Oil and gas companies have recovered from the 2020 crisis with bumper cash flows in 2021 and are looking towards 2022 with more cash on hand to increase shareholder distributions and prepare for the energy transition.
In 2022, the oil and gas industry could be up for a transformational year in terms of both preparedness to continue the decarbonization drive and rewarding the shareholders of the sector that has seen poor returns since the previous crisis in 2015-2016.
Strategic choices in investment in clean energy solutions, responding to the pressure to decarbonize, and portfolio repositioning will be next year’s key themes for all oil and gas companies—from the supermajors and the national oil companies (NOCs) to the U.S. independent oil and gas producers, Tom Ellacott, Senior Vice President, Corporate Research, at Wood Mackenzie, wrote in a recent report with an outlook of what to expect in 2022.
Massive cash flows, in many cases at record levels, will likely be used for both increasing shareholder payouts and repositioning for the energy transition, according to WoodMac’s vice president, corporate analysis, David Clark.
Oil firms can no longer turn a blind eye to investor and societal pressure to cut emissions and actively participate in the decarbonization of their own operations and of other energy-intensive industries.
“It’s clear that sitting on the decarbonisation sidelines isn’t an option. As stakeholder pressure intensifies, it’s time for big strategic decisions. These choices will set trajectories for the energy transition that will only gather momentum. Wood Mackenzie expects an exciting 12 months,” Ellacott said.
The largest international majors—ExxonMobil, Chevron, Shell, BP, and TotalEnergies—are set to raise their capital budgets for 2022, but capital discipline is still a pillar of their strategies, as is increasing investment in low-carbon energy solutions. Big Oil is set to invest a growing share of total capital expenditures in clean energy solutions, including the U.S. supermajors who differ from their European competitors in strategy by not being willing to invest in any solar and wind power generation. Instead, Exxon and Chevron plan to focus on renewable fuels and carbon capture and storage (CCS), both to cut their own carbon footprint and to develop in partnership regional CCS hubs in heavily industrialized areas.
Despite higher spending guidance, the top international oil firms continue to be conservative in capital allocation now that shareholders want returns and ESG investors want accountability.
“2022 could see cash-rich companies ‘do it all’ if today’s prices hold. Indeed, increasing shareholder distributions while decarbonising and repositioning for the energy transition will be key to rebuilding the investment story,” WoodMac’s Clark said last week, noting that the sector will likely be bold next year as the energy transition and ESG remain top topics in oil and gas.
Mergers and acquisitions (M&As) are likely to accelerate next year, led by the U.S. shale patch again. More deals are on the cards thanks to stronger balance sheets, high oil and gas prices, improving equity valuations, and investor pressure to align portfolios for resilience in the energy transition, Wood Mackenzie’s analysts say.
“Companies will also capitalise on a window of opportunity to rationalise their portfolios in 2022, wary of longer-term price and regulatory risk. Many more players will be in a position to buy and will see an opportunity in sweeping up cash-generative assets for implied valuations as low as US$50/bbl,” said Greig Aitken, director, corporate analysis, at WoodMac.
In the United States, the recent jump in price volatility will motivate more companies to consolidate, especially in the Permian, industry executives told the Houston Chronicle earlier this month.
Going into 2022 after the year of recovery in 2021, the oil and gas industry will be looking to balance increased shareholder distributions with emissions reductions to heed investors’ concern about the industry’s relevance in the energy transition. Lower emissions, higher investments in alternative energy, and repositioning of asset portfolios will continue to be the key themes to watch in the oil and gas industry next year.
By Tsvetana Paraskova for Oilprice.com
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This year's investments by the industry at estimated at about $341 billion, which is 35% lower than pre-pandemic investment levels of $525 billion, and that's despite rising global demand for oil and gas.
Oil and gas investment will need to return to pre-pandemic levels and stay there to 2030 to restore market balance. The energy crisis in Europe and Asia this winter is a preview of what we can expect in the years ahead from underinvestment.
After all, oil makes the world run. That is what the chief executive of American oil giant Chevron Mike Wirth + succinctly told the World Petroleum Congress meeting (WPC) in Houston in early December. His statement expressed a sentiment that oil and gas are indispensable and will continue to be indispensable for the global economy well into the future.
He was echoed by the chief executive of Saudi Aramco Amin Nasser who told the WPC meeting that admitting publicly that oil and gas will play an essential and significant role during the global energy transition and beyond will be hard for some but admitting this reality will be far easier than dealing with energy insecurity, rampant inflation and social unrest as energy prices become intolerably high.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London