WoodMac: Upstream companies shift to ‘thrive’ in 2018

Oil and gas companies are set to enter 2018 in their best shape since oil prices collapsed. In its 2018 Upstream Outlook, global natural resources consultancy Wood Mackenzie believes many will now focus on demonstrating they can thrive in a low-price environment.

“Now that the belt-tightening is done, companies are looking to deliver profitable growth and build for the future,” said Tom Ellacott, WoodMac senior vice-president. “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.”

Angus Rodger, upstream research director, added, “The downturn meant that close to $1 trillion was taken out of company spending from 2015 to 2020. But we believe the big cuts are over. WoodMac expects global capital expenditures to increase slightly in 2018 to a total of $400 billion.

“This is more impressive given that the LNG cliff has arrived: LNG spend will plummet by $16 billion—roughly 40%—as major projects in 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 3 years of decline, signaling this key resource theme is back on track.”

In the outlook, WoodMac forecasts a third successive increase in project sanctions from the low seen in 2015. This is another indicator that recovery is under way. WoodMac expects the number of major project sanctions to increase to 25 in 2018 from just over 20 in 2017, as operators take advantage of what may represent their best chance to lock in rock-bottom costs.

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

Ellacott said, “Optimizing the core business, controlling costs, and employing digital technology like predictive analytics will all play a part. We expect companies to continue to develop high-value, low-cost oil. 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.”

Business developers will look to capture prime discovered resource opportunities. WoodMac expects Iran and the UAE to award at least 10 billion boe of discovered resources next year. There’s also growing interest in Latin America, where around 10 billion boe of deepwater resources could be auctioned in Brazil alone.

“Companies will need to find the right formula to win back investors after a year of poor stock market performance in 2017. Demonstrating that free cash flow can grow in a low-price environment and fund higher shareholder distributions will be a core focus. Companies must also build a compelling case for long-term investment. This may not happen in 1 year, but they will need to show clear progress in 2018.”

Ellacott said, “Looking at the upstream sector as a whole, we expect more activity from the Asian NOCs as they tackle structural production declines. US Independents will be more focused on execution—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.”