The oil and gas industry is not new to supply disruptions and price volatility, but this time it seems different due to reduced capital expenditure mandated by investors leading to underinvestment in oil and gas assets.
Moreover, energy transition, security, and diversification are imbalanced as the recent geopolitical and economic events exacerbated the underinvestment problem. However, the ongoing price strength and capital discipline can help the industry navigate 2023 uncertainties as most companies aim to balance their priorities to shareholders, invest in the best hydrocarbon wells, and accelerate the low-carbon businesses.
To understand the outlook and perspectives of organisations across the oil and gas industry in 2023, Deloitte surveyed executives globally across five specific industry segments: exploration and production, oilfield services, midstream, petroleum refining, and marketing, and integrated oil and gas and new energy companies. Based on the survey results, we have identified 5 key trends to watch for in 2023:
The upstream industry’s capital discipline is likely to be a continuing trend
The global upstream industry is projected to generate its highest-ever free cash flows of $1.4 trillion in 2022, yet 40% of survey respondents favor capital discipline to strengthen their balance sheets through debt repayments and distributing cash back to shareholders as their top cash deployment strategies.
New policies are expected to accelerate the clean energy transition and investment into low-carbon businesses: About 50% of survey respondents believe higher demand for low-carbon energies and scalable, economical low-carbon use cases are necessary to accelerate the clean energy transition
a. Policy push: Over $750 billion cumulatively added by new energy policies in Europe (Fit for 55 climate package, and RePowerEU) and the US (Infrastructure Investment and Jobs Act, and Inflation Reduction Act)
b. Clean energy investments: Supportive policies along with national clean energy strategies are boosting the share of clean energy spending as part of oil and gas CAPEX spending, which increased from below 2% to 5% between 2020 and 2022
In addition to favorable new policies, the momentum of the clean energy transition in 2023 will be impacted by multiple factors:
- The relative price of fuel: Sustained high natural gas prices could make green hydrogen and biomethane more attractive to future investments relative to blue hydrogen
- Challenges to new infrastructure: Speed and ease of permitting for new clean energy projects including LNG terminals, hydrogen hubs, and carbon capture industrial clusters
- Food versus fuel concerns: Availability of agricultural feedstock for renewable fuels as supply chain issues and high commodity costs amplified by geopolitical tensions are driving concerns over food inflation
Natural gas is coming out of the shadows
Certified natural gas and carbon-neutral LNG to gain momentum in 2023: 45% of survey respondents noted that an unfavorable regulatory environment and significant investments have held back investment in natural gas production.
The energy policy narrative has changed from phasing out natural gas to reducing emissions from natural gas while cleaner alternatives are developed and deployed. With increasing policy support and rising demand, some possible signs of rising investment in the natural gas market in 2022 include:
- Highest ever LNG vessels ordered globally during the first seven months
- Long-term 10-year LNG contracts are trading at around 75% above 2021’s rate due to the significant increase in demand for secured supplies
Moreover, rising demand for certified “clean” natural gas and carbon-neutral LNG is shifting the investment focus towards GHG intensity reduction of natural gas and related infrastructure. - 100 times increase in the volume of certified low-carbon natural gas, since last year
- At least 3 proposed liquefaction projects are planning to build CCS facilities to produce lower-carbon LNG cargoes
Consequently, the development of certified natural gas and carbon-neutral LNG is expected to gain significant momentum in 2023.
Refiners are rethinking their investment strategy in the face of weakening demand, changing end-use patterns, and rising oil price volatility
40% of survey respondents view refinery modification for low-emission fuels (renewable diesel and hydrogen) as the key to maintaining growth.
Facing shifting energy demand and oil price volatility, refiners are increasingly rethinking their investment strategies to include:
- Altering product yields toward high-margin petroleum and chemical products,
- Repurposing existing infrastructure for clean energy options (renewable diesel)
Low-carbon assets
O&G M&A deal value slowed down 27% YoY in the first nine months of 2022.
But interest in low-carbon assets has risen, around a quarter of survey respondents view stable and high energy prices as necessary to sustain the M&A momentum in the next year, but capital discipline and economic uncertainty could likely restrain O&G M&A activity.
Macroeconomic uncertainty along with price volatility has raised buyer caution and altered buying strategies during the first nine months of 2022 as seen below across the industry segments:
- Upstream: Accounted for 60% of overall deal value as PE companies cashed out of shales, oil majors streamlined their portfolio while mid-size operators added to production acreage.
- Midstream: Accounted for a quarter of deal value as buyers picked up oil tankers and LNG carriers to alleviate infrastructure constraints.
- Oilfield services: Deal value remained below $10 billion as upstream clients restrained spending but drilling rigs were most favored in anticipation of rising drilling activity.
- Downstream: 57% year-on-year decline in deal value due to risk of demand destruction as investors increasingly favor the distribution and retailing assets over refining assets.
Supply-side disruptions drove M&A activity during the first nine months of 2022, but the M&A activity next year would be expected to balance both energy security and energy transition needs.
As we move toward 2023, the oil and gas industry is proving resilient amid uncertainty. Companies are expected to provide short-term energy security and maintain their energy transition progress while navigating trade restrictions and macroeconomic uncertainty in the year ahead.
