* Oil investment growth slows sharply
* Onshore investments seen hurting most
* Ultra-deepwater segment seen best placed for growth
By Henrik Stolen, Gwladys Fouche and Balazs Koranyi
OSLO, Sept 5 Oil and gas firms are cutting back on investments to try and improve profits and save cash for dividends, perhaps signalling an end to a decade-long boom in capital spending.
Companies seeking to bring oil fields into production have splashed out on new drilling, equipment or pipelines, supported by rising oil prices.
But suppliers and analysts expect investment growth to slow sharply this year and in 2014, in line with a projected fall in oil prices. The spending boom has squeezed budgets and forced companies to sell assets and issue debt to pay dividends.
Onshore spending will be hurt the most, including the saturated U.S. shale segment. New ultradeep markets, such as Brazil, West Africa and Mexico, will still flourish, however, as they offer the rare opportunities for big finds.
"Oil firms have a dilemma: They still need to grow their production, which is virtually flat and even declining, so they have to spend but will have to become much more selective," Magnus Lundetrae, the chief financial officer of Seadrill , the world's biggest offshore rig operator said.
"In total they'll spend around $700 billion (this) year...I expect spending to be flat (from next year) ... with onshore declining and offset by deepwater."
Many companies prefer to quietly delay projects but there have been a few high profile casualties already this year including Statoil delaying its $15 billion Johan Castberg project in Norway's Arctic and BP reconsidering its $10 billion Mad Dog project in the U.S. Gulf of Mexico.
Nordic bank SEB, a major lender to the sector, has cut its estimate of exploration and production spending from a rise of 12 percent this year, broadly in line with 2012, to 7 percent this year and 4 percent next year.
Deutsche Bank said growth could be even lower, falling to 5 percent this year and 1 percent next year. Norway said on Thursday it expects capital spending in its offshore market to rise just 1 percent next year after growing 18 percent in 2012.
"A balanced oil market with stable to slightly lower oil prices, rapid growth in U.S. tight oil production and lower free cash flow have a dampening effect on budgets," SEB analyst Terje Fatnes said.
Capital spending has grown by more than 10 percent a year since 2003 and oil prices have risen nearly four-fold to $115 per barrel but energy firms have not reaped major benefits because they have not become more efficient, analysts say.
Their return on average capital employed, a measure that shows profitability on investments, fell from over 15 percent six years ago to just 9 percent now, analysts say.
Credit Suisse estimates that capital spending per barrel rose by around 14 percent between 2005 and 2012 while production is expected to rise just over 1 percent this year and next.
Spending is so high that cash flow from operations cannot cover dividends so the net cash flow has been negative since 2009 and expected to stay in the red for several more years.
"The oil price has not boosted earnings in the exploration and production sector. Oil companies make money but not as much as expected," Ole Henrik Bjoerge, the CEO of brokerage Pareto said. "The largest oil companies have no free cash flow in 2013. Their cash flow is the worst in the last four years."
Shares have also suffered as oil and gas stocks underperformed the broader market by over 25 percent since the start of 2012 as profits fell, cash flow declined and the sector's return on investment fell, analysts said.
Major oil companies trade at a price to 2014 earning ratio of 8.9, below their own long term average, while Shell and BP both trade at about 1.1 times their book value, both among the lowest on the FTSE 100.
"What has happened over the past year, is that a certain number of projects, for various reasons, were no longer economically profitable for our clients," Thierry Pilenko, the CEO of French oil services group Technip said. "Some of them were because of costs increase that were not taken into account, but were real, like the Australian projects."
Woodside Petroleum this year shelved its $45 billion Browse LNG plant off Australia due to rising costs.
Seismic explorers, considered bellwethers in the industry because they gauge exploration appetite, have warned recently that energy firms are pushing out contract awards, delaying spending, moving some projects into next year to reduce budgets.
Shares in seismic firm EMGS tumbled 32 percent over the past 3 months while Polarcus is down 25 percent and TGS fell 10 percent.
"There are warning signals," Oeyvind Eriksen, the acting CEO of oil services group Aker Solutions said. "It is a combination of a stable oil price and increased costs and that puts pressure on net cash flow. Projects that were profitable in the past become marginal today."
Technip's Pilenko says another major issue is that there are fewer mega projects around and oil firms are struggling to adjust to the smaller scale, resulting in some cost blowouts.
The ultradeep market is likely to be one of the few bright spots in the next few years because it offers the chance of large finds. Charter rates for deepwater rigs are holding steady at around $600,000 a day, near their historic high.