WoodMcKenzie’s 2018 global upstream trends needs Nigeria’s policy response

Analysts at Wood Mckenzie have highlighted five key themes that will mark the global upstream industry this year which requires urgent policy response:

Global investment stabilising

Investment stabilised in 2017, and it will grow slightly in 2018, signalling an end to the cuts that saw more than $900 billion taken out of global investment since 2014. We expect development investment of around $400 billion, indicating that the cycle has bottomed out.

This is despite LNG spend collapsing 40 percent as projects are completed in Australia and Russia. The resulting gap will be filled by unconventionals and deepwater projects, where investment will be up 15 percent for both. After three years of decline for deepwater, this is a noteworthy shift, and we expect the Gulf of Mexico to be the big winner. We will also see Brazil leading the way for major project FIDs in a third successive year of rising project sanctions, again signalling that the cycle is turning.

Tight oil’s growing pains

We expect US tight oil production to surge 24 percent (1.2 million b/d) in 2018, driven by a 60 percent increase from the Permian. We believe most of the major players can deliver this growth while generating free cash flow above $55/bbl. But rapid growth is not without its challenges.

Service-sector costs are already increasing, and operational hiccups and less experienced crews could also slow momentum. Drilling technology and subsurface challenges are additional risks.

We see break-evens rising as much as 15% for US tight oil next year, particularly in the booming Permian and Mid-Continent. But as it stands, there are more questions than answers when it comes to tight oil economics. We should have a clearer picture as 2018 plays out.

Service sector stress

It looks like 2018 will extend the tough run the service sector has had since the downturn. While oil companies have been adapting to the lower-for-longer cycle and moving toward growth, the service sector is still in survival mode.

Operators will continue to take advantage of an oversupply in the sector, there will be a great opportunity to lock in rock-bottom costs. There is also likely to be growth in operator-service sector collaboration, which is showing early signs of being an effective means to reduce pre-FID costs. And we expect more integrated supply chain players to move into the upstream operator space.

Opportunities from discovered resources and exploration

Discovered resource opportunities (DROs) will play a big part in building up portfolios in 2018. Iran and the UAE could award at least 10 billion boe of discovered resources next year. There will be huge interest in exciting Latin American opportunities too, particularly in Brazil.

NOCs and the Majors will compete fiercely to access DROs and exploration blocks in Brazil, bolstered by world-class deepwater economics. Licensing rounds in Mexico will also draw strong bidding from these players, while independents will look for lower-cost licensing opportunities.

Fiscal terms evolving

Investment hotspots in Latin America have seen host governments maximise their share of future profits by allowing industry to bid the fiscal rates. Iran will almost certainly follow suit in 2018. Most other countries don’t have such prospective rocks to offer, yet many governments continue to insist on a high fiscal burden. This is deterring potential upstream investment.

In 2018, we expect to see more regimes open the fiscal rates to a bidding process, which should establish a more appropriate ‘market rate’. To incentivise lower-cost operations, some governments, like Indonesia and India, are opting for revenue-sharing agreements over profit-sharing. Will others follow?

Policy response

The current rally of crude oil prices even with runaway shale production is the strongest evidence yet that these forecast for the oil sector need to be taken seriously.

Nigeria has been unable to pass the petroleum industry bill for over a decade now and in 2018 the urgency to pass bill would be intense. A competitive regulatory and fiscal regime is required to share in $400 billion investment available for this cycle before it bottoms out.

Fortunately, Nigeria does not need to articulate new policies or laws, just action on ones in the national assembly and implementation of oil and gas policies championed by the ministry of petroleum resources.

ISAAC ANYAOGU