Wood Mackenzie’s latest analysis reveals that sustainability and resilience will be at the heart of the oil and gas industry this year.
In 2020, the oil and gas industry’s immediate actions following the price downturn challenged the perceptions of what’s possible and set records for responsiveness.
While many challenges lie ahead, dealing with unknowns has been a core industry strength.
Wood Mackenzie believes a broad oil and gas sector recovery is possible. In a series of global outlooks for 2021, the company highlights some key trends to watch for:
- Continued underinvestment in upstream oil and gas;
- Industry focus on resilience, sustainability and the energy transition; and
- Companies working to shape the upstream portfolio of the future.
Continued underinvestment in upstream oil and gas
According to Fraser McKay, Head of Upstream Analysis at Wood Mackenzie, the upstream oil and gas sector will endure another year in the doldrums.
Mr McKay expects investment levels to remain flat at about US$300 billion in 2021. Falling prices will mean rapid cuts, whereas at higher prices, contingency and resilience will outweigh enthusiasm to take advantage of a nadir in service sector costs.
Strategically, companies will focus heavily on stability and financial resilience. Investment decisions will reflect this priority. Wood Mackenzie expects 20 or so big project sanctions in 2021, up from just over 10 in 2020, but just half the prevailing pre-pandemic trend.
The merits of these will increasingly be judged on their environmental, social, and corporate governance (ESG) credentials.
“The class of 2021 will not all be low-carbon, low-cost trailblazers. But the direction of travel is one-way in terms of industry stakeholder aspirations,” Mr McKay commented.
Wood Mackenzie expects continued downsizing in the service sector. This will lay the foundation for improved margins, even if activity does not increase as forecasted between 2022 and 2025. Next year, operators have a closing window of opportunity to lock in lower project costs.
Industry focus on resilience, sustainability and the energy transition
Wood Mackenzie’s Senior Vice President of Corporate Research, Tom Ellacott, shared that new businesses, and new business models, are emerging from the wreckage of 2020.
“Companies will focus their investment on building a foundation which will be sustainable across a range of scenarios,” Mr Ellacott said.
Companies are expected to continue their relentless focus on boosting margins in upstream and downstream, and diversification into new energy is anticipated to accelerate as more players commit to decarbonisation.
“The Euro Majors will put more meat on the bone in 2021,” said Mr Ellacott.
He noted that geo-political factors such as the change in the U.S. administration, upcoming COP26, and shifting global sentiment will pressure international oil companies and national oil companies (NOCs) to lay out road maps to net-zero emissions.
Wood Mackenzie states that governments will have to explore fiscal policies that support the global green initiative, while also balancing the need to restore budget deficits. It believes that higher tax rates on cash-generative legacy oil and gas assets could emerge.
Jessica Brewer, Principal Upstream Analyst added: “The momentum to reduce carbon emissions will intensify. Integrated energy hubs, like those envisioned in the UK, could take a step closer to reality in 2021.”
What new initiatives are in the cards in 2021? Battery electrification solutions, hydrogen for power, and methane reduction initiatives will all take a step closer to commerciality. Flaring reduction also remains a hot topic and a prolonged pledge.
Companies working to shape the upstream portfolio of the future
Wood Mackenzie states that producers choosing to stick with oil and gas cannot ignore relentless asset depletion.
The group sees some moving on exploration opportunities before competition heats up again.
Well count and investments are forecast to be down 35 per cent versus pre-crisis levels in 2021, but Wood Mackenzie expects a profitable year.
The Majors and larger internationalising NOCs are likely to drill 75 per cent of the biggest wildcats.
Moreover, mergers and acquisitions (M&A) are set to be the main lever in upstream restructuring.
“Highgrading will focus portfolios on the most advantaged assets and corporate consolidation will dominate activity in the US Lower 48. Upstream M&A activity will likely top out at 2019 levels of 200-300 deals,” Wood Mackenzie concluded.
