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Home Fossil Energy WoodMac: Are shifts in energy policy on the cards for oil & gas ecosystem and which forces will be at play in 2024?
The shifting sands of time are bringing winds of change to the global energy landscape in a bid to make it more sustainable, so that, the climate change woes can be tackled before time runs out. This has spurred decarbonization over the years, imbuing it with greater vigor. However, these efforts are not yet on a grand enough scale to usher in a clean energy future required for net zero aspirations. While offering its predictions for 2024, Wood Mackenzie, an energy intelligence group, has outlined several key themes to watch in global and corporate upstream sectors.
Illustration; Source: Wood Mackenzie
The concerns regarding energy security serve as both an impetus to accelerate green energy deployment and also as an impediment since the same argument is used to extend the lifetime of fossil fuels. Within its ‘What to Look for in 2024’ upstream series, Wood Mackenzie claims that the key themes to watch out for encompass continued consolidation in the oil and gas industry, increased activity from National Oil Companies (NOCs), reversing decarbonization gains, shifts in strategic playbooks, and an upstream investment plateau.
Fraser McKay, Wood Mackenzie’s Head of Upstream Analysis, outlined: “Geopolitical tensions, a record year for elections and economic uncertainty will provide the backdrop to 2024. Energy policy will continue to be a frontline issue, exposing wide divides in countries’ energy transition strategies. Most upstream operators have little influence on these external forces. But they will seek to mitigate their impact by focusing on efficiency, sustainability and concentration risk. Upstream operators will remain focused on resilience, sustainability and efficiency.”
Annual emissions; Source: Wood Mackenzie Emissions Benchmarking Tool
According to Wood Mackenzie, another banner year for mergers and acquisitions (M&A) is in the offing, which will focus on scale, performance improvement, and diversification, since sector consolidation will continue to be a key trend in 2024. While there is no unifying theme across all these potential big deals, the energy intelligence group highlights that the industry is maturing, and size matters, thus, as higher market valuation multiples, easier access to finance for larger companies, lower costs, and better execution are some of the incentives.
“For deals to work, they need to demonstrate improved operational, financial and, for some deals, emissions performance. Some buyers may follow ExxonMobil’s playbook with Pioneer and look to bring unique data, technology, and processes to a basin. Others will be marriages of convenience. But not all deals will work, and it will remain hard for smaller international independents to prove tangible synergies between disparate portfolios than their larger more diversified brethren,” added McKay.
During 2024, NOCs – a peer group that produces half of the world’s oil and gas – are expected to step up activity, as COP 28 has placed greater emphasis on sustainability plans. Wood Mackenzie underlines that the effect on some NOCs will be demonstrated through bigger ambitions in low carbon and emissions abatement, particularly for those that signed up to the Oil and Gas Decarbonisation Charter (OGDC). Despite this, the company is adamant that upstream growth will be on the agenda for most NOCs in 2024.
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Neivan Boroujerdi, Director of Corporate Research and NOC Lead at Wood Mackenzie, commented: “Most NOCs are still in the business of growing upstream capacity. It is a strategy that has been emboldened by the energy security concerns of the last 24 months.”
Based on Wood Mackenzie’s analysis, the Middle East heavyweights will lead much of the growth, with ADNOC, Aramco, and KPC ramping up spending to meet domestic capacity targets. Aside from these, the Chinese NOCs could also step up their investment ante, albeit from a low base, thus, upstream equity, LNG offtake, and strategic partnerships in the Middle East, Africa, and Latin America are possibilities. Additionally, mergers and acquisitions are also forecast to get a boost.
“The NOCs have reset financial strength and will target M&As to plug strategic gaps in gas, LNG, short-cycle oil and international exploration. With this amount of growth and activity, there is a risk that transition strategies could slow, but most will continue to accelerate international transition themes,” noted Boroujerdi.
However, Wood Mackenzie believes that some decarbonization gains will reverse in 2024, as production is set to rise by 3% without decarbonization keeping up. As a result, upstream scope 1 and 2 emissions are likely to increase by 12 million tons of CO2e year-on-year.
Posted: 2 months ago
Adam Pollard, Wood Mackenzie’s Principal Analyst of Upstream Emissions Research, emphasized: “Emissions intensity will keep falling through flaring reductions, more electrification, CCUS and greenfield projects, which will all help to reduce emissions per barrel, by at least 2%. But the biggest driver is rising volumes of advantaged low-intensity oil and gas from the Middle East and U.S.
“Incremental intensity improvements are good, but more work is required to reduce absolute emissions. Tougher new regulations are on the way, many of which will face political delays. But oil and gas remain low hanging fruit for some governments’ decarbonisation efforts. The sector will get more ambitious with new initiatives announced and major projects sanctioned, but it will take several years to see the impact on global emissions reductions.”
Furthermore, Wood Mackenzie predicts shifts in the strategic playbook for oil and gas players, with sustainability concerns, stakeholder pressures, and low valuation multiples driving companies to adjust their strategic roadmaps.
Tom Ellacott, Senior Vice President of Corporate Research for Wood Mackenzie, stated: “Investors want a reliable, growing base dividend as a reward for rising energy transition risks. But companies will have to grow cash flow if they want to grow dividends, re-balancing capital allocation towards investment to maintain sustainable cash-generating businesses.”
Upstream investment by region; Source: Wood Mackenzie Lens Upstream
While upstream investment is predicted to plateau, Wood Mackenzie offers more insight on further trends in regional reports for Asia Pacific, Canada, Caspian, Continental Europe, Latin America, Middle East and North Africa, North Sea, Russian Federation, Sub Saharan Africa, and US Lower 48. The company claims that global spending in 2024 will reach just over $500 billion in 2024, up 2% from 2023 after a rise of 18% over the last three years. This incremental rise is said to belie important underlying shifts.
In line with this, Wood Mackenzie underscores that upstream operators will remain focused on resilience, sustainability, and efficiency, with most anticipated to exercise caution in the face of inflation, bottlenecks, and price uncertainty, as confidence is undermined by widening OPEC+ production cuts.
Ian Thom, Wood Mackenzie’s Director of Upstream Research, said: “Investment will rise in the Middle East, but fall in the US Lower 48. The new project pipeline remains healthy, with 45 projects vying to take final investment decision (FID) – a potential investment commitment of US$170 billion to develop 25.5 billion boe.
“Around 30 will proceed in 2024. Many of these will be deepwater discoveries, with the 10 biggest deepwater oil projects requiring US$52 billion of investment for recoverable resources of 5 billion barrels of oil.”
Moreover, global economic weakness or a loss of unity in OPEC+ are perceived to be key investment wildcards. Since a steep price downturn could precipitate the third investment collapse in a decade, Thom claims that “operators can and will slash budgets quickly if they need to.”
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