. NAM E&P spending is expected to increase 20.6% in 2022, reversing the 1.7% decline in 2021 and part of the 44.1% collapse in 2020. At about $73 billion in 2021, NAM capex fell to its lowest level since 2003 and was about 72% below the 2014 peak and 49% below the 2018 high point.
The U.S. will lead NAM at 23.5%, while Canada decelerates from 21.4% to 7.7% growth. Efforts are underway to reduce emissions from Canadian oil sands production, but we believe Canada is likely permanently impaired, due to the rise of U.S. oil shale and an unfavorable political climate for oil and gas.
Meanwhile, despite the sharp three-year consecutive decline in spending, U.S. crude oil production averaged 11.2 MMbopd in 2021, down only 100,000 bopd, year-over-year, and down 1.7 MMbopd from the November 2019 peak of 12.9 MMbopd. We believe U.S. shale production has peaked, with declining well productivity and increasingly challenging geological conditions limiting production growth. With operators prioritizing capital discipline and limiting capex spending, we believe U.S. shale is also structurally impaired. Thus, U.S.-based E&Ps have shifted focus from production growth, as the rise of value-based management incentives has modified corporate strategies to de-leveraging balance sheets, boosting shareholder returns and creating value into the unfolding commodity upcycle.
Middle East. We expect spending by select Middle East companies will accelerate to 19% growth in 2022. Abu Dhabi National Oil Co increased its five-year plan for 2022-2026 to $127 billion. The company is working to increase oil production capacity to 5 MMbopd (from the current 4 MMbopd) by 2030 and has plans to double its LNG production capacity from 6 MMtpa to 12 MMtpa. Adnoc recently awarded $6 billion of service contracts to boost its drilling capacity, including $3.27 billion for wellheads over 10 years and $2.34 billion for downhole completion equipment over five years.
Saudi Arabia is targeting growth of 1 MMbopd by 2030. Having slashed its 2020 capex budget to $27 billion from $35 billion to $40 billion previously, the NOC expects to spend about $35 billion this year and grow 20% to 25% in 2022, as it strives to expand oil production capacity to 13 MMbopd by 2030. The Kingdom plans to produce and export about 4 MMtons of hydrogen by 2030, when gas and renewables are expected to make up 50% of the nation’s energy mix.
Kuwait announced plans to invest $6.1 billion in exploration over the next five years to increase its oil production capacity to 4 MMbopd by 2040. About 31 oil rigs were contracted earlier this year to drill 700 new wells, as Kuwait Oil Co launched several new projects targeting a near-term production target of 3.2 MMbopd by 2025 from current production of 2.4 MMbopd in 2020. Qatar Energy is making progress on its massive North Field expansion plan, which will raise its LNG capacity from 77 MMtpa to 110 MMtpa by 2025 and 126 MMtpa by 2027. Meanwhile, expansion of Al-Shaheen oil field is being done in partnership with TotalEnergies.
Latin America. We estimate E&P spending by select Latin America companies will increase 19% in 2022, building on the 9% growth experienced in 2021. Overall spending in the region could be even higher, with the majors and NAM independents stepping up development offshore Guyana, Suriname and Brazil.
Mexican President Andres Manuel Lopez Obrador proposed an ambitious $32-billion budget for Pemex in 2022. While part of the funding is for downstream, $18 billlion has been allocated to hydrocarbons, representing a 26% increase to boost production 4.2% to 1.826 MMbopd. Having stemmed 15 years of production declines, the company is making progress on revitalizing its mature shallow-water plays and has plans to invest $100 million in exploration of the Upper Cretaceous region by 2023.
Brazil’s Petrobras announced plans to invest $68B between 2022-2026, which includes $57.3B or 84% for exploration and production. About two-thirds of the budget will focus on pre-salt projects in both deep and ultra-deepwater, which is expected to increase from 70% of total output in 2022 to 80% by 2026. Petrobras’ oil output is expected to increase from 2.1 MMbopd in 2022 to 2.6 MMbopd by 2026.
Africa. Spending by African companies is on track to accelerate 18% in 2022. Capex by Libya’s National Oil Co. could increase from $1 billion to $1.6 billion in 2022. The Oil Ministry targeted oil production growth to 1.4 MMbopd by year-end 2021, and is striving for 1.6 MMbopd in 2022. TotalEnergies has plans to invest billions in Libya to boost oil production, reduce flaring and develop solar.
Egypt exported 1 MMt of LNG during third-quarter 2021, surpassing its North African neighbors. Spending could increase 20%, with multiple operators targeting growth in the Western Desert, where Cairn Energy and Chevron recently closed on their acquisition of Shell’s assets, and Eni recently made three new discoveries that added 50 MMboe of reserves.
The Algerian government may boost state-owned Sonatrach’s budget by 30% in 2022. The country is targeting growth of its production capacity from 187 MMt to 195.9 MMt. A major supplier of natural gas to Europe, Eni is also assessing Algeria for production of blue and green hydrogen, and recently signed an agreement with Sonatrach to accelerate cooperation.
Asia/Australia. We expect spending in this region to accelerate 16% during 2022, vaulting total regional spending 32% above the 2018 trough and 22% from the 2013 peak. On an absolute basis, Asia leads the industry at 27% of total international E&P spending and 22% of global capex. We forecast the region to account for almost 30% of 2022 international capex growth.
China has been busy preparing for the Beijing Winter Olympics, which is expected to showcase low-carbon development through use of renewable energy, sustainable venues and green transportation. However, that has not stopped CNPC, Sinopec and CNOOC from boosting both onshore and offshore investments. The country produced 20 Bcm of gas in 2020, short of its 30-Bcm target. New targets of 50 to 80 Bcm were established for 2025, and the city of Chongqing has plans to invest $30 billion in a new production zone for 20 Bcm by 2030, to feed new gas-fired power plants. Sinopec is on track to produce a record 7 Bcm of shale gas this year.
Europe. Spending by European companies should increase 11% during 2022. Companies in the North Sea are advancing offshore wind and other low-carbon solutions, but the majority of capital spending continues to target the upstream oil and gas sector. Rising commodity prices and fuel shortages are reinforcing the need to keep investing in oil and gas, with Equinor continuing to dedicate 90% of its budget to the upstream, including 10% for exploration. Turkish Petroleum is moving forward with its first deepwater development, sanctioning the August 2020 Sakarya gas discovery as a $3.6-billion, fast track greenfield development. It is due to go onstream in 2023.
Russia/FSU. Spending by Russian and FSU companies should grow 6% in 2022. Companies are slowly restoring production at legacy assets and increasingly shifting their focus to LNG and other low-carbon resources for European export. Although work offshore remains constrained by ongoing U.S. and European sanctions, Gazprom is moving forward with new exploration wells in the Barents Sea.
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