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Upstream Sector To Surprise In 2016 Despite Negative Forecast: New Report

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Despite the forecast of 2016 being a challenging year, a new report by Wood Mackenzie shows that the year presents many opportunities around the world for the upstream sector. In this report, analysts point to the positive developments in the upstream industry globally.

The report predicts that 250,000 extra barrels of oil from new Gulf of Mexico (GOM) production will hit the market. This will push GOM production to a new peak of 1.9 million barrels per day. It is expected that this production will raise many large and mid-size companies, but will slow their development plans. As a result, this will bring out private-equity backed entities to push on with exploration and development. The low-cost and low-risk of Miocene plays are attractive in a low-price environment according to Wood Mackenzie’s analysts.

It is also expected that Merger and Acquisitions (M&A) activity will pick up after years of very little activity. “With oil prices continuing their downward spiral, sellers are more motivated than ever to offload positions. Look for private money to pick up bargains, especially in the less intensive CapEx projects. Meanwhile, we are looking for some large players with limited exposure to deepwater GOM to increase their exposure in the form of significant asset deals or outright takeovers of mid-sized players,” the report says.

Meanwhile, the report believes in Canada that the Petronas’s Pacific Northwest LNG project in British Columbia will go forward, while Canada will forego oil sands investments decisions this year. Offshore exploration projects in Canada have impressed according to Wood Mackenzie, “Both the Nova Scotia and Newfoundland & Labrador provinces of Canada stood out in 2015 for active offshore exploration campaigns. In 2016, we expect both regions to continue to buck the global trend of declining exploration activity. More companies will join the exploration efforts, and a development timeline for the Bay du Nord discovery in the Flemish Pass will be established.”

Wood Mackenzie also expect that Mexico’s deepwater licensing project will be successful, “The Deepwater phase of Round One will close in late 2016. It will be highly contested and a success. This phase offers ten blocks in the Sabinas-Rio Grande (primarily Perdido Foldbelt) and Salinas Sureste basins. Given the long lead time of deepwater projects, high prospectivity of acreage and favorable contracts, Mexico’s deepwater will be attractive even at today’s oil prices.” Wood Mackenzie also estimates the yet-to-find resources to range between 15 and 20 billion barrels of oil in the Sabinas-Rio Grande basin.

In Brazil Petrobras is aiming to hit a $15.1 billion divestment target by the end of 2016, but Mckenzie does not expect Petrobras to hit that goal, “Petrobras will be competing against over $320 billion of upstream assets on the market, making it harder to hit its target.” Instead, Wood Mackenzie expects the company will focus on divesting its downstream assets.

Though the report suggests that Iran will dominate attention in 2016 by offering 52 development projects, it does not expect there will be a significant increase in production from the region. The Italian firm Eni is expected to sanction the Zohr super giant field that was discovered only last year. According to the report, “Work has started on the first of three appraisal wells that will form the basis of the 800-million cubic-feet-per-day phase one subsea development. With an ambitious plan of the first gas in 2017, Eni will need to work quickly to install subsea equipment and tie the field back to existing infrastructure, over 80 miles away.”

Elsewhere in Africa, Wood MacKenzie expects a lot of M&A opportunities to emerge as companies look to generate cash. The main question though is if there will be buyers because of expected stagnating production in Nigeria and Angola.

The Caspian region will see the final investment decision (FID) for the Tengizchevroil Future Growth Project (FGP), a $30-billion expansion project in Kazakhstan.

Russian production is expected to be unaffected by the low oil price environment and still produce 10.7 million barrels per day. However, the country’s upstream sector is heading for uncertain times regardless as the Russian government considers tax changes amid failing budget revenues, EU/US sanctions, and increased geopolitical risk.

Worst off is probably going to be the North Sea where a further drop in capital investment, falling exploration activity and rationalization of operations is expected. Still altogether 13 fields are scheduled to start up in the North Sea during 2016, but several UK fields are operating with a cash flow negative position in 2015 and that some of those are expected to be retired early.

The Browse floating liquid natural gas project in Australia is not expected to reach an FID in 2016, but the Gordon LNG project is expected to finally start production this year.

China’s national oil companies are set to struggle balancing shale development while cutting costs in what is an over-supplied gas market. Sinopec and PetroChina are expected to continue investing in shale to support the government’s ambitious targets regardless of capital constraints and a slowdown in China’s gas demand. International oil companies in China like BP are seen as the exception as the other majors reduce exposure. China is also expected to pay more attention to the upstream sector in the 13th Five Year Plan (FYP), “We’ve already seen significant policy changes in 2015; in natural gas pricing, licensing rounds and retail fuel pricing. We expect more moves to reduce NOC dominance, encourage new domestic players and diversify sources of investment.”

Two major themes are expected to dominate the market in Asia. First, many countries will adjust their tax regimes to secure future upstream investment. The second theme for the Asian market is M&A activity. “Shell, ConocoPhillips, Chevron, Repsol and Total are amongst the players looking to renationalize South-Eastern Asia portfolios, where growth prospects have been impacted by challenging fiscal terms, poor exploratory results, regulatory uncertainty and emboldened IOCs,” according to the report.

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