North American 2020 upstream spending down 42%, back to pre-shale era: Reports

Houston — North American exploration and production spending is falling 42% in 2020 to 15-year lows that revert industry investments back to the pre-shale era as the coronavirus pandemic continues to cripple global oil demand, according to new reports from energy analysts.

Global upstream spending is down nearly 30% this year, but the picture is even bleaker in North America with shale spending down by more than 50%. Total North American spending is boosted up a bit only because of smaller cutbacks to offshore spending, said energy research reports from Evercore ISI and Rystad Energy.

North American upstream capital spending is now 5% below the 2016 trough of the last oil bust and 71% below the 2014 peak when oil was still priced north of $100/b.

"The devastation brought forth to the US and Canadian energy industry cannot be overstated, as three years of painfully slow single digit growth from 2017-2019 has been fully eliminated," the Evorcore ISI report stated, "reverting back to 2003-2004 levels before the U.S. shale gas revolution began."

The report called North American shale a fragmented business in need of major change. "There still remain too many assets, companies, management teams and debt. This downturn will accelerate the restructuring and consolidation cycle that is required as the US land market will be smaller on the other side of this downturn."

The new Rystad report on June 11 said global upstream spending is down 29% to $383 billion versus $539 billion in 2019.

But the biggest hit comes to shale and tight oil spending plunging 52.2% to $67.3 billion -- mostly in the US -- and oil sands investments down 44% to $5.1 billion. Comparatively, longer-cycle deepwater spending is only down 15.6% to $69 billion.

"As the impact will be more severe than in the previous downturn, companies are fiercely defending shareholder value and pivoting towards more conservative spending strategies in the near-term," said Rystad upstream analyst Olga Savenkova. "As the global upstream sector contends with low prices, falling demand and fluctuating exchange rates, every dollar cut will strike directly to the bone."

Global picture

The picture outside of North America isn't quite as bad but still devastating nonetheless, the reports argued.

Excluding North America, global upstream spending is down 22% with all regions of the world in decline for only the second time in modern history, according to Evercore ISI.

Africa is leading the way with a 43% drop in upstream capital spending followed by Europe and Russia being down about 30%. Latin American spending is falling by nearly 25% and Asia and the Middle East are only down by about 15% on average, the report said.

Within North America, US spending plunged by 43% and Canada fell by 36%. Canadian upstream spending is down for the sixth time in the last 10 years and the US now accounts for 80% of all North American upstream energy dollars.

The projections don't get much better in 2021 with spending expected to remain flat or tick up only slightly from 2020, Evercore ISI and Rystad said.

As for US shale, the onshore rig count has plunged 65% since the end of the year, exiting 2019 at 782 rigs and dropping 511 rigs to reach 271 in the latest week, according to the latest estimate from Baker Hughes.

Evercore ISI said it estimates the 2020 US land rig count will decrease by 58% year over year and average 389 rigs for the full year after bottoming out in back half of the year before a very slow rebound begins in early 2021.

"Companies are now highly risk-averse, with finances and operational performance under intense pressure," added Rystad's Savenkova. "Nevertheless, E&Ps will need to prepare for opportunities and threats that may await them once the crisis is past."