What’s on upstream leaders’ minds?

Upstream has a new lease of life. Meetings with industry leaders, investors and bankers in London last week revealed a confidence that’s been hard to detect for a decade or more.

The massive financial windfall from global conflict is certainly part of it. Upstream and integrated companies will collectively reap at least US$700 billion of additional free cash flow in 2026 on our calculations. A rare trifecta of high oil and LNG prices and astonishing refining margins kicked in, Brent averaging US$100/bbl compared with the notional US$60/bbl anticipated pre-Iran war. The windfall is timely as IOCs and NOCs look to invest in building portfolios for the future, but it’s by no means the only factor. Here’s our take on what’s on the industry’s minds.

1. Macro – this is the new normal

Shocks and uncertainty are here to stay, the war in Iran and the closure of the Strait of Hormuz won’t be the last disruption to energy flows. Perspectives on longer-term oil prices haven’t changed much, the industry still considers US$70-75/bbl Brent (real) will be needed to incentivise investment in new projects to offset natural decline. Near-term price forecasting, though, is well-nigh impossible. Volatility is the one certainty for both oil and gas pricing.

2. Global upstream outlook the most upbeat for a decade

The belief that oil and gas demand will be resilient into the 2030s and perhaps beyond has grown in recent years, boosted even by the war in Iran which has been a reminder of the energy system’s present reliance on molecules. Sustained investment is required to fill the supply gap as producing fields decline (we estimate 20 million b/d of new oil supply must be brought onstream by 2035). Importing governments’ desire for supply diversity supports investment in legacy, emerging and new upstream provinces. We have seen reinvigorated interest in a number of regions not experienced since the pre-2015 era.

3. Supply chain is a risk

After a decade of incessant cost pressure from operators, service companies have had little appetite to invest in new capacity as old assets are retired. Bottlenecks loom as upstream invests to meet future demand, not least in deepwater. Refurbishment of old rigs may be a stop gap, but deepwater drilling rigs will become scarce and day rates could soar. Operators will need to reinvent their relationship with the supply chain to secure equipment (largely rigs and heavy lift vessels) at reasonable prices. This is familiar ground for industry; in future closer collaboration with the supply chain will be paramount.

4. Shaping the upstream portfolio

Resilience of portfolio and balance sheet are the guiding lights to minimise risk in a world of heightened uncertainty. After a rocky decade (including dividend cuts for some European majors) bigger IOCs want an all-weather portfolio that can pay the dividend even at the low point of the cycle. Strategies for building a balanced upstream portfolio vary by company size and region, but the general framework for investment is strict hurdle rates, diversification (geographical, oil/gas/LNG production), trading and risk management. Refining’s value in integrated companies’ portfolios has been amply demonstrated through the crisis.

5. Upstream deal-making is back on

There are presently more buyers than sellers, as companies look to strengthen portfolios and future production profiles. Recent transactions show that sellers and buyers can, if the will is there, reach agreement on value even with current extreme price uncertainty. Deals that have completed are typically structured on a base case of Brent US$65-75/bbl but with an oil price-linked payment over a set period. But there’s no free pass for buyers – investors will always have to be persuaded on value, portfolio fit and the impact on the balance sheet. Banks are busy, incoming calls as frequent as outgoing, more deals may flow after the US mid-term elections.

6. M&A, exploration, DROs all on the table

Bigger companies will look at all options to strengthen portfolios, including asset/corporate acquisitions and organic investment. Exploration is unashamedly back, high impact deepwater acreage reloading in particular for the big IOCs and NOCs with its potential to deliver volume at scale. West Africa, Latin America and SE Asia are among the hot spots. The crisis in the Middle East is laying the foundations for access to more Discovered Resource Opportunities in the region, potentially including Saudi Arabia, where until now upstream has been off limits to IOCs. US IOCs, perhaps even Chinese NOCs, with strong G-to-G relationships, look well positioned.

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