Sector analysis - What does the future hold for oil and gas? Answer hazy, ask again later

Sector analysis - What does the future hold for oil and gas? Answer hazy, ask again later

06 Sep 2021

The work-related drought for the oil and gas sector, which formed the main talking point of 2020 has officially broken, with a healthy pipeline of work appearing in earnest. The evidence can be seen from both the number and type of contracts, plus the number and amount of investment related to upstream projects (see figure). When compared to 2020, we are seeing a surge in late stage contracts being awarded; around 76% year-on-year so far and growing. The top five countries we are seeing major contracts being awarded in are: United Kingdom, Brazil, Norway, Qatar and Malaysia, with the potential for Saudi Arabia and the UAE to edge into the top five if their extensive tendering and bidding exercises are realised at the back end of the year.

FIDs for the upstream sector this year are already even 450 with FIDs from 2020, with the 400 potential for at least 40 more before the end of the year. We 350 have also seen a rise in both 300 the number of billion-dollar 250 projects (mega-projects) 200 being sanctioned and the 150 total investment from FIDs 100 this year compared to last year. In 2020 we saw at least 50 five upstream mega-projects sanctioned; for a grand total of around US$25bn. This year we have already seen at least seven; totalling over US$23bn so far, and with the potential for at least another 20 before the end of the year. This is a clear indicator that projects which stalled in 2020 are making a come-back.

With the rise in the oil price, the balance sheet for the operators and contractors is starting to move back into the black. The thermostat for the industry, the oilfield services contractors – Baker Hughes, Schlumberger and Halliburton – have all said that not only are they predicting growth in demand for oil, gas and LNG into 2022, but also that they are expecting an increase in orders in the second half of the year.

While the short term for the upstream sector looks assured, at least up until 2023, questions still remain such as: how long will the window for oil and gas last? How will the sector continue attracting new talent given its climate-unfriendly reputation? How quickly should traditional oil and gas operators and contractors transition into cleaner energy sectors such as renewables?

The answers, as always, are unclear and often contradictory. As of July 2021, all signs point to oil and gas continuing to be utilised past 2050, despite ever-increasing climate change pledges by nations, as the feasibility of those goals is called into question. Governments and regulators are struggling to balance the public’s appetite for a faster switch to renewables with the difficulties of phasing out hydrocarbons in a manner that doesn’t leave them vulnerable to importing from potentially higher carbon economies with lower regulatory and environmental standards. Recently we’ve seen the extraordinary case of both the UK government and the Oil & Gas Authority being dragged through the courts by environmental groups and campaigners in an attempt to stop the development of the Cambo field, one of the few greenfield developments left in the UK North Sea, which initially looked set to take FID by the end of this year.

The operators themselves are also under fire – both in physical court and in the court of public opinion; with Shell currently attempting to appeal the ruling made in the Netherlands in May 2021 that it must slash its emissions by 45% by 2030 compared to 2019 levels. While this may look like a win for the energy transition, in reality Shell may be forced to offload oil and gas assets to meet these targets; which will inevitably end up in the hands of other players, most likely either national oil companies or private equity-backed small to medium-sized players; neither of whom are as beholden to legal challenges or shareholders as compared to the majors.

However, it is hard not to agree that Shell may have a point in appealing the ruling. Penalising one company, while setting a precedent, will not stop climate change. Not while other nations, while just starting their net zero journeys, continue to build and rely on coal-fired power stations, deforest large swathes of rainforest and swamp which are natural carbon sinks, and continue to flare natural gas unabated.

Diveena Danabalan

Senior Energy Analyst & Strategic Relationship Manager – Oil & Gas

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