Wood Mackenzie’s latest analysis reveals that sustainability and resilience will be at the heart of the oil and gas industry story in 2021.
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, Wood Mackenzie highlights some key trends to watch for:
- Continued underinvestment in upstream oil and gas;
- Industry focus on resilience, sustainability and the energy transition;
- 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. McKay expects investment levels to remain flat at about US$300 billion in 2021. He says, “falling prices would 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,” said McKay.
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 said, “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.”
Companies will continue their relentless focus on boosting margins in upstream and downstream. Diversification into new energy will accelerate as more players commit to decarbonisation.
“The Euro Majors will put more meat on the bone in 2021,” said Ellacott. He adds 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.
Governments will have to explore fiscal policies that support the global green initiative, while also balancing the need to restore budget deficits. 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
Producers choosing to stick with oil and gas cannot ignore relentless asset depletion. Some will move on exploration opportunities before competition heats up again. Well count and investments will be down 35% versus pre-crisis levels in 2021, but Wood Mackenzie expects a profitable year.
The Majors and larger internationalising NOCs will likely drill 75% of the biggest wildcats.
M&A will 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.