Global energy consultancy group Wood Mackenzie released a new report that shows the energy transition represents US$14 trillion worth of uncertainty for upstream oil and gas (O&G). According to the firm’s analysts, O&G is currently a hazardous business.
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A trillion-dollar uncertainty for O&G companies – Wood Mackenzie
In recent years, upstream O&G companies thought an indefinite rising demand could temper risks. However, as the energy transition advances in every aspect of the industry, that belief will need to be reassessed to face current challenges accurately.
According to Wood Mackenzie’s report, oil demand may continue to grow for another decade or more. However, considering that the world may start acting decisively to limit global warming to 2°C by 2050, oil demand and prices would fall rapidly later this decade. In contrast, gas demand and cost would be more resilient.
As scenarios are still not accurate enough, there is a considerable amount of upstream value on the table. Thus, Wood Mackenzie used its global Lens asset-by-asset modeling to estimate the range of pre-tax future valuations for upstream. Accordingly, the firm found that this range is a staggering US$14 trillion – from US$9 trillion to US$23 trillion.
In this sense, Wood Mackenzie’s vice president Fraser McKay said: “The industry now finds itself having to supply oil and gas to a world in which future demand – and price – are highly uncertain. Thus, the range of possible outcomes is dizzying. However, the world will still need oil and gas supply for decades to come, and the scale of the industry will remain enormous.”
All-demand scenarios – only with ESG investments
In conclusion, Wood Mackenzie’s report stresses that delivery and discipline will be paramount for upstream companies in the future. Therefore, performance against budgets and timelines expertise can help them overcome the forecasted dramatic downturns.
Moreover, firms that are experienced in improving efficiency while driving costs down and delivering projects flawlessly will be better-positioned in this sense.
Accordingly, Wood Mackenzie research director Angus Rodger said: “Only exceptional, low-cost projects will work in all demand scenarios. Inevitably, the cost of capital and the cost of doing business in oil and gas will increase.”
The consultancy firm also pointed out that O&G companies must improve their environmental, social, and governance (ESG) credentials; particularly, in order to remain competitive. Thus, the ESG bond of trust with stakeholders must improve. One way to enhance their investment confidence through lowering or cutting their Scope 1 and 2 emissions.
Finally, the investment will shift to gas, ending oil’s long supremacy, says the report. Accordingly, McKay said that “the industry will have to figure out the conundrum of weaker economics. Mainly, if the giant gas projects the world needs are to happen.”