Norwegian research consultancy Rystad Energy does not expect upstream exploration and production spending to rebound to pre-coronavirus levels, despite the recent oil-price recovery and robust cash-flow generation.

At a Rystad event on Thursday, senior analyst Olga Savenkova said she expects the next investment cycle by upstream oil and gas players to be focused on portfolio transformation and decarbonisation as the companies look to meet their emissions reduction targets.

Savenkova noted that many companies had already set goals to achieve net-zero emissions by 2050, while a number had already revised that goal to as early 2030.

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“We see that more and more companies from the oil and gas sector are embarking on investments in clean energy and across the whole electricity value chain, in line with their diversification and decarbonisation commitments,” she said.

“European majors, along with such companies as Equinor and Repsol, are gradually expanding into low-carbon business units, underpinned by a significant investment commitment. For example, Shell has pledged to allocate more than 25% of its total budget to low-carbon business units by 2025.”

Savenkova highlighted that the significant investment in diversifying their portfolios could see a number of oil and gas companies become "top players" in the fast-growing renewables markets, seeing them make the transition from oil majors to energy majors.

Divestments amid diversification

As companies look to diversify their portfolios, the head of Rystad India’s research, Parul Chopra, showed a number of majors had accelerated their divestment process, with a total of about $45 billion-worth of assets available in the market for potential divestment.

Chopra claimed more than half of those assets have come into the market since the beginning of this year, which he stated showed a “marked change” among majors, which appear to be prioritising a streamlining of their upstream portfolios.

This streamlining primarily includes selling mature assets, moving away from non-core assets, divesting assets with higher emissions and coordinating their portfolio to certain geographies.

“The divestment process by many majors, including Exxon[Mobil], BP, Shell and Chevron, has been ongoing for two years, and they have sold more than $25 billion-worth of upstream assets since 2019, in addition to other midstream and downstream assets,” Chopra said.

“Going forward as well, Exxon has a large portfolio, which is still on the market, and BP plans to sell a total of $25 billion-worth of assets by 2025. And Shell, on similar lines also, is planning to sell $4 billion-worth of assets each year to reduce its high debt.”

Resilient portfolios

Chopra noted that oil gas players were also looking to make their operations more sustainable at lower oil prices, following last year's oil price collapse amid the Covid-19 pandemic and the Saudi Arabia and Russia price war.

In order to protect cash flows, Chopra claimed many of the majors were now working to make their upstream businesses resilient at an oil price of $40 per barrel.

“In addition, we also see more selective screening by companies for new project sanctions, with a breakeven of less than $35 to $40 per barrel by maintaining a high … IRR [internal rate of return] of 20% to 30%,” Chopra added.

“Lower emissions is also an important consideration for new project sanctions with new measures being put in place to reduce emissions by 30% to 50%, as compared to similar projects, per year.”

Revenue risks

Rystad's research places cost risks going forward as a result of carbon taxes within the range of 5% to 10% for all of the oil majors, however, its estimates of revenue risk varied greatly among companies.

Chopra noted that ExxonMobil had the highest revenue risk, compared with its peers, of about 35%, which he added was primarily due to more capital intensive projects in the US Permian basin and Guyana.

“At the same time, their upstream spending in the next five years drops by only 20% as compared to 30% to 40% drop for other majors,” he said.

“This leaves more cash flow in the hands of its other peers as compared to Exxon from the current operations as well as the new investment they have already made over the past few years.”

Lagging behind

While the US giants ExxonMobil and Chevron are lagging behind their European peers when it comes to diversification, it could also be an advantage for them, according to Chopra.

“Companies like ExxonMobil and Chevron can potentially benefit from their peers and pick out from the best practices before charting out their own path for diversification,” he explained, while adding national oil companies were also taking a “cautious approach” towards net zero emissions.

While Chinese national oil companies have announced plans to target net-zero emissions from their upstream operations, Chopra said there was little detail on how they plan to achieve that and how much capital they intend to allocate in the future to address their emissions.

Meanwhile, he added national oil companies in other countries had also yet to come up with a clear strategy on how they intend to address their emissions, but noted that in many cases they had to balance addressing increasing domestic energy requirements and climate change concerns.

“As more and more pressure builds up in countries across the globe for achieving net zero, we're likely to see more companies come up with aggressive targets for achieving their own net-zero goals in addition to decarbonising their upstream operations,” Chopra said.