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FORESIGHT 2020

What to expect from oil and gas companies in 2020

by Wood Mackenzie's corporate analysis team

“The industry enters the new decade under growing pressure from investors and stakeholders. Capital markets are concerned about long-term sustainability and perceived inaction on carbon emissions and climate change.” Tom Ellacott, SVP corporate analysis

What will our analysts be watching in the year ahead? We highlight our top five themes.

  1. The energy transition
  2. Zero-carbon investments
  3. M&A
  4. IMO 2020
  5. Tight oil

All eyes on Big Oil’s response to climate change

2020 could herald the start of a transformational period for oil and gas.

Big Oil enters the new decade under increasing pressure from investors and other stakeholders to reduce emissions and take action on climate change. How will companies respond?

Our corporate analysts pick their top five themes to watch in the corporate oil and gas sector in 2020.

1. Adapting to the energy transition

Investors are concerned about the long-term sustainability of Big Oil. What does the industry need to do to win back shareholders?

First, it needs to future-proof legacy oil and gas operations. The industry must continue to re-engineer portfolios for resilience; cost-cutting and cash flow growth will be top priorities. And as resource renewal strategies shift to making the most of existing assets, digitalisation and technology will become more prominent.

Secondly, factoring in the price of carbon will become commonplace, helping to incentivise the shift away from carbon-intensive ‘problem assets’.

And finally, the industry will have to embrace emissions reduction. More targets to reduce Scope 1 and 2 emissions will be rolled out. And the industry’s biggest players will get bolder on Scope 3 emissions. Companies will be compelled to do more to bring strategies and portfolios in line with the goals of the Paris Agreement.

Which companies are leading the way in making commitments on emissions? Fill in the form on this page to read the full insight.

2. Will companies make significant investments in zero-carbon energy?

Larger oil and gas companies will continue to take steps to invest in green energy in 2020. But radical changes are unlikely; these are the early stages in a long journey.

Renewable acquisitions will add new growth options for the future. But opportunities in the US$1- 5 billion range are rare: 2020 is likely to be another year of small, incremental changes.

So, which companies are furthest down the green energy road? And what are the chances that a Major could pull off a transformative acquisition that would act as a catalyst for radical change in the sector? Download our insight to find out more.

3. What’s on the M&A horizon?

2019 saw the lowest levels of upstream M&A in almost two decades. Could 2020 bring a big rebound in activity? It’s unlikely.

The Supermajor sell-off will fuel the supply of upstream assets. But capital discipline and negative market sentiment in the face of longer-term demand uncertainty will weigh on deal activity in 2020.

4. The IMO 2020 effect

Refiners will get a boost from IMO 2020. Kicking in on 1 January, the legislation will see an increase in demand for high quality and value oil products, boosting crack spreads for middle distillates and pushing up the premium for lighter, sweeter crudes.

This bodes well for refining margins.

Not all refiners will benefit equally from IMO 2020. Which regions are set to benefit the most? And how will the petrochemicals industry fair in the face of softening demand growth? Our insight explores these themes in more detail.

5. Can US tight oil players surprise on the upside?

Market sentiment towards US E&P producers plumbed new depths in 2019.

Tight Oil Inc. will be hoping that higher free cash flow and shareholder distributions, at the expense of lower growth, will be the winning formula in 2020.

Can US tight oil players surprise on the upside? It won’t be easy against a backdrop of growing operational and financial risk.

The divide between tight oil winners and losers will grow wider in 2020. Read our insight to find out what sets them apart.