Oilfield service companies are being told to prepare for a ramp-up in natural gas drilling next year as the outlook for prices continues to improve, according to Barclays Oil Services and Drilling analyst James West.

West presented the results of a semiannual survey of more than 300 oil and gas companies’ budgeted global upstream capital expenditures on June 4, in which he noted that prospects for North American spending have improved since year-end 2012.

The survey shows that North American spending should rise by 2% this year – an increase of 3.4% in the US more than offsetting a decline of 2.4% in Canada – compared to expectations six months ago that spending would remain largely flat to 2012.

“Recovery in the US land market is underway, although somewhat uneven,” said West. “The rig count is up off its December low and permits are rising.”

While rising rig counts are primarily targeting oil prospects, the industry looks to be gearing up to increase spending on drilling in gas prospects next year.

“There’s optimism out there amongst the oil and gas companies, and certainly amongst the oil service companies,” West said. “They’re being told by the gas companies to be prepared to increase activity.”

The gas drilling recovery is likely to be modest, at least to start. West anticipates perhaps that drillers could add somewhere in the range of 50-100 gas rigs next year, “not some kind of huge ramp-up”. But the magnitude of the increase will depend on gas prices.

“If we start to see gas in the $4.50-$5.00 [per million Btu] range, it may be a more significant increase.”

Looking out beyond 2014, the outlook for gas drilling is even better. “The gas pick-up that we expect in 2014 will expand for several years after that,” West said.

New sources of demand will drive this acceleration post-2014. This includes the start-up of LNG exports from the Lower 48 states – with Cheniere’s Sabine Pass LNG project due onstream as early as late 2015, and Freeport LNG slated for start-up in 2017 – as well as the potential for natural gas to capture a greater share of the vehicle fuel market.

“In 2015-2017, the industry is very much aware of the increase in LNG exports from North America, the movement towards LNG vehicle fueling, which is picking up momentum, and also the chemical renaissance,” West said. “They want to be able to support that demand.”

Other Key Takeaways:

• Global E&P spending is on track to set a new record this year, at $678 billion.
• “PetroChina has now overtaken Exxon as the largest spender of E&P dollars in the world,” said West. PetroChina, the overseas arm of China National Petroleum Corporation, will spend more than $36 billion this year, compared with ExxonMobil’s $33.9 billion.
• Middle East spending is set to increase by 28% over 2012, to $33.8 billion, up from expectations of 11% spending growth in December. The Middle East will surpass all other regions in spending growth, with significant investment planned in all countries, notably Saudi Arabia, Kuwait and Iraq.
• Latin America spending, in contrast, is now projected to grow by 12%, compared with expectations of 15% in December, owing to a reduction in Mexican state-run oil company Pemex’s anticipated spending at the Chicontepec field. “Pemex has reversed course,” West said.