Producers of crude oil and natural gas will invest more in their business next year amid a stumbling transition away from hydrocarbons. The development may come as a surprise in the context of ever more transition commitments on the part of governments, but it simply proves one thing: while there is demand, there will be supply.
Investments in oil and gas among the 23 biggest producers in the world are set to climb by over 60% by next year, compared to the trough of 2020 and the pandemic lockdowns. The forecast comes from Wood Mackenzie, which said the annual investment increase will be 5%, which is a slowdown on previous investment boosts.
That said, large oil companies are reinvesting as much as 50% of their income on average, and individual companies are returning between 35% and 60% to their shareholders in the form of dividends or share buybacks. Moreover, the bulk of investments, especially among companies that Wood Mac calls emerging majors, is going into the upstream segment. For emerging majors, as much as 90% of the total investment goes into that segment, meaning more production and exploration.
Against the background of commitment after commitment and pledge after pledge for the attempted phaseout of oil and gas, this state of affairs may seem unnatural. However, as Wood Mackenzie analysts themselves point out, it is anything but that.
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“The main driver has been the dawning realisation that the transition is unfolding more slowly than expected, implying that oil and gas demand may be stronger for longer,” the research firm said. “EuroMajors are looking to plug production and cash flow gaps by investing more in upstream. US Majors and some Emerging Majors have already used M&A to expand and extend upstream exposure. We expect more sector consolidation to come in 2025.”
Consolidation may be the new way of expanding asset bases because direct spending on exploration specifically remains lower than it was a decade ago, and that spells potential trouble for reserve replacement down the line as the transition continues to falter, strengthening the long-term outlook for hydrocarbons, including coal. China’s coal imports just hit an all-time high in September and China is the country with the most wind and solar capacity, plus the biggest EV market in the world.
Industry observers got a taste of that further refocusing on core business among oil and gas majors earlier this month when BP said it would drop a target for oil and gas production cuts by 2030. The target, originally announced back in 2020, set BP’s 2030 total output 40% lower but was later revised to 25%. Now, BP is ditching that altogether as it seeks to boost oil and gas production in key regions such as the Gulf of Mexico and the Middle East.
Even with this new focus on core business, oil and gas companies are still pouring cash into the energy transition, albeit some of them at a considerably lower rate than before. Five companies, according to Wood Mac, are spending some $5 billion a year on low-carbon projects each. These are Aramco, Adnoc, BP, Shell, and Total.
Perhaps more interestingly, national oil companies tend to spend more on transition projects than private companies. That fact has its explanation in ownership: the owners of Aramco and Adnoc are the government of Saudi Arabia and the UAE, and the local state energy company makes the most sense as the champion of alternative energies for the future. Yet as they invest in these alternative energies that have yet to prove they can rival traditional sources, oil and gas companies seem to have given up their ambitions of turning away from oil and gas altogether.
By Irina Slav for Oilprice.com
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