Opinion

What is the current state of the upstream industry?

We asked our clients what they thought 2018 will bring

Martin Kelly, Head of Corporate Analysis

Martin Kelly

Head of Corporate Analysis

Martin oversees research into the world's leading oil and gas companies as head of our corporate and M&A team.

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How can we address decarbonisation and adapt to the energy transition that is underway?

What should we do about Digitalisation?

These are two of the most talked about disruptive trends in the upstream oil and gas industry. We recently ran our second annual ‘State of the Upstream Industry’ survey, which confirms that although we've seen a lot of companies embarking on these journeys, there's still much more to be done.

What can we discern from this? Well, compared to last year’s survey, the rise of renewables continues apace. Nearly 15% of respondents indicated that renewables were the best investment option for the long-term. And 10% said that addressing the energy transition was the industry’s priority for 2018.

This year's 'State of the Upstream Industry' survey in numbers:

  • 15% said renewables is the best investment
  • 10% said the focus should be on addressing the energy transition
  • 70% proposed investing in renewables or reducing carbon footprint as a way to tackle the energy transition
  • 75% said the oil price will be above $US75/bbl by 2021
  • 60% said digitalisation will have a major impact on operations

>Download our report to see the full survey results<

 

We’ve seen the likes of the European Majors leading the way with renewables investment.

Shell has an aggressive target of halving its carbon footprint by 2050, while Statoil is in the process of changing its name to Equinor to reflect the change the company is undergoing.

Of the respondents to the survey, nearly 70% believe that investing more in renewables or reducing their carbon footprint is the right way to tackle the energy transition challenge.

But companies can’t ignore their roots. Investing in renewables is happening, but it is from a low base. Oil and gas projects still pay the bills. Compared to last year’s survey, there is optimism on oil prices: more than 75% think it will be above US$75/bbl in 2021. And in a period of higher oil prices, it looks like growth options are increasingly on the table. Asset M&A and frontier exploration are more attractive options this year than last year, while 'Discovered Resource Opportunities' have moved in the opposite direction.

The industry seems overall much more confident, but is that a good thing?

Confidence is evident in spending expectations as well. More will be spent globally and in each region compared to last year. And overall, capital investment, exploration investment and M&A spending will all increase by at least 10% from last year. It's down to this confidence that the number of Final Investment Decisions (FID) doubled from 2016 to 2017. But will we return to the boom and bust cost cycles of the past?

With more of a focus on growth and investment than this time last year, companies are still disciplined in how they sanction projects using hurdle rates (What is a hurdle rate? Watch my video to find out). But hurdle rates have dropped slightly this year, particularly at the riskier end of the investment spectrum. Both deepwater and exploration investments have a lower average hurdle rate compared to last year (moving from close to 16% last year to below 15% in the 2018 survey). Now as an analyst, I'm a numbers guy... and I know this change may well be statistically insignificant. Only time will tell.

And what about the other great disruptive trend, Digitalisation?

Over 60% of survey respondents said digitalisation of the industry will have a ‘major’ or ‘transformational’ impact. It’s the operational end of the industry where this impact is expected - production optimisation, equipment reliability and internal process efficiency. Faster and better decisions, more production, less outages. Cost savings is the other key area that Digitalisation will help with. If we translate the 10% saved by operators in the L48 with edge analytics, the industry is looking at US$20 billion saved on drilling globally.  That's a big piece of the pie.

So will we look back on 2018 as the year when the energy transition really became a focus?

Will it also be the year that Digitalisation was established as the most disruptive trend in recent memory?

Survey says yes – and we'll be digging into both of these trends over the next few months.

If you want to find out more about the survey results, download our report.