With many ups and downs and uncertainties affecting different levels of society, the Oil and Gas industry has seen itself in varying scenarios, making it the one of the most reported about industries in 2022.
The Oil and Natural Gas industry is not new to surprise disruptions and price volatility, but the situation is unique today. With the war in Ukraine and the subsequent boycott of Russian gas, a sort of ‘trilemma’ was created: energy security, supply diversification, and low-carbon transition, according to Deloitte. Finally, there is an increase in countries expressing interest in renewable energy. In the end, 2022 has shown us that we are amid an energy transition that continues to evolve.
Today, we delve into the trends we can expect within the Oil and Gas industry in 2023, according to the latest Oil and Gas Outlook report from Deloitte.
1. The upstream industry’s capital discipline is likely to be a continuing trend, rather than growth.
With the rising oil prices, companies are now facing healthy balance sheets creating opportunities for the industry. However, at the same time, the dilemma for upstream companies is if they will continue to prioritize shareholder payouts or increase their hydrocarbon investment rate. This dilemma is further pushed by the urgency to please the demand for affordable energy in the world.
The truth is that several oil majors and large E&Ps have already revised their 2022 shareholder payout target significantly higher. In addition, with the world economic uncertainty and volatility of energy prices, the industry’s capital discipline is the new must for operating at a steady and healthy way. This discipline is translated in optimized capex and production strategies.
2. Clean energy is rapidly changing the anatomy of Oil and Gas companies.
The low-carbon transition is gaining momentum. Oil and gas companies are going to face increasing pressure to adapt their business models, diversify their portfolios, and anticipate changes in demand for their products as the alternatives become more attractive in the long run – especially if new policies put a price on carbon emissions. Said policies push is already looking big in Europe (Over $750 billion cumulatively added by new energy policies in Europe) and the US (Infrastructure Investment and Jobs Act, and Inflation Reduction Act). It is not expected to be long before other regions put such policies in place.
3. Natural gas is back, stronger than ever; and now, as a member of the energy transition mix.
With Europe and the US, implementing policies incentivizing natural gas investment while ensuring emissions reduction, decision making has shifted from phasing out natural gas to reducing emissions from this energy source while cleaner alternatives are developed and deployed.
Now, natural gas is placed as a sustainable alternative by European policymakers and the demand for low-carbon natural gas has increased. In the other hand, the Inflation Reduction Act which sought to relieve the American economy, offers grants to O&G companies to monitor and reduce methane.
Moreover, natural gas high-producing countries are increasing their production and storage capacity is expected to increase more than 20% throughout 2023. With that, growth is expected for certified natural gas and lower-carbon LNG, and the industry can enjoy an increased momentum in 2023.
4. Refiners are rethinking their investments in the face of uncertainty.
With capacity for fuel storage greatly reducing and refining capacity in decline in the last years, oil prices are reaching a novel high towards the start of 2023 after a troubling first half of 2022. However, this is added to the brief but impactful decrease in demand.
With refiners focusing on shareholder payouts, especially in the US, investments in refinery optimization projects are on the rise. Refiners are as well repurposing infrastructure for clean energy options as a response to the high prices of renewable identification number compliance credits. According to Deloitte, nearly 40% of our surveyed O&G executives view refinery modification for low-emission fuels, such as renewable diesel and hydrogen, as crucial to maintaining growth over the next few years.
5. Low-carbon assets: deal-making shows bigger-than-expected trends in the market.
Regardless of the high oil prices averaging more than $100/bbl, mergers and acquisitions coming from Oil and Gas companies fell by about 27% year after year. This trend was fed by the uncertainty surrounding industry and world economy, as a result, buying strategies and decision making faced unprecedented changes. However, because of the industry’s capital discipline we talked about in trend #1, this behavior is very likely to persist and mergers and acquisitions will be kept in check in 2023.
Nonetheless, those mergers and acquisitions taking place in 2023 are expected to follow trends too, such as, an increased number of investments in new clean energy technologies, the reduction of operation emissions through acquisition of assets strong in ESG and vertical integration to alleviate uncertainties in their supply chains.
In all, amid the ongoing integration of numerous acquisitions and the recent downturn in global markets, O&G industry executives and shareholders alike are looking to 2023 as the next opportunity for growth. However, it is a must to put priorities straight in accounts to the demand from governments, population and the planet. This is positive news for an industry already seeing a rapid increase in revenue from the largest mergers in history.
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