2019 Oil & Gas Survey Outlook Report: Capital spending declining, cost controls tightening

Image: Shell

The outlook for capital spending in Canadian oil and gas is trending downward, according to the 2019 Daily Oil Bulletin Industry Survey.

Forty per cent of respondents said they are planning to decrease capital spending this year, roughly twice as many as last year, and only 16 per cent plan to increase spending.

The shift in capital spending between this year and last is especially evident at the extremes. Thirty-one per cent of companies are planning to slash spending by 20 per cent or more, a 13 point bump from last year, while a mere 5 per cent of companies are planning to increase spending by 20 per cent or more—a decline of 11 points.

Especially disconcerting, at least in terms of oil and gas activity in Canada, is where survey respondents expect their most significant growth in 2019. Thirty-two per cent may have cited Alberta, but a quarter of oil-related companies said the U.S. Ten per cent said they would see their most significant growth in Saskatchewan, 7 per cent in British Columbia, and another 7 per cent elsewhere in Canada.

Opportunity shifts from drilling to MRO and process improvement

Survey respondents most commonly identified the same three opportunities for capital spending this year and last, when asked to select their top three, but a shift in order is indicative of the Canadian oil and gas industry’s increasingly dire situation.

Last year, exploration and development took pole position, followed by maintenance repair and operations and technology and process improvement.

This year, exploration and development dropped two positions, and in the process declined by 36 percentage points to 21 per cent. In contrast, maintenance, repair and operations gained 6 points, as did technology and process improvement, to 49 per cent and 24 per cent, respectively.

Oil-focused and gas-focused E&P companies are much more likely to be planning to decrease capital spending in 2019 than increase it based on the survey results, whereas companies with a balanced production portfolio are actually upbeat about spending.

Sixty per cent of respondents from oil-focused companies said they are planning to cut capital spending this year, three times more than plan to increase it.

Fifty-three per cent of gas-focused companies are planning to cut capital spending, over four times more those planning to increase. In contrast, a third of respondents representing balanced companies said they were planning to increase capital spending this year, and none indicated plans to cut.

Cost creep happening, but subdued due to market conditions

The rebound in the Canadian oil and gas industry in 2018, especially in the first half of the year, led companies to experience more cost creep on services and supplies than in 2017.

Seventy-five per cent of survey respondents suffered cost creep last year, an increase of 9 percentage points from the year before. But cost creep tended to be relatively subdued in 2018, with 56 per cent of oil-related companies reporting increases of less than 10 per cent, a 4 point rise from 2017.

Nineteen per cent of respondents reported an increase of 10 per cent or greater last year, more than double the year before.

Cost reductions

The three most common ways companies are hoping to reduce operating costs this year are layoff/staff reductions, production optimization and implementing new technologies.

Twenty-three per cent of respondents said layoff/staff reductions would be their main source of cost savings in 2019, the same percent as last year.

Eighteen per cent of companies said production optimization, a decline of 4 per cent from last year. Nine per cent cited implementing new technologies, a decline of 7 per cent.

Thirteen per cent of respondents said they do not expect to reduce operating costs this year.

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