While many challenges still lie ahead for producers, Wood Mackenzie believes that dealing with unknowns has been a “core industry strength” for oil and gas
Resilience and sustainability are set to be the core themes within the oil and gas industry in 2021, according to an analyst.
Energy researcher Wood Mackenzie says the fossil fuel industry’s immediate actions in 2020 following the price downturn “challenged the perceptions of what’s possible” and “set records for responsiveness”.
But while many challenges still lie ahead for producers, it believes that dealing with unknowns has been a “core industry strength” and that a “broad oil and gas sector recovery is possible”.
Here are three key trends Wood Mackenzie has highlighted for the industry in 2021.
Key themes for the oil and gas industry in 2021
1. 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 $300bn in 2021 and 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 – and investment decisions will reflect this priority. Wood Mackenzie expects about 20 big project sanctions in 2021, up from just over 10 in 2020 – but that is still just half the prevailing pre-pandemic trend.
It claims the merits of these projects 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,” says McKay.
Wood Mackenzie expects continued downsizing in the service sector, which will “lay the foundation for improved margins”, even if activity does not increase as forecasted between 2022 and 2025. It adds that next year operators will have a “closing window of opportunity to lock in lower project costs”.
2. Industry focus on resilience, sustainability and the energy transition
Tom Ellacott, Wood Mackenzie’s senior vice-president of corporate research, says new businesses, and new business models, are “emerging from the wreckage of 2020”.
He believes companies will focus their investment on building a foundation that will be “sustainable across a range of scenarios”.
Wood Mackenzie claims companies will continue their “relentless focus on boosting margins in upstream and downstream”, while diversification into new energy will accelerate as more players commit to decarbonisation.
Elacott says the Euro majors will put “more meat on the bone in 2021”. He adds that geo-political factors such as the change in the US 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.
According to Wood Mackenzie, governments will have to explore fiscal policies that support the global green initiative, while also balancing the need to restore budget deficits. This could mean higher tax rates on cash-generative legacy oil and gas assets could emerge.
Jessica Brewer, Wood Mackenzie’s principal upstream analyst, says: “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.”
The energy researcher believes battery electrification solutions, hydrogen for power, and methane reduction initiatives will all take a “step closer to commerciality” in 2021, while flaring reduction also remains a “hot topic and a prolonged pledge”.
3. Companies working to shape the upstream portfolio of the future
Wood Mackenzie says producers choosing to stick with oil and gas “cannot ignore relentless asset depletion”.
It believes some will move on exploration opportunities before competition heats up again. The researcher projects well count and investments will be down 35% compared to pre-crisis levels in 2021, but it expects this year to still be profitable.
It adds that the majors and larger internationalising NOCs will likely drill 75% of the biggest wildcats, while mergers and acquisitions (M&A) will be the “main lever in upstream restructuring”.
Wood Mackenzie says highgrading will “focus portfolios on the most advantaged assets” and corporate consolidation will “dominate activity in the US Lower 48”. It believes upstream M&A activity will likely top out at 2019 levels of between 200 and 300 deals this year.