The transition to a net-zero carbon future puts uncertainty into an estimated $14 trillion worth of upstream oil and natural gas assets, with no assurance that demand will continue to rise, according to analysts.
The industry, whose fortunes are tied to discoveries, consumption and price volatility, has seen its risks “tempered by a single tenet, that demand would continue to rise indefinitely,” Wood Mackenzie analysts said. “As the energy transition gathers momentum, that belief has all but evaporated.”
While global oil demand is forecast to increase for another decade or more, there is growing pressure to limit global warming to 2 degrees C by 2050. The International Energy Agency, the global energy watchdog, said Tuesday no more oil and gas field developments should be sanctioned if the world is to have a shot at achieving net zero emissions by 2050.
In Wood Mackenzie’s accelerated energy transition 2 C scenario, or AET-2, “oil demand and prices would fall rapidly later this decade.” Natural gas demand and prices “would be more resilient.”
There are multiple pathways to reduce emissions, and the AET-2 scenario is Wood Mackenzie’s interpretation of the likeliest route, given policy drivers and technological innovation required. However, it did not assign a probability to the likelihood of any scenario being realized.
Upstream Value Left Behind
Regardless of the energy transition’s path, a “huge amount of upstream value” would remain on the table, analysts said. Using proprietary asset-by-asset modelling, Wood Mackenzie estimated the pre-tax future valuations for the upstream would be $9-23 trillion. On a post-tax basis, operators’ share was estimated at $3-9 trillion.
“The industry now finds itself having to supply oil and gas to a world in which future demand — and price — are highly uncertain,” said Wood Mackenzie’s Fraser McKay, vice president. “The range of possible outcomes is dizzying. But the world will still need oil and gas supply for decades to come, and the scale of the industry will remain enormous.”
Delivery and discipline remain paramount to the upstream value chain, and companies also need to send a “strong signal to stakeholders that they can be reliable stewards of capital,” the firm noted.
“Only exceptional, low-cost projects will work in all demand scenarios,” said research director Angus Rodger. “Inevitably, the cost of capital and the cost of doing business in oil and gas will increase.”
Investments have long been shifting to natural gas from oil, and that is expected to continue.
“The industry will have to figure out the conundrum of weaker economics if the giant gas projects the world needs are to happen.” Rodger said. “The returns on developing a bbl of oil are currently higher, with oil production and cash flow profiles delivering more value upfront.
“Gas prices are lower than oil prices on an energy-equivalent basis; that relationship will have to invert as it does in our AET-2 scenario to make this happen.”
Business models are adapting and consolidation to bolster margins should gather momentum, McKay said. “Just a few more years of firm oil prices would strengthen balance sheets, making transition strategies easier to execute.”
Green-Directed Capex
Meanwhile, Deloitte estimated that the global oil and natural gas industry may be able to deploy up to $838 billion over the next decade, or around 20% of cumulative capital spending, to optimize businesses and pursue growth in new energy ventures.
The industry faces a “conundrum,” the consultancy said, to capture additional value from hydrocarbons businesses or put more capital expenditures (capex) into low-carbon ventures.
“A confluence of factors, including climate, the pandemic, supply-demand imbalances, changing trends in end-markets, and growing appetite for sustainability investments, has given oil, gas and chemicals companies the need to progress faster around portfolio transformation,” said Deloitte LLP’s Amy Chronis, U.S. oil, gas and chemicals leader.
“Many companies are eager to act but are seeking guidance on the speed and extent to which they expand into new, potentially high-growth areas, be it in new regions, markets, products or technologies. By taking a strategic, purpose-driven approach, companies can sustainably and profitably build a future-ready portfolio.”
While the “high-growth phase of the oil market may have come to an end, oil demand is still projected to remain above 87 million b/d by 2030, even in accelerated energy transition scenarios,” Deloitte noted.
To determine how much capital to redeploy toward energy transition endeavors, the consultancy said oil and gas companies could begin with capital that is not earning the “desired return.”
In its base case scenario following an analysis of 286 listed global companies, Deloitte found they could have the opportunity to optimize up to 6% of future oil and gas production, which may not generate a 20% return at an average oil price of $55/bbl.
That translates into about $838 billion, or 20% of future capex that could be redeployed to “pursue promising green ventures.”
In addition, Deloitte said the findings “suggest that the opportunity to redeploy will not decrease, but rather increase if oil prices stay above pre-pandemic levels.”
Among the various global groups, the supermajors “have a potential to redeploy up to 36% of their future capex.” Unlike independents, the world’s supermajors, which include BP plc, Chevron Corp., ExxonMobil and Royal Dutch Shell plc, explore, develop, produce and refine oil and gas.
Many oil and gas companies are working to transform their portfolios but Deloitte warned that not every strategic turn will prove successful.
For example, the analysis found that of the more than 286 upstream and integrated companies analyzed, only 16% that made frequent changes to their portfolios delivered top quartile financial performance.
In addition, “oil still delivers significant value for many,” Deloitte noted. “Two-thirds of oil-heavy portfolios deliver above-average performance.”
Of the portfolios that have captured more renewable prospects, “9% delivered top quartile financial performance, underscoring the importance of a strategic, purpose-driven approach to portfolio transformation.”
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May 24, 2021 at 04:15AM
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Global Oil, Natural Gas Companies Juggling Capital to Green Up Portfolios - Natural Gas Intelligence
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