Oil and gas players must ensure they have capital flexibility built into their portfolios if they are to ride the wave of supply and demand uncertainty amid an age of accelerate energy transition.
“One of the reasons why people invest in the US unconventionals is the speed at which you can turn that off and turn it back on again. So, that gives them some capital flexibility into the portfolio,” Jon Clark, partner at UK-based services giant EY, said on the opening day of the Africa Oil Week conference in Cape Town on Tuesday.
Clark said that, by contrast, many upstream developments in Africa tend to have longer lead times from discovery to first production.
“Maybe they (African projects) have better scale, but possibly less certainty about demand. So, it is all about balance in the upstream (portfolio),” he said.
With oil majors increasingly investing in alternative energy sources – solar, wind, floating wind, carbon capture, utilisation and storage, to name a few – the exploration and production sector still offers a compelling case for large-scale investment, he argued.
“The upstream (sector) is kind of a ‘no-regret’ investment today because it is going to make returns irrespective (of future energy scenarios), whereas some of the other investment types are much more of a strategic bet,” Clark said.
“Big companies, particularly those with heavily invested portfolios today, are not really in the business of making strategic bets – they are in the business of optionality.”
Speaking alongside Clark, Chris Leeds, executive director of commodity origination at Standard Chartered Bank, was similarly positive on industry prospects, in particular on conventional oil output growth.
“We think the forthcoming Opec meetings will be relatively bullish – the meeting in December, we expect them to not only roll over the current production cuts but potentially increase them,” he said.
However, he pointed to a likely slowdown in output growth in the next two years from US tight oil.
“We think that the US oil growth is going to reduce – it is not going to fall in terms of outright production, but the growth is going to reduce next year – and could reduce even further into 2021.”