* Spending to rise 3pct to $450bln after two years of cuts
* U.S. shale to get most investment growth
* Deepwater projects set to get green light as costs drop
* GRAPHIC: Oil project FIDs http://tmsnrt.rs/2iAE2BQ
By Ron Bousso
LONDON, Jan 11 (Reuters) - Oil and gas companies willincrease spending in 2017 and more than double new projectdevelopments as they gain confidence that a two-year oil priceslump is behind them, consultancy Wood Mackenzie said.
The upbeat outlook follows a more than 20 percent rise inbenchmark crude oil prices in the past two months to around $55a barrel on the back of an agreement by major producers to trimoutput.
"We've just come through two years of gloom and lots ofcosts cutting and now we are cautiously optimistic there will bea start of recovery in 2017," Malcolm Dickson, a principal oiland gas analyst at Wood Mackenzie, said.
According to WoodMac's global upstream outlook for 2017,exploration and production spending is expected to rise by 3percent to $450 billion. This is still 40 percent below 2014levels.
Geographically, the increased activity will vary hugely.U.S. shale oil production is expected to account for most of thegains because it is relatively cheap and quick to develop, insome cases it can take only 6 months.
Shale was the main driver of the recent supply glut and alsoexperienced the sharpest declines in terms of output during thedownturn.
Production in the most attractive shale areas, particularlyin the Permian basin in Texas, is currently profitable with oilat $40 to $60 a barrel, according to WoodMac analyst TomEllacott.
U.S. shale oil production is expected to grow by around300,000 bpd in 2017 to around 4 million bpd, according toWoodMac estimates.
WoodMac forecasts oil prices to average $57 a barrel in 2017and gradually increase to $85 a barrel in 2020 as suppliesdecrease due to the investment cutbacks of the past few years.
Aside from onshore U.S. production, oil companies globallyhave also been able to reduce costs of field developmentssharply by simplifying engineering plans and lowering contractorand rig rates.
Costs have fallen by 20 percent since 2014 and are expectedto decline by an additional 5 percent this year, according toDickson.
The savings are having a profound impact on projectprofitability, including costlier deepwater projects, some ofwhich are profitable at oil prices of $50 to $60 a barrel.
The number of final investment decisions for projects withresources bigger than 50 million barrels of oil equivalent willmore than double in 2017 to 20 to 25 from only 9 in 2016.
Projects most likely to get the nod include Exxon Mobil's Liza discovery offshore Guyana, deepwater projects inBrazil and in the Gulf of Mexico. BP late last yearapproved the development of the second phase of the Mad Dogfield in the Gulf of Mexico and its partners will decide on itthis year.
But the pick up in activity is still not enough to cover agrowing supply/demand gap, which WoodMac expects will widen to20 million barrels per day by 2025, based on current developmentplans.
"You need the new projects to be sanctioned by 2020 to meetfuture supply gap," Ellacott said.
(Reporting by Ron Bousso. Editing by Jane Merriman)