Intelligence brief: WoodMac, Deloitte warn on trillion-dollar capex cuts; Private equity set to deploy dry powder

Upstream oil and gas news you need to know

Capital-spending budgets for 2016-2020 have been slashed (Image credit: iStock / tiero)

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WoodMac, Deloitte warn on trillion-dollar capex cuts

Planned capital spending on upstream oil and gas for the years 2016-2020 has been cut by $740 billion to $2.6 trillion since the oil price started to drop almost two years ago, Wood Mackenzie has said. Spending cuts total more than $1 trillion when reductions in conventional exploration investment are included.

In a separate report, Deloitte has warned that the global oil and gas industry needs a minimum $3 trillion investment in 2016-2020 to ensure its long-term sustainability.

According to Wood Mackenzie, the US onshore oil industry has seen the quickest and deepest cuts, with half of the capex spend of $125 billion cut from 2016-17 budgets, and more than $200 billion in further cuts expected by 2020. The UK and Norwegian sections of the North Sea have seen cuts of 36% or $27.5 billion since late 2014. In the UK, WoodMac expects at least 140 fields to cease production over the next five years, with a total of $78 billion (in real terms) to be spent on decommissioning the UK Continental Shelf.

Deloitte said in its report that about 80% of the oil and gas industry’s capex over the past 10 years has gone toward replacing exploited reserves, while only 20% went toward growth. Therefore, it said, the industry could reduce its overall capex by a maximum of 20% to remain flat. But after making capex cuts of 25% in 2015, Deloitte said, these companies have announced additional capex cuts of 27% in 2016 and expect a flat 2017 – “taking future spending far below the levels required to stay flat.”

Global upstream capex (excluding MENA) has been cut for 2016 and beyond (Image credit: Deloitte)

Private-equity leaders believe oil and gas funding will rise this year

Sixty-four percent of private-equity investors believe fundraising for oil and gas will increase over the next 12 months, an EY survey of 100 managing directors and partners from PE firms who have invested in oil or gas in the past two years has found.

PE firms had $971.4 billion in cash reserves in June 2016, EY said, pointing to data from research firm Preqin. The survey found that 43% of PE investors believe the industry will begin to invest the bulk of these cash reserves – also referred to colloquially as dry powder – in the first half of 2017. Some 30% said the bulk of the reserves would be deployed by the end of 2016, 21% said they would be used in the second half of 2017, and 6% said beyond 2017.

A total of $7.6 billion was spent by PE firms on 12 separate deals in the oil and gas sector in the first quarter of 2016, EY said. This included notable midstream deals, such as a group of US-based investors acquiring a 12.3% stake in Plains All American Pipeline for $1.5 billion.

PE activity in oil and gas hit an all-time high in 2014 with 104 deals worth $38.6 billion. Activity slowed significantly in the first quarter of 2015 on the drop in the oil price, before picking up to end the year with 64 deals worth more than $20 billion.