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Upstream Ready to Thrive, Not Merely Survive in New Year, Says Wood Mackenzie

Oil and natural gas operators are entering 2018 in the best shape since oil prices collapsed in late 2014, Wood Mackenzie researchers said Thursday.

In the global consultant’s 2018 Upstream Outlook issued Thursday, researchers said energy companies want to show how they can thrive and not merely survive in a low-price world.

“Now that the belt-tightening is done, companies are looking to deliver profitable growth and build for the future,” said Senior Vice President Tom Ellacott. “We also expect to see signs that the investment cycle is starting to turn and the sector has reset itself to operate at lower commodity prices.”

Close to $1 trillion was pulled out of global energy company spending plans for budgets from 2015 to 2020 following the downturn, said upstream research director Angus Rodger.

“But we believe the big cuts are over,” he said.

Global capital expenditures (capex) are forecast to grow slightly in 2018 to a total of $400 billion, even with an expected decline in liquefied natural gas (LNG) terminal spending.

“This is all the more impressive given that the LNG cliff has arrived,” said Rodger. “LNG spend will plummet by $16 billion, roughly 40%, as major projects in the United States, Australia and Russia are completed.

“The resulting investment gap will be filled by unconventionals and deepwater projects, with spend to rise 15% for both. The growth in deepwater comes after three years of decline, signaling this key resource theme is back on track.”

The expected 15% increase in unconventional capex for 2018 tracks a similar forecast issued by Evercore ISI. Wood Mackenzie’s researchers also are optimistic about increased spend by the offshore sector.

“In our outlook, we forecast a third successive increase in project sanctions from the 2015 low,” Rodger said. “This is another indicator that recovery is underway.”

Researchers are forecasting major project sanctions to reach 25 in 2018 versus about 20 this year, “as operators take advantage of what may represent their best chance to lock in rock-bottom costs,” he said.

Added Ellacott, "The rise in project sanctions will be a clear sign that new projects can work in a low-price environment. Oil and gas companies will continue to adapt portfolios to perform at high and low prices and also to provide a platform for longer-term energy transition."

Optimizing core businesses, along with controlling costs and using digital technology “will all play a part,” Ellacott said.

“Building exposure to gas will also be a core strategic objective for most larger companies as they transition towards low-carbon portfolios. This process will include small-scale investments in renewables to bring more optionality in wind, solar and power markets.”

Capturing “prime discovered resource opportunities,” will be the aim for business developers, according to the forecast.

Iran and the United Arab Emirates are expected next year to award contracts to at least 10 billion boe of discovered resources.

“There's also growing interest in Latin America, where around 10 billion boe of deepwater resources could be auctioned in Brazil alone,” researchers said.

Meanwhile, operators will be looking for the right formula to convince investors of their abilities following a year of poor stock market performance in 2017. A core focus is to demonstrate that free cash flow can grow in a low-price environment and fund higher distributions.

“Companies must also build a compelling case for long-term investment. This may not happen in one year, but they will need to show clear progress in 2018,” said researchers.

“Looking at the upstream sector as a whole, we expect more activity from the Asian national oil companies as they tackle structural production declines,” said Ellacott.

“U.S. independents will be more focused on execution,” he said. “They need to demonstrate that tight oil can deliver volumes and earnings. The majors will continue to cherry-pick opportunities, building on the great progress already made in repositioning portfolios for lower prices.”

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