What Does 2022 Have in Store for the Oil and Gas Sector
What should we all be considering in our planning for 2022 and what might the major developments impacting E&P be? If we could accurately predict this, we would all be rich but it’s a safe bet that decarbonisation will continue (if not accelerate) in driving change, and this will naturally result in explorers keeping options open for the energy transition. But apart from the obvious, which key trends might be important this year and how is the war in Ukraine impacting energy security considerations?
Oil Price to Firm
Oil and gas cash flows will remain very high with Brent at US $70-80 per barrel. The talk of $100 oil remains theoretical, but this could happen if the main OPEC+ producers keep production below target levels and if Iranian crude remains stranded. Further supply disruptions resulting from activities in Libya, or the UAE could also allow oil prices to rise above $100.
Since this article was written, the European energy ecosystem has been turned on its head following Russia’s invasion of Ukraine. With the EU, UK and particularly Germany pushing energy security to the top of governmental agendas and seeking to move away from Russian supplies, the price of oil and gas will almost inevitably remain higher for longer and US$ 100 may become the ‘new normal’ for some time.
The high oil price may eventually be corrected by marginal production, possibly from US shale and other production from Canada, Brazil, Norway and Guyana. Gas prices are likely to remain higher for longer and northern Europe is currently scrambling to seek alternatives to Russian gas, such as LNG from the Gulf and US.
Project financing pressures could force some smaller operators to choose to delist and move back to private ownership with less onerous ESG investor scrutiny. Further Covid variants are a threat to demand and prices, and so remain impossible to predict.
Exploration to Remain Subdued
Conventional exploration is likely to remain supressed despite firming oil prices. Exploration spend is likely to be around US$20-25 billion, with frontier exploration dominated by the major IOCs and larger NOCs. Areas with significant production, including offshore South America, and West Africa will continue to be important with deepwater areas accounting for around half of all new reserves.
On a less positive note, in 2022, more governments could initiate vetoes on exploration, but this seems unlikely to include countries with basins with substantial production and remaining prospectivity.
Since the war in Ukraine, the picture perhaps looks more positive for exploration, with energy security concerns driving a re-think on where energy should be sourced from. Will this mean a reprieve for the UKCS and other areas, with governments seeking to extract more indigenous resources, or will it simply drive faster more aggressive investment in renewables? These scenarios are not mutually exclusive.
Service Sector to Remain Under Pressure
The strongest service companies are already gearing up for the energy transition but the weaker ones, without the cash to invest in research, development and diversification will come under further stress. The seismic business which is still suffering from over capacity may see further company consolidation with more vessels being permanently taken out of circulation. Increased utilisation is required before the sector can exert price pressure.
Operators are expecting inflation of 5-10% in 2022, depending on the sector, and how much of this trickles down to the service companies will be determined by the pace of the increase in activity. Global supply chain disruption, labour costs/shortages and increasing commodity prices will be passed down to operators, but this is unlikely to support increased service sector profit margins.
The service sector has been decimated over the last 4-5 years with many skilled technical staff being forced or choosing to leave the industry altogether. This could also provide challenges in a rebound scenario.
Carbon Capture and Storage (CCS) Will Mature
Proposed projects in Indonesia and Qatar are expected to be sanctioned. Santos’ plan to turn Bayu-Undan into a CCS hub will progress and TotalEnergies’ Papua LNG redesign will facilitate CO2 injection from the start of operations. Sizeable hub developments could be authorised for the first time in Europe, and a proliferation of new global project proposals will emerge, driven by government policy and investor pressure
Oil and gas operators and service companies will continue to diversify to exploit emerging areas such as renewables, CCUS and hydrogen storage. Keeping options open for the future, operators will want to retain their diminished technical expertise but will apply their skills to new areas. Some oil and gas operators will focus on developments with low carbon footprints such as Kistos’s Q10-A development, off the Dutch coast which demonstrates how it is possible to secure and develop European gas resources from a mature area with minimal carbon footprint.
Diversification of energy sources will continue but one consequence of the war in Ukraine is that upstream oil and gas spending is now estimated by Rystad Energy to increase by ~ 15% (which equates to over US $140 billion – compared to 2021) as global producers increase investment budgets to boost production. Recent statements and energy plans announced by some Government officials such as the UK’s Kwasi Kwarteng (Secretary of State for Business, Energy and Industrial Strategy), admit that domestic oil and gas production will have to continue for at least a few decades. Obvious one might think, but now a more public admission of the reality of the energy transition.