Global upstream oil, gas may lose $14 trillion to energy transition

Experts at a global research body, Wood Mackenzie, in a report released yesterday predicted further woes for the oil and gas sector, stating that the pressure from energy transition could wipe as much as $14 trillion from the upstream sector of the petroleum industry.

The International Energy Agency (IEA) had earlier in the week said investments in new fossil fuel projects would need to stop if the world would reduce global warming to 1.5 °C. The Guardian had reported that such development put planned $150 billion oil and gas projects in the country at risk.

The new report released by WoodMac said that energy transition represents $14 trillion worth of uncertainty for upstream oil and gas.
The experts noted that while oil and gas has been alluded to as a risky business, growing tension pushing for energy transition has worsened the concern.

The experts predicted rapid fall in oil demand if the world acts decisively to limit global warming to 2°C by 2050 but that gas demand and price would be more resilient.

“While this range of outcomes has major implications for the oil and gas industry, in either scenario there is still a huge amount of upstream value on the table.

“Using its global Lens asset-by-asset modelling, Wood Mackenzie estimates the range of pre-tax future valuations for upstream is a staggering $14 trillion – from $9 trillion to US$23 trillion. On a post-tax basis, operators’ share of this economic rent ranges from $3 trillion to $9 trillion,” the research noted.

Wood Mackenzie vice president, Fraser McKay, stated that the sector has found itself having to supply oil and gas to a world in which future demand – and price – are highly uncertain.

According to her, the range of possible outcomes was dizzying but the world would need oil and gas supply for decades to come, and the scale of the industry will remain enormous.

As the environment for oil gas gets tougher, WoodMac said delivery and discipline would remain paramount in all aspects of the upstream value chains as the macro environment for oil and gas gets tougher.

“Performance against budgets and timelines has improved dramatically since the last downturn. The industry needs to remain relentless in its push to improve efficiency, drive down costs and deliver projects flawlessly. Oil and gas companies need to send a strong signal to stakeholders that they can be reliable stewards of capital,” the report noted.

Wood Mackenzie Research Director, Angus Rodger, added that “Only exceptional and low-cost projects will work in all demand scenarios.
He predicted that the cost of capital and the cost of doing business in oil and gas will increase.

“Oil and gas companies must improve their environment, social and governance (ESG) credentials.

“The bond of trust with stakeholders must improve. For the biggest players, new energies will play an increasing role, but this is not an option for many industry participants. They will need to cut Scope one and two emissions to reduce their exposure to increasingly expensive debt,” the report said.

The report further noted that investment would shift to gas, a development that would signal the oil’s long supremacy.

“The industry will have to figure out the conundrum of weaker economics if the giant gas projects the world needs are to happen. The returns on developing a barrel of oil are currently higher, with oil-production and cash-flow profiles delivering more value upfront. Gas prices are lower than oil prices on an energy-equivalent basis; that relationship will have to invert as it does in our AET-2 scenario to make this happen,” said Rodger.