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Energy Transition, Digitalization Top Upstream Sector Agenda

Decarbonization, the energy transition and digitalization are priorities for the upstream sector this year, according to Wood Mackenzie’s second annual industry survey.

Nearly 70% of respondents to the State of the Upstream Industry survey said investing in renewables to reduce carbon footprints was the right way to adapt to the energy transition.

Over the past year, European-based oil majors that include BP plc, Royal Dutch Shell plc, Statoil ASA and Total SA have emerged as leaders in alternative energies investments, a strategy highlighted as a priority by 15% of the survey’s respondents.

However, “companies can’t ignore their roots,” said the Wood Mackenzie team. “While there has been an increase in investment in renewables, it is from a low base. Oil and gas projects still pay the bills.”

The key messages from the 2017 survey haven’t changed much in the new survey.

“The industry’s growing confidence is evident in spending expectations too,” said Wood Mackenzie’s Martin Kelly, head of corporate analysis. “More will be spent globally and in each region this year compared to last year. Capital investment, exploration investment and merger/acquisition (M&A) spending will all increase by at least 10% year-on-year.”

Value over volume remains a priority, with financial health considered key, said respondents. Nearly half ranked free cash flow as the top concern in 2018. Still, capital expenditures are forecast to increase this year, with 85% expecting higher investment levels versus 70% in 2017.

Compared with the 2017 survey, operators are optimistic about oil prices, with more than 75% expecting prices to climb above $75/bbl by 2021. Growth options also are back on the table, with asset M&A activity and frontier exploration considered more attractive options this year than last year.

Operators “are still disciplined in how they sanction projects using hurdle rates,” Kelly said. “But hurdle rates have dropped slightly this year, particularly at the riskier end of the investment spectrum.

“Both deepwater and exploration investments have a lower average hurdle rate compared to last year, moving from close to 16% last year to below 15% in the 2018 survey. This may be statistically insignificant, but it’s a trend worth keeping an eye on.”

Digitalization, another key theme in this year’s survey, should have a “major” or “transformational” impact on business, according to more than 60% of the respondents.

“This is likely to be felt most at the operational end of the industry -- production optimization, equipment reliability and internal process efficiency,” Kelly said. “Digitalization is expected to result in faster and better decisions, more production and fewer outages. It will also help reduce costs.

“If we translate the 10% saved by operators in the Lower 48 with edge analytics, the industry is looking at $20 billion saved on drilling globally. That's a big piece of the pie.”

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