Upstream Companies Shift Focus from ‘Survive’ to ‘Thrive’

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.Slash $910bn global capital expenditure
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A new report by the global natural resources consultancy group, Wood Mackenzie has revealed that oil and gas companies are set to enter 2018 in their best shape since oil prices collapsed.

Wood Mackenzie’s separate study, Global Costs Survey, has also shown that operators have cut investment, deferred projects and implemented tough cost discipline, slashing $910 billion from global capital expenditure forecasts for 2015-2020
In its 2018 Upstream Outlook released at the weekend, Wood Mackenzie believes many companies will now focus on demonstrating they can thrive in a low price environment.

Wood Mackenzie’s Senior Vice President, Tom Ellacott, said the companies would deliver profitable growth in 2018.
“Now that the belt-tightening is done, companies are looking to deliver profitable growth and build for the future. We also expect to see signs that the investment cycle is starting to turn and the sector has reset itself to operate at lower commodity prices,” Ellacot said.

On his part, the Upstream Research Director, Angus Rodger added that the downturn meant that close to $1 trillion was taken out of company spending from 2015 to 2020.
“But we believe the big cuts are over. Wood Mackenzie expects global capital expenditure to grow slightly in 2018 to a total of $400 billion,” Rodger added.

In our outlook, the report forecasts a third successive increase in project sanctions from the 2015 low, indicating that recovery is under way.
Wood Mackenzie said it expected the number of major project sanctions to increase from just over 20 in 2017 to 25 in 2018, as operators take advantage of what may represent their best chance to lock in rock-bottom costs.

“The rise in project sanctions will be a clear sign that new projects can work in a low-price environment. Oil and gas companies will continue to adapt portfolios to perform at high and low prices and also to provide a platform for longer-term energy transition,” Ellacott explained.

“Optimising the core business, controlling costs and employing digital technology like predictive analytics will all play a part. We expect companies to continue to develop high-value, low-cost oil. Building exposure to gas will also be a core strategic objective for most larger companies as they transition towards low-carbon portfolios,” Ellacott added.

According to the report, companies will need to find the right formula to win back investors after a year of poor stock market performance in 2017. The report added that the companies would need to demonstrate that free cash flow can grow in a low-price environment and fund higher shareholder distributions will be a core focus.

On its part, the Global Costs Survey also conducted by Wood Mackenzie revealed that operators are keeping close a close eye on cost inflation in 2018
According to the survey, the impact of the 2014 oil price collapse is still being felt across the upstream sector.
The reported added that the operators have cut investment, deferred projects and implemented tough cost discipline, slashing $910 billion from global capital expenditure forecasts for 2015-2020.

While many operators believe the cuts will stick, the survey indicates that the pictured is more nuanced.
The survey revealed that in Asia-Pacific, South America and parts of Sub-Saharan Africa, unit operating expenditure (Opex) is already starting to increase due to a lower cost base, local content requirements and the growing need for enhanced oil recovery in mature assets.
Globally, Wood Mackenzie expects operating costs to start increasing from 2018, but still be five – 10 per cent below 2014 levels in 2020.