December 8, 2011
By Erik Wold, Partner & Head of Technology; Jan G. Norstrøm, VP Technology
Defining the E&P spend market
Rystad Energy has thoroughly analyzed Norwegian E&P and oil service businesses. In Norway we find transparent and high quality reporting of investment data via Statistics Norway (SSB) and the Norwegian Petroleum Directorate (NPD). Based on our research the Norwegian oil companies’ costs and the oil service market (for 2010) can be broken down as shown in Figure 1.
A in Figure 1 shows the Capex, i.e. investments, totaling NOK 125 b. It includes all capitalized spend on projects, e.g. all exploration costs, all new facilities, all wells and larger modifications and upgrades. B also includes operating costs and is the total field license cost i.e. Capex + Opex for all fields, exploration blocks, pipelines and terminals. Opex includes operation related costs like operation and maintenance of facilities, salaries, tariffs and fees. Opex is NOK 59 b so that Capex + Opex = NOK 184 b. To get to the total costs for oil companies we also need to include non-license related costs like pre-license exploration, sales and administration, and non-operational costs. This amounts to NOK 34 b and shows that total costs of oil companies in Norway sums up to NOK 218 b, shown as C in Figure 1.
However, all oil company costs are not purchases from oil service suppliers. Non-purchase costs include salaries within the oil companies, tariffs for processing and transportation, cost of injection gas, and direct taxes like CO2 tax. Tariffs also include historical Capex costs. We find these cost elements both in the Capex, Opex and non-license related budgets, with NOK 8 b, 19 b and 32 b respectively. Subtracting non-purchase costs leaves us with the actual purchases, which we term “E&P direct purchases”. This is the sum of contracts the oil companies put in the oil service market. In 2010 it totaled NOK 159 b, shown as D in Figure 1.
However, the total oil service market is larger than the sum of the contracts because many contractors sub-contract parts of their scope to sub-contractors. In this case, both companies will report the sub-contracted volumes in their revenues, and the contract volumes are double-counted. The size of the market as seen from the oil service suppliers is the sum of reported revenues from these companies within the oil service segment. The difference between this total oil service market and E&P purchases, often referred to as Supex (supplier expenses), was NOK 26 b in Norway in 2010, resulting in a total oil service market of NOK 185 b, shown as E in Figure 1. Note that contracts (D) won by non-Norwegian suppliers will not contribute to the Norwegian total oil service market (E).
The Opex in Norway amounts to NOK 59 b. It is interesting to note that out of the NOK 59 b budget, 40 b relates to purchases from suppliers. Thus, 25% of E&P purchases are from the oil companies’ Opex budget. We have seen arguments that Opex purchases should not be included in the oil service market, and we disagree. Most oil service companies are not concerned with what budget funds their services, and Opex purchases take up a large part of their capacity, including man power, which is a scarce resource. On the contrary, we have noted that “Capex-focused” companies may miss out on business opportunities in the operational phase – leaving the others to harvest in their natural aftermarket.
Example: Global E&P spending analysis
Figure 2 shows the result of the E&P spending analysis “Barclays Capital’s Global Capital Spending Update”, a best practice study. Barclays Capital uses the term “Global E&P spend”, but specifies this market to be the sum of development and exploration Capex.
In Figure 3 we compare the 2010 numbers in Figure 2 with Rystad Energy’s estimated market sizes. Barclay estimates the market for 2010 to $458 billion, to be compared with our “purchases from Capex” estimates at $548 billion (A in Figure 3), which is 20% higher. In B) we have included estimated Opex purchases which gives a total spend of $675 billion. This is the best global spend estimate for the oil service industry.
The main reason why Rystad Energy’s Capex numbers are higher is our more thorough coverage. Barclays analysis is based on top 420 E&P companies. Rystad Energy’s estimates are based on UCube, our own complete global asset database, including full portfolios of 3,200 companies.
Forecasting future market trends
More interesting than scaling the current market is to forecast the market going forward, taking into account the aging of existing fields, new discoveries to be made and developed, consequences of trends like increasing unconventional and deep-water developments, etc. In this respect operator budgets are of limited value. Operators have a limited planning horizon, and budgets will only include short term investments. Forecasts based on budgets consistently show a short term increase and then drop off, despite all the facts pointing to a continuous activity level.
Rystad Energy has taken the efforts to build a complete database of oil fields, discoveries, and yet-to-be-discovered assets. We have taken the liberty to develop the assets long before they appear at the companies’ decision gates, and broken down the costs. This consistent and systematic approach provides us with a strong basis for forecasting of E&P production and costs.
An example of this is shown in Figure 4, where we have compared capex forecasts for Norway made in 2007. As expected forecasts based on operator reported plans drop off after some years. Rystad Energy’s bottom-up forecast showed steady growth, and was the only source that ended up close to actual investment levels. Rystad Energy estimate was 6% and 8% below in 2008 and 2009. OED NB2007 was 25-30% below for all years. OLF was 12% and 27% below in 2008 and 2009. Statistics Norway ended up 34% below actual for their 2008 forecast.
Note that real investments also exceeded Rystad Energy’s estimates.
Figure 4: Comparison of future capex investment forecasts from 2007 from OLF/ECON, MPE/National Budget 2007, Statistics Norway (SSB), and Rystad Energy.
• OED and OLF numbers were given in real values. Adjusting for that gives NOK 87 billion in 2010, or NOK 30% below actual.
• For OED, exploration costs were not included. We have included a fixed cost of NOK 12 billion all years for exploration, which was the 2006 exploration spend
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