Signs of Life Upstream

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Last week, Chevron's (NYSE: CVX) CEO declared that the company's capital budget would hold firm even in the face of falling oil and gas prices. This is welcome news, given that some upstream projects, particularly in the oil sands, are starting to look like nonstarters. Total (NYSE: TOT), for example, has cited $90 as the price it needs to make an acceptable rate of return up in Canada's Athabasca Basin.

The resilience of oil majors like Chevron should be of some reassurance to investors in the energy service names, but ultimately it's spending by the national oil companies (NOCs) that really matters. They're the ones that control about 90% of the world's oil reserves, after all. In that spirit, let's look at two recent announcements by these market movers.

First off, Saudi Aramco is out with an announcement that it's relaunching tenders for its $10 billion Manifa oil project. This is a mixed blessing for the contractors. On the one hand, the contract renegotiations indicate that Aramco is still willing to pony up to get its megaprojects moving forward -- even if there's a modest delay, as with the Yanbu refining joint venture with ConocoPhillips (NYSE: COP). On the other hand, with steel and other raw material prices having dropped dramatically, service companies like Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL) are likely going to have to give price concessions on existing contracts, which may or may not cut into margins.

Closer to home, Mexico's Pemex doesn't appear to be throttling back expenditures either. In an interview late last week, the NOC's chief of exploration and production said that the $20 billion budget for 2009 is intact. He further indicated that only sub-$25 oil prices would prompt a pullback in Pemex's development plans.

This isn't much of a surprise, because Mexico really can't afford to let its production continue to deteriorate. Now that the legislature has eased Pemex's ability to contract with foreign firms, I would expect folks like Petrobras (NYSE: PBR) to step in and help make the country's deepwater drilling program a success.