WoodMac: Upstream industry rebounds – but fears of ‘peak of uncertainty’ weigh in 2022

The oil and gas industry will continue to rebound in 2022, according to Wood Mackenzie, a Verisk company (Nasdaq: VRSK). But the positive outlook will be tempered by concerns about its future.

In his Global Upstream Outlook 2022, Wood Mackenzie stresses that the upstream industry must react to the implications of the commitments made at COP26 and that governments must define a path for the industry to follow.

Fraser McKay, vice president of upstream research, said: “The upstream industry enters 2022 with a ‘peak of uncertainty’ – with record cash flows but heightened scrutiny.

“At a Brent price of around US $ 70 / barrel, oil and gas cash flow will be at near record highs. At US $ 80 / b, it would soar to US $ 1 trillion (based on taxes, capital expenditures, pre-financing and dividends). Despite this, for many stakeholders and even some business leaders, the risks of the industry outweigh its benefits. This tension will define 2022.

Governments align themselves with net zero aspirations. It is likely that next year will see more carbon taxes enacted to align with the COP26 commitments. Other fiscal measures will target disproportionate cash flows to fill fiscal deficits induced by the pandemic. While exceptional taxes are possible, so are overall energy fiscal conditions and more incentives for carbon capture and storage (CCS).

McKay said: “Financing oil and gas was becoming increasingly difficult ahead of COP26, but the pressure will increase in 2022. Institutions with more than $ 130 trillion in capital under management have joined the Glasgow Financial Alliance to Net Zero. Expect the donor pool to shrink, borrowing costs to rise, and project funding for oil to tighten.

“But the loans won’t stop immediately. And gas – especially when aligned with the coal retreat or CCS – will be spared the worst. “

Overall investment will increase, but capital discipline will prevail. A 9% year-over-year increase will result in spending of over $ 400 billion again in 2022. Despite this, at 40%, the overall reinvestment rate (capital investment divided by operating cash flow before dividends after tax) will remain close to the all-time low at our forecast price.

More than 40 projects of more than 50 million boe will be sanctioned in 2022. The emphasis will be on privileged barrels. Low-break-even, low-carbon deepwater projects will dominate entirely new FIDs. While the economics of the project are strong, short paybacks and low emissions are also primary considerations.

McKay said, “Companies will allocate more capital to upstream decarbonization. Value-creating solutions that increase product sales will continue to lead the way, but CCS projects will gain momentum and attract new participants.

Increased transparency and emissions benchmarking reports will lead to more decarbonization action. The biggest gains are in production and processing; electrification will remain at the top of the agenda.

The Global Methane Pledge, announced at COP26, is a tangible step towards regulations, sanctions and fines. It’s a win-win solution for governments, capturing lost value, mitigating leaks and advancing net zero goals.

However, 2022 promises to be difficult for the service sector. Operators will experience inflation of between 4 and 10% next year, depending on the sector. But the part of this amount that reaches service companies depends on the pace of the increase in activity. The disruption of the global supply chain, labor costs and rising raw material prices will be passed on to operators, but this is unlikely to support service sector profit margins.

More use is needed before the service sector can put pressure on prices. Meanwhile, intense pressure on an already weak supply chain adds risk of project execution as well as increased costs. Hot spots like Norway and the United States Lower 48 will be the first affected, McKay said.

Wood Mackenzie expects the exploration industry to accelerate its repositioning for the energy transition in 2022. Beneficial resources will be targeted, replacing legacy assets as they mature. Even oil and gas companies with doubts about demand will seek to upgrade their project pipeline.

Conventional exploration will follow the disciplined path set in 2021, despite improving prices. Spending will total between US $ 20 billion and US $ 25 billion, with wildcats led by the majors and the biggest NOCs. These companies will find about 75% of the 15 to 20 billion barrels of oil equivalent that we expect from new discoveries. Success at this scale will generate double digit returns over a full cycle at US $ 50 / bbl.

Deep water areas with highly productive reservoirs will be prioritized, including giant prospects in Brazil, Guyana, Suriname, Namibia and South Africa. Deep water is expected to account for half of all new volumes.

McKay said, “Gas will again represent about half of the resources discovered. By focusing on timing and carbon, explorers will favor piped gas over liquefied natural gas, both for emissions and return on investment.

“Subsurface organizations will continue to be restructured to defend emerging themes such as CCS, geothermal energy and hydrogen storage in 2022. By keeping options open for the future, operators will want to retain experts, while being agnostic about the application of their skills. “

Read the article online at: https://www.oilfieldtechnology.com/special-reports/13122021/woodmac-upstream-industry-on-rebound-but-peak-uncertainty-fears-weigh-in-2022/

Carol N. Valencia