Robust oil prices and major upcoming projects would boost the global oil and gas sector earnings by five to six per cent in 2015.

However, the sector faces increasing capital intensity and execution risks as it shifts from traditional to more costly and complex oil and gas resources, says Moody's Investors Service in a report on Thursday.

The report, titled: "Global Integrated Oil and Gas Industry: Crude Prices Bolster Oil Majors with New Production Capacity Coming On-stream," said although oil prices had recently retreated, it was still expected to remain relatively strong.

“…a string of major projects are due to come on stream and ramp up in 2015-16, which will deliver volume and cash flow growth,” Thomas Coleman, Moody's Senior Vice President, said.

"However, companies still face production growth challenges because of the sheer volume that companies must replace and the shift to resource developments in harder to drill areas," he said.

The industry's shift to more costly and complex developments like deepwater and pre-salt projects, heavy oil and synthetic crudes, large integrated liquefied natural gas projects and unconventional shale, reflects the companies’ exclusion from many of the most attractive oil provinces.
Sector operating and capital costs have also increased dramatically over the past few years, pressuring capital returns, despite fairly robust upstream profits and relatively stable unit cash margins.

Rising unit costs reflect increasing project complexity, longer cycle times and higher maintenance and safety requirements, as well as sector inflation in the face of rising oil prices and labour and equipment shortages.

However, with the completion of numerous large upstream projects, the capital spending cycle is turning.

Consequently, the trend in sector negative free cash flows and rising debt levels should moderate from 2015 through late 2016.

The report said many of the leading integrated companies were taking a pause from long-cycle investments to focus on more capital efficiency and shareholder rewards.

This could slow down sector growth even if investor returns ultimately improved, it said.

Integrated oil companies also face heightened political risk, with major regional conflicts ongoing in the Middle East and in Ukraine.

However, the integrated companies generally have scale and good geographic diversification to help offset the political risk. As a result, Moody's sees the conflicts primarily affecting long-term growth opportunities rather than near-term cash flow and production, said the report.

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