Wood Mackenzie Sees $85 Crude in 2020, Oil and Gas Projects Doubling in 2017

Thursday January 12, 2017

The oil rally may have faltered, but producers are gung ho about the year ahead: according to Wood Mackenzie, they will increase exploration and production spending by 3 percent to $450 billion.

The news comes on the heels of PLS reporting that merger and acquisition activity rebounded in 2016, to the tune of $69 billion – in sharp contrast to total deal values plummeting 62 percent in 2015.

While the 2017 investment prediction is 40 percent below 2014 levels, it's still seen as a sign that producers view the oil price slump as firmly behind them: "We've just come through two years of gloom and lots of costs cutting and now we are cautiously optimistic there will be a start of recovery in 2017," said Malcolm Dickson, a principal oil and gas analyst at Wood Mackenzie.

With the consultancy forecasting oil prices to average $57 per barrel this year (and gradually increase to $85 per barrel in 2020 as supplies decrease), U.S. shale production is expected to grow by around 300,000 barrels per day (bpd) in 2017 to around 4 million bpd – thanks to costs having fallen by 20 percent since 2014 and anticipated to further drop by a 5 percent this year, according to Dickson.

Moreover, Wood Mackenzie believes the number of final investment decisions for projects with resources bigger than 50 million barrels of oil equivalent will more than double in 2017 to as much as 25, compared to only 9 last year; Exxon Mobil's Liza discovery offshore Guyana plus deepwater projects in Brazil and in the Gulf of Mexico are cited as mostly likely receiving the green light.

Brian Lidsky, managing director of research and content at PLS, told CNBC noted that 2016 merger and acquisition activity in the Delaware Basin (a portion of the larger Permian Basin located in Texas and New Mexico) will expand outward: "In 2017, we do believe that acquisition activity will expand beyond the Permian into other known, proven plays that become significantly more economic at pricing above $50."

But while all of this is good news, Wood Mackenzie warns that the short-term increase in activity won't be enough to solve a long term supply/demand gap, which it believes will swell to 20 million bpd by 2025.

Andrew Dittmar, mergers and acquisitions analyst at PLS, was equally prudent in delivering the optimistic outlook: "I think there still is quite a bit of caution in the market," he told CNBC, adding, "There is building confidence as we move through 2017, as we see if OPEC can deliver on the cuts."

Dittmar touches upon the one factor that could seriously impact the new-found confidence of producers, and if this week's news on the Organization of the Petroleum Exporting Countries (OPEC) front is any indication, the Wood Mackenzie report should be taken with a grain of salt: a loading program obtained by Bloomberg reveals that Iraq, which vowed to slash production under the cartel's reduction plan, will ship 3.64 million bpd of crude in February, exceeding its December average of 3.51 million bpd, which was a record high.

Iraq pumping all-out caused Robert Yawger, director of the futures division at Mizuho Securities USA, to remark, "Iraq may be the first big crack in the wall of the OPEC agreement."