Decarbonization, the energy transition and digitalization emerged as key themes in Wood Mackenzie’s recently released second annual State of the Upstream Industry survey.
Respondents told Wood Mackenzie that addressing decarbonization and adapting to the energy transition were priorities. Almost 70% of respondents proposed investing in renewables of reducing carbon footprints as the right way to adapt to the energy transition.
Over the past year, the European Majors have emerged as leaders in renewables investment – a strategy highlighted by 15% of the survey’s respondents as a priority, Wood Mackenzie said.
"But companies can’t ignore their roots. While there has been an increase in investment in renewables, it is from a low base. Oil and gas projects still pay the bills," according to the consultancy.
Compared with last year’s survey, companies are optimistic about oil prices: more than 75% think it will be above US$75/bbl in 2021. And in a period of higher oil prices, it looks like growth options are being brought back to the table. Asset M&A and frontier exploration are more attractive options this year than last year, the survey showed.
Martin Kelly, Wood Mackenzie’s head of corporate analysis, said: “The industry’s growing confidence is evident in spending expectations too. More will be spent globally and in each region this year compared to last year. Capital investment, exploration investment and M&A spending will all increase by at least 10% year-on-year."
He added: “With more of a focus on growth and investment than this time last year, companies are still disciplined in how they sanction projects using hurdle rates. 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.”
And what about digitalisation, the other key theme highlighted by the survey?
Kelly said: “More than 60% of survey respondents said digitalisation of the industry will have a ‘major’ or ‘transformational’ impact. This is likely to be felt most at the operational end of the industry - production optimisation, equipment reliability and internal process efficiency. Digitalisation is expected to result in faster and better decisions, more production and fewer outages. It will also help reduce costs,” he said. “If we translate the 10% saved by operators in the L48 with edge analytics, the industry is looking at US$20 billion saved on drilling globally. That's a big piece of the pie.”