As demand returns and prices rise after the pandemic shocks, publicly-traded global oil producers who have been holding back spending could enjoy a share of $348bn free cash flow
Upstream oil and gas companies are poised to generate record-breaking free cash flow across the industry in 2021, expected to be in the region of $348bn globally.
Rising oil prices – currently hovering around their highest levels since late 2018 – coupled with low investment activity will help deliver the account book boost for publicly-traded businesses in the exploration and production (E&P) sector.
After a damaging period for the oil industry as the pandemic erased almost 10% of world oil demand, sent commodity prices tumbling to historic lows and forced companies into deep cost-cutting measures, prospects are starting to look significantly brighter.
According to Rystad Energy, as both demand and prices continue to recover, revenues generated across the global E&P sector are expected to surge by 55%, or $500bn, this year compared to 2020.
At the same time, businesses are maintaining spending discipline after the economic shocks of the pandemic, with investments across the sector growing by only 2%.
Bumper cash flow across oil industry in 2021 boosted by returning demand and higher prices
If the $348bn free cash flow figure estimated by Rystad is reached, it would far surpass the previous record of $311bn set back in 2011.
“Oil demand has gradually increased after the initial shock of the Covid-19 pandemic, and Opec+ continues to hold back volumes from the market,” said Espen Erlingsen, head of upstream research at Rystad Energy.
“The consequent high price movement has been further supported by a slow ramp-up in US tight oil activity. In conjunction with the persisting low investment environment, E&Ps are enjoying super-profits.”
The International Energy Agency has steadily raised its expectations for the recovery of global oil demand in recent months, and in its latest update suggests consumption will exceed pre-pandemic levels by the end of 2022 – giving producers who have been holding back output opportunity to start pumping more oil.
Crude prices have been supported by production restraint agreed among members of the Opec+ alliance of oil exporting countries, and some traders and analysts have even suggested a return to $100 per barrel crude oil could be possible if demand exceeds spending on new supply projects.
Rystad identifies the US tight oil sector as a main driver of the anticipated cash surge, reversing its historical struggles to generate positive returns by delivering $60bn in free cash flow this year, before any hedging effects are taken into account.
Conventional onshore operations globally will deliver the highest returns of almost $160bn, while deepwater and offshore shelf sectors will each generate around $60bn in free cash flow.
Additional cash surpluses could lead to higher levels of activity in the sector going forward, and Rystad expects greenfield investments this year to be more than double the amount sanctioned in 2020.