E&P spending is set to increase in 2023, albeit slower than growth
experienced in 2022. Spending deceleration in North America (NAM) follows a
near-record NAM level in 2022. International spending’s growth will slip, due
to declines in Russia.
Building on robust growth in 2022, we at
Evercore project North American E&P spending will increase 17.7% in 2023 to
within 7% of pre-Covid levels. The U.S. should lead again, with spending up 19.1%
in 2023 while Canada moderates at 10.5%, Fig.
1. Independents and private operators have
an outsized role in North America, accounting for more than 70% of regional capex.
While privates were faster to increase
capex post-Covid, the publicly traded independents
shored up their balance sheets and prioritized returning cash to shareholders.
We believe this trend could be reversing, with privates becoming more fiscally
minded, as service cost inflation begins to rise. Privates make up about 20% of
our U.S. capex estimate but 60% of the rig count, suggesting overall U.S.
spending could be larger than we estimate.
Our sample of private operators
increased U.S. capex 67% in 2022, accelerating from 56% in our mid-year survey.
They topped overall growth of 48.4% from independents but are planning to
increase spending by a comparable 20% in 2023, Table
1. Slower growth of 11.5% and 14% is
expected from the majors in the U.S. and Canada, where they make up less than
10% of spending.
growth is broad-based, with the exception of Russia,
as nearly all regions are growing. Spending will increase across all geographies
and for all operator types internationally. Growth is accelerating in Africa, the
Middle East, India, Asia and Australia, but decelerating slightly in Latin
America and Europe, Table. 2. While 2022’s leader, Latin America (+20.4%), slows, we project capex to
remain more than 40% from its historical peak. International growth for 2023 will
be led by India, Asia and Australia, where spending held up remarkably well and
failed to establish new lows during the 2020 downturn.
Along with the Middle East, spending in
India, Asia and Australia should recover to within about 6% of its historical
peak in 2023. Asia remains the largest international market, followed by Russia
and the Middle East close to each other for second and third, while Latin
America is in fourth place. We believe Russia/FSU makes up about 15% of international
spending, rising from 11% in 2006 to as much as 22% in 2017.
Having lagged the 2017-2018 NAM recovery
by about one year, international capex peaked in 2019, but is still 33% below
the 2014 peak. Two consecutive years of growth more than recovered the 17%
decline in 2020, with international spending poised to achieve an eight-year
high in 2023. Cash flow and oil price remain dominant drivers of global
spending, and at current levels, commodity prices merit increased investments.
alignments. With China’s President Xi Jinping
visiting Saudi Arabia shortly after participating in the 4th Russian-Chinese
Energy Business Forum, energy is clearly driving new global alignments. We
expect Saudi Arabia to remain China’s largest oil supplier, followed by Russia,
despite a 9.5% increase in imports year-to-date. The newly signed Saudi-Chinese
agreement strengthens their cooperation further to include clean energy, with
Saudi targeting hydrogen while advancing its Vision 2030. Meanwhile trade
between China and Russia is expected to increase from the current $155 billion
run rate to $200 billion by 2024, with new pipelines driving further longer-term
is king. For the seventh straight year and
eighth time in nine years, cash flow leads as the key determinant of E&P
spending. A new record 88% of our survey respondents cited cash flow as a key
driver of spending, up from 77% in our 2022 survey and the previous record of
80% in our 2015 survey. In fact, cash flow has ranked first or second as the
leading determinant of E&P spending in all but four of the past 24 years of
our survey history while oil price has ranked first, second or third since
2009. Natural gas prices reigned supreme from 2000 to 2010 with the onset of
the gas shale revolution, but they have slipped to fifth place for the third
time in our survey history. Combined with oil price retaining second place,
stronger balance sheets appear to be less of a pressure on spending plans.
activity. A record 39% of our survey respondents
increased their exploration budget as a percentage of their total spending in
2022, up from 21% in 2021 and beating the prior record of 35% that increased in
2019. In contrast, only 9% of our survey respondents trimmed their 2022
exploration budget as a percentage of their total spend, rising slightly from
7% in 2021. Only 29% of survey respondents in our initial 2022 survey planned
to increase their exploration budgets as a percentage of their total spending
for 2022, while 11% had planned to decrease their exploration mix. Following
three years of materially higher exploration budget mixes from 2017-2019, a
record 28% had planned to cut in 2020. Covid-19 and the short OPEC+ market
share war resulted in a record 35% that actually cut their exploration budgets,
as all discretionary capex was eliminated.
The majority (85%) of operators entered 2022 expecting service/supply
pricing to increase. A fundamentally strong global economy was driving higher
pricing expectations for labor, tubulars and transportation. Oilfield service
companies had only just begun to implement pricing increases for
select products and services in 2021,
carving back substantial savings passed on to operators during the pandemic.
Higher pricing materialized in 2022 as expected, with 39% experiencing broad
service pricing increases. This leads second place pumping consumables at 33%,
while completion and other downhole tools came in third place (17%), and
pressure pumping equipment was in fourth place. Drilling-related rigs,
consumables and services failed to gather any votes, as pricing increases
lagged more significant pricing hikes in completions and production-oriented
consumables, equipment and tools at the start of the year.
transformation. Digital technologies, including
advanced data analytics, AI/machine learning and remote operations, continue to
trail shale-driven fracturing/stimulation and horizontal drilling technologies
in impacting 2023 spending plans. However, operators are more likely to test
and adopt new technologies than a year ago, with a near-record 28% slightly
trailing the 30% record set in 2020. We believe lower oil prices and the
pandemic generated a temporary pause in new technology adoption, with lower
cash flows and a risk-adverse mentality during the downturn forcing operators
to accelerate production, using proven methods. But given higher commodity
prices and signs of a lengthening up-cycle, operators appear more willing to
test new technologies in 2023.
to fluctuate. According to Evercore ISI analyst Steve
Richardson, the market is likely to remain volatile, while demand growth
expectations oscillate. But Richardson sees more positive than negative drivers
in 2023. Chinese demand, and Russian and U.S. supplies, combined with the
relative strength of the U.S. dollar, are all uncertainties, but the baseline
demand numbers for 2023 are starting from a strong footing. Modest re-opening
and mobility gains in China have provided glimpses of what lies ahead, while
the Northern Hemisphere winter will prove challenging for energy systems. Evercore
ISI forecasts global oil demand to increase 1.7 MMbpd in 2023. OPEC is
forecasting continued global demand growth to 110 MMbopd by 2045.
prices. Oil price expectations have moderated
since our mid-year 2022 outlook, with companies lowering their WTI oil price
assumption 6% to $78.34/bbl. Companies forecast WTI price higher than the current
spot price but below Evercore’s forecast of $84/bbl for 2023. Prices spiked to
$124/bbl in March, with the start of the Russia-Ukraine war, and have declined
on anticipated lower demand from a global recession.
In the U.S., natural gas prices at Henry Hub have plummeted $5.54/MMBtu
since August ($8.81/MMBtu) to average just $3.27/MMBtu in January, a 63%
decline. Despite the dramatic price drop, Evercore ISI forecasts natural gas to trade for $5.07/MMBtu in 2023
on a global basis, which is essentially unchanged from their midyear 2022 survey.
Gas prices will be supported by the Russia-Ukraine war.
renewables. While some supermajors and state-owned
companies have positioned themselves as renewable and energy companies, North
America-based operators remain firmly committed to oil and gas. A record 91%
are not likely to expand their resource base to include renewables, while 4%
are somewhat likely and a modest 4% are more likely to seek additional revenue
streams in the near-to-medium term. With a tight 3%-to-6% of operators more
likely to expand their target resource base over the past three surveys, we
believe hydrocarbons will remain a meaningful part of the consumption mix for
the foreseeable future, even as some companies begin to diversify their revenue
stream into renewable and low-carbon energy.
North American growth slows to 17.7% from a near-record 43.6% in 2022. E&Ps were
slow to increase spending in 2021, with NAM’s 0.8% growth lagging behind international’s
7%. Improved balance sheets and very strong cash flows drove 2022 budgets
progressively higher in the U.S. (+45.8%) and up 33.4% in Canada. While NAM
spending growth should moderate in 2023 at 19.1% in the U.S. and 10.5% in
Canada, spending should increase for a second straight year but remain
structurally lower for longer. Spending in the U.S. is back at levels last seen
during the 2009 financial crisis at about half its historical peak, while
Canada is running at about a quarter of its historical peak.
Middle East. Evercore predicts a third straight year of accelerating growth
in the Middle East. Spending by select Middle Eastern companies will increase 13%
in 2022, falling short of the 23% and
19% increases projected in our mid-year and initial surveys. Despite lofty aspirations, supply chain challenges and
delays caused several key operators to spend below plan for the year.
Nevertheless, spending accelerated from 6% in 2021 and should increase for a
third consecutive year at an accelerating pace of 17.3% in 2023.
Spending by select Middle Eastern
operators held up relatively well during the pandemic and contracted the least
from the 2014 peak, down 19% compared to Latin America’s -54% and North
America’s -49% from their respective 2019 peaks. As a result, the Middle East’s
-16% decline in 2020 was second only to Latin America’s 14% contraction, with
spending holding up relatively well, compared to Africa’s -48% and North
America’s 44% decline. The relatively shallow 16% decline in 2020 was more than
recovered by two straight years of spending increases and despite short-term
changes in OPEC+ production quotas.
America. We estimate spending by Latin
America companies increased 20% in 2022, up slightly from 18% and 19% growth
projected in our mid-year and initial surveys respectively. Having contracted
62% from the 2014 peak to the 2017 trough, LatAm spending held up relatively
well during the 2020 downturn, falling 14% versus a 17% decline in international
capex and 44% collapse in NAM spending. From about 9% above the 2017 trough,
spending increased slightly in 2021 to its highest level in five years. A
second straight year of accelerated growth in 2022 increased spending to 31%
above the 2017 trough and 3% above 2016 levels for a seven-year high.
We expect spending growth to
decelerate slightly in 2023 to 18.6%, putting overall capex 54% above the 2017
trough and within 42% of the 2014 peak. NOCs, including Petrobras, Petro Rio,
YPF and PetroEcuador, are driving the increase in 2023 spending while independents
take a pause after ramping up capex 60% in 2022. At the current 18% growth
rate, it could take four years (2027E) for spending to recover to its
historical peak, which may not be possible if Venezuela’s oil and gas industry
remains in disarray. However, a six-month license for Chevron to expand its
operations with state-owned PDVSA could signal the start of a much-needed
reinvestment cycle in Venezuela, where oil production has fallen to 636,000
bopd from a record high of 3.5 MMbopd in 1997.
Africa. Spending by African companies was on
track to increase 20.4% in 2022, which is above the 13.3% growth projected in
our mid-year survey but below our initial 18% estimate. Our initial estimate
for 2023 is for spending to accelerate 16.1% for 2023, with overall capex
rising for the third straight year at an accelerated rate. Africa was impacted
the most by Covid, with E&P collapsing to new lows 55% below the 2012 peak.
Two straight years of improvements increased capex 24% from the 2020 trough but
spending remains 35% below pre-Covid 2019 levels and 45% from the historical
With growth accelerating to 16.1% in 2023, we forecast capex to
increase 44% from the 2020 trough but remain 25% and 37% from 2019 and 2012
levels. At the current pace of growth, spending could approach 2012 levels in
2026. The African Energy Chamber forecasts the continent to increase its annual
gas production from 260 Bcm this year to 335 Bcm by 2030, balancing increased
exports to Europe with surging domestic demand.
We expected spending by select Indian, Asian
and Australian companies to increase 12.6% in 2022, lagging the 19% and 16%
growth projected in our mid-year and initial surveys, respectively. With capex
little changed from 2016-2018, spending by select operators held up the best
during the pandemic, down a modest 8% versus international’s -17% and NAM’s
-44%. Spending quickly rebounded to
pre-Covid levels in 2021 and is on track to recover to its highest level in
With the projected 19.3% increase
that we anticipate for 2023, spending could recover to within 6% of the
historical 2013 peak. Despite years of little-to-no growth in spending, the
region leads at approximately 30% of total international E&P spending and
23% of global capex. We forecast the
region to account for more than 40% of 2022 International capex growth and 30% of
Europe. We expected spending by European companies to
increase 12.5% in 2022, falling short of the 16% growth projected in our mid-year
survey, but above the 11% growth that we had estimated in our initial survey.
Two straight years of spending growth increased 2022 capex to within 10% of
pre-Covid 2019 levels, with an anticipated 11% increase in 2023 raising capex
to 6% above 2019 levels and within 17% of the 2014 historical peak. At the
current 11% growth rate, spending could top the historical peak in 2025.
However, our 2022 and 2023 estimates could also revise lower for
weather, operational delays and increased
security risk. With LNG imports hitting a record high of 11.4 million tons in
November, the European Commission is evaluating various measures to potentially
cap gas prices while implementing price caps on Russian oil supplies. In
addition to banning all seaborn Russian oil imports, Russian oil must be bought
for less than $60/bbl to use EU tankers, insurance companies and credit
institutions. The EC is also implementing its RepowerEU strategy to replace
Russian gas supplies by increasing LNG imports while also reducing Europe’s
overall gas consumption by 15% through March 2023, with 5% from energy saving
Russia/FSU. We believe spending by Russian and FSU companies increased for a second
straight year in 2022, accelerating to 10% from 8% in our mid-year and initial
survey. While it has never been easy to obtain a clear picture of spending and
activity in Russia, Rosneft is on track to increase 2022 capex 15%, while
KazMunayGas has increased its upstream spending 35%. Russian gas giant Gazprom
also continues to progress various growth investments, including start-up of
production from Semakovskoye field while Kharasavey field is expected to start
next year. We believe Russian operators largely executed on 2022 growth as
planned, making up for three straight years of decline from extended OPEC+
production cuts. Spending in the region contracted to a new cyclical low in
2020 and spending likely recovered to 2018 levels or 21% from the 2013 peak.
Due to ongoing sanctions, we project E&P spending to revert by 10% in the
region in 2023. WO