North American Upstream Spend Report - 1st Quarter 2021
In our latest North America Upstream Spend report, we project that North American onshore E&P capex spending in 2021 will reach USD 108 billion, mostly due to activity increases rather than service pricing movements. This is a material increase from the 2020 spending level of USD84 billion, and it also represents a roughly 17% increase over our previous assessment of the 2021 level.
After a very tough 2020, we imagine our readers will be encouraged to see these results. We also understand they may have questions on how we reached such conclusions, especially since much of the world is still fighting the COVID pandemic.
The summary of the reasoning leading to our optimistic North American outlook is as follows:
- IHS Markit's view is that generalized vaccine distribution in 2021 will lead to a strong recovery in the back-half of the year, leading to increased oil demand.
- Capex in the US dropped very significantly from 2019 to 2020. After such a reduction, we do not expect operators will cut more given the expected economic recovery cited above. Furthermore, our 2021 spending recovery in percentage terms seems strong, but this is again in light of a very strong drop from 2019 to 2020, and it still does not get the industry back to historical highs.
- Our WTI oil price assumption for most of 2021 is $55/bbl, ending the year at $60/bbl. At this level, break-evens support activity in top-tier acreage, and in fact large portions of class 3-4 acreage become economic between $45 and $55/bbl, so spending can occur even under a paradigm of fiscal discipline from operators.
To the extent that spending ultimately boils down to "price x quantity", we have established that we project higher activity in 2021, so it's worth considering our outlook for service pricing generally. Our results indicate that substantial service cost deflation occurred in North America in 2020, and we expect a muted pickup in 2021; in fact, our narrative is similar to that of capex spending:
- From 2019 to 2020 we recorded an overall drop of about 20% in North American service pricing.
- This is an average; some drops could have been higher and so we could only see costs increasing this year.
- The service market will remain oversupplied in the first part of 2021, but as activity increases we expect a 5% nominal increase in pricing overall, a combination of some tightening of capacity (with regional differences) and monetary inflation.
In aggregate terms, the North American upstream services industry should be on better footing in 2021 than it was in 2020, but individual service companies will still have to compete strongly with each other to win their respective slice of the additional spending we expect to see.
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