The year, which is now behind us, was marked by a global energy crisis and price volatility, putting the energy trilemma into stark relief. However, 2023 is still uncharted territory, which can be used to shape new developments in the oil and gas industry. While this fresh start in the new year will provide oil and gas players with new opportunities, it is also expected to bring a new set of challenges for the industry to navigate.
The Ukraine crisis has put all eyes on finding a new balance between security, affordability and sustainability. Despite oil and gas players being called to provide more of both, as fast as possible, the longer-term desire remained for an accelerated shift away from hydrocarbons towards low-carbon and green sources of energy.
Bearing this in mind, Wood Mackenzie, an energy intelligence group, has released a new report called Corporate oil and gas: 5 things to look for in 2023, outlining key themes to watch for in the oil and gas industry this year. The energy intelligence provider forecasts that companies will look to recalibrate strategies and shift capital allocation while governments are expected to mull windfalls and incentives, as decarbonisation gains momentum.
Wood Mackenzie pointed out that 2023 will see operators shifting capital allocation dynamics, and growing momentum in decarbonisation and renewable energy with continued reconfiguring of oil and gas projects and portfolios. As governments mull windfall taxes and the supply chain looks to capture higher margins, country risk and cost inflation have also risen to the top of corporate agendas.
How things stand for oil & gas players in 2023
Wood Mackenzie highlighted that the oil and gas sector will largely complete the deleveraging phase of the current cycle in 2023. While an elite group of companies will aim for net debt zero to bulletproof balance sheets, more highly geared players will also reach their optimal state, particularly if oil remains above $80/bbl.
Tom Ellacott, senior vice president of corporate oil and gas for Wood Mackenzie, remarked: “We could see a record year for buybacks in 2023. We are forecasting that 54 of the world’s largest oil and gas companies will generate $400 billion in surplus cash flow (post dividends but pre-buybacks) at $95/bbl. With less capital going into debt reduction, buybacks could surpass 2022’s record of around $110 billion.
“The majors and U.S. independents have re-invested just 27 per cent and 35 per cent, respectively, of their year-to-date operating cash flow in 2022. Most will look to increase re-investment rates to maintain or grow oil and gas production, accelerate decarbonisation and expand into renewable energy. More cash-funded M&A also seems likely.”
The energy intelligence player underlined that more operators will shift towards a dual capital allocation strategy to invest or return cash to shareholders. More players will also weigh up expanding investment while sticking with disciplined screening criteria.
U.S. operators: Deleveraging down, distributions up during 2022; Source: Wood Mackenzie
“Tight oil leaders are in pole position to shift gears to high single-digit growth among the International Oil Companies. For the National Oil Companies (NOCs), the focus on securing new supply will take centre stage with rising investment in delivering new oil, gas and LNG supply,“ added Ellacott.
Top priority: Decarbonisation of oil & gas assets
According to Wood Mackenzie, decarbonising oil and gas portfolios and developing resources responsibly will take centre stage during 2023, however, the company underscored that activity levels must increase if future supply shocks are to be avoided.
Fraser McKay, Head of Upstream Analysis at Wood Mackenzie, elaborated: “Upstream development spend needs to rise. Not by as much as most observers think; the inefficiency of the early 2010s is neither welcome nor required. But where investment is deployed and by whom will be a topic of much debate in 2023. Operators will seek the sweet spot where social licence and fiscal incentives align with advantaged barrels.”
Furthermore, the number of major projects – larger than 50 million boe in size – likely to take final investment decisions in 2023 will remain flat, with around 30 projects proceeding. The company claims that inflation and execution risks will continue to rise in 2023, with the supply chain reluctant to add capacity until the service sector is convinced the uptick in demand is here to stay.
Wood Mackenzie further explained that the capacity will at best creep upwards, with most additions at the high-tech end of the market. While this is expected to be more efficient, the firm believes it will not be cheaper.
Moreover, governments and NOCs in the main producing countries will try to marry low-carbon credentials with increasing upstream investment in 2023. As international operators will need to demonstrate and disclose further emissions reductions, Wood Mackenzie predicts that the spending on decarbonisation will increase with a focus on methane emissions reduction and carbon capture and storage (CCS).
“Operators will design upstream projects with low carbon credentials in mind. Developments will become ever more entwined with renewables, low-carbon hydrogen and offsetting projects to balance emissions. By the end of 2023, it will be extremely hard for mainstream operators to sanction projects without emissions mitigation plans. It could be an inflection point on the path to Upstream 2.0,” elaborated McKay.
Watch out for renewable energy making strides
Based on Wood Mackenzie’s report, the oil majors will enter a different growth phase in low-carbon energy, with tailwinds from growing and consistent government support – such as the U.S. Inflation Reduction Act and RepowerEU – offset by rising competition, supply chain challenges, permitting and grid-access constraints.
“The Euro majors will once again set the pace. Leaders such as TotalEnergies, Shell and BP may even invest more in renewables than some big traditional utilities. The Euro majors will scale up M&A with the possibility of transformational transactions in power,” highlighted Ellacott.
In addition, the report notes that the European majors will place more emphasis on project execution in 2023, as their renewables portfolios mature. The risk of delays and cost overruns will grow, but renewable energy activity will broaden to more oil and gas companies, says Wood Mackenzie.
“We expect the U.S. majors to play a more active role in low carbon as their budgets increase and business development in CCS, renewable hydrogen and low emissions fuels accelerates. The NOCs’ energy transition models will also take shape in 2023, as they did for Euro majors in the 2010s,” concluded Ellacott.
Meanwhile, the report also examines how oil and gas companies will diversify geographically, into gas and across different asset classes to broaden their risk exposure. Additionally, green hydrogen will be facing a pivotal year in which the sector needs to sort the hype from reality, underlined Wood Mackenzie.
