Wood Mackenzie’s latest analysis asserts 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 has said that it believes a broad oil and gas sector recovery is possible.
In a series of global outlooks for 2021, Wood Mackenzie highlighted the following 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, the head of upstream analysis at Wood Mackenzie, the upstream oil and gas sector will endure another year in the doldrums. McKay said he expects investment levels to remain flat at about $300 billion in 2021. “Falling prices would mean rapid cuts,” he said, “whereas, at higher prices, contingency and resilience will outweigh enthusiasm to take advantage of a nadir in service sector costs.”
Strategically, companies are expected to focus heavily on stability and financial resilience. Investment decisions will reflect this priority. Wood Mackenzie said it expects 20 or so big project sanctions in 2021, up from just more than 10 in 2020 but just half the prevailing prepandemic trend.
The merits of these increasingly will be judged on their environmental, social, and corporate governance (ESG) credentials. “The class of 2021 will not all be low-carbon, low-cost trailblazers,” McKay said. “But the direction of travel is one way in terms of industry stakeholder aspirations.”
Wood Mackenzie said it expects continued downsizing in the service sector. This will lay the foundation for improved margins, even if activity does not increase as forecast 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
Tom Ellacott, Wood Mackenzie’s senior vice president of corporate research, 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 decarbonization.
“The Euro majors will put more meat on the bone in 2021,” Ellacott said. He added that geopolitical factors such as the change in the US administration, the upcoming United Nations Climate Change Conference, 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 for Wood Mackenzie, 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% vs. precrisis levels in 2021, but Wood Mackenzie said it expects a profitable year.
The majors and larger internationalizing NOCs will likely drill 75% of the biggest wildcats.
Mergers and acquisitions (M&A) will be the main lever in upstream restructuring, according to Wood Mackenzie. High-grading 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, Wood Mackenzie said.