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Wood Mackenzie: Seismic changes across upstream as industry grapples with Energy Transition

Published by , Deputy Editor
Oilfield Technology,

The energy transition is undoubtedly impacting corporate upstream strategies in significant and disruptive ways. Coupled with the post-2014 downturn in oil prices, Wood Mackenzie sees seismic changes in the way the industry allocates capital across development, exploration and in particular M&A. 

Operators using M&A to reshape portfolios for resilience

While the global upstream M&A market is shrinking, its importance is growing as E&P players reshape their portfolios for resilience in the face of long-term demand uncertainty.

“On the face of it this sounds like a paradox, but it is because the role of M&A in adding new barrels to company portfolios – in part because of a sharp fall in exploration – has become more important,” said research director Angus Rodger at the inaugural Wood Mackenzie Energy and Commodity Summit Singapore today.

“From 2005 to 2014, 37% of the new resource added to upstream portfolios came from M&A. In the last three years (2015 to 2018), this has risen to 46%. Yet at the same time global M&A activity declined since 2014. Global M&A flow has fallen particularly steeply in 2019, and we are on course for perhaps the slowest year of deals since the start of the century.”

One of the drivers for the lack of deals is investor pressure, particularly in the US where the appetite for acquisitive growth has been severely punished by a market that instead wants to see capital discipline and greater profitability.

In contrast, Asia Pacific has seen a relatively busy year. But it will be interesting to see if this appetite for M&A can be maintained as the majors ramp up disposal programmes intended to leave them with smaller but higher margin regional footprints. In recent weeks, Chevron, Total and ConocoPhillips have exited non-core assets, while ExxonMobil has kicked off divestment processes in Australia and Malaysia.

“Three quarters of the majors’ Asia Pacific portfolios by value sit in Australia. This reflects both the importance of cash-generative long-life LNG assets, and the key role of gas in the energy transition. Other regional projects that cannot compete for capital in the face of low-cost, high-margin opportunities elsewhere will become increasingly non-core,” said research director Andrew Harwood.

Focus on gas impacting exploration returns

For oil and gas explorers, the energy transition is having a profound impact on what has historically been the industry’s primary engine of growth.

From a value creation perspective, the exploration industry has recovered since the downturn, by focusing on a smaller number of world-class, and often oil-prone, regions. But maintaining this improvement in value creation will become difficult as gas becomes a greater focus. 

Rodger said: “Of all volumes discovered over the last decade, over 50% was gas, and it is steadily increasing. But while the ‘bridge fuel’ is seen by many players as key plank of their energy transition strategies, gas is simply worth less than oil on a unit basis. Its per barrel of oil equivalent (boe) development value is often a third less than oil.”

“That said, as with M&A, we have reasons to be more optimistic around the Asia Pacific outlook. Proximity to existing infrastructure and strong gas demand offers incentives for gas exploration,” added Harwood.

“Declining utilisation across a number of key pipelines and liquefaction plants in Asia presents interesting opportunities. Expect to see exploration campaigns kicking off over the next couple of years in offshore North Sumatra, Indonesia, onshore Northern Territory, Australia and Sabah, Malaysia, in an effort to fill this future pipeline and plant capacity.”

Technology driving resource growth from within

Perhaps the biggest shift being witnessed in resource capture strategies are technology-led efforts to unlock more from existing fields. Advancing technology – seismic, data analytics, machine learning, AI, cloud computing – is changing the industry’s understanding of the resource base. The majors have managed to unlock 19 billion barrels of conventional and tight oil resource from within their portfolio since the oil price downturn, accounting for a third of all reserves added then. 

Harwood commented: “We have seen this approach bear fruit in Asia Pacific, with Woodside recently upgrading resources at its Scarborough project by 52% through the application of new seismic techniques and processing. Given the maturity of much of the existing resource base in Asia Pacific, new approaches to improving recovery could prove an effective means of boosting the supply outlook.

“Just a 5% increase in recovery from producing assets in Asia could add another 5 billion boe of resource – equivalent to the volume of exploration-led resources added in Asia Pacific over the last three years.”

But the clock is ticking on bringing these reserves to market. Many of the largest stranded assets across Asia Pacific are non-commercial due to high levels of carbon dioxide and other contaminants, and as such may never be developed. 

“Adherence to environmental, social, and governance (ESG) principles is now a key concern for all oil companies, which has risen to prominence dramatically over just the last 12 months,” said Rodger. “This is across the spectrum from national Asian oil companies through to pure-play shale firms in the heartlands of ‘drill, baby, drill’ Texas.”

The industry is seeing rapid evolution in companies’ resource capture strategies. This has in part been influenced by growing debate on the future role of exploration and large-scale M&A, both from investors and within oil companies. The carbon footprint of assets in the portfolio is also now of key concern for publicly-listed players, and directly affecting capital allocation decisions.

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