After a full year of recovery following the 2020 crisis, the oil and gas industry is generating record cash flows these days.
Increasing uncertainty about the energy transition could prevent oil and gas companies from spending more, and strategic options for investing in clean energy solutions, in response to pressures from decarbonization, and reassessing investment opportunities, may be the main topics this year for all oil and gas companies. Wood Mackenzie says companies will allocate more capital to sequestering carbon in production processes.
In a report published by the American “oil price” website, writer Tsvetana Paraskova said that the global oil and gas production sector is expected to recover in 2022, and the total investment in exploration and production will exceed $400 billion for the first time in 3 years, according to a report by Wood Company. McKinsey’s global production forecast for this new year.
But despite the record cash flows, and the price of a barrel of oil exceeding $70, reinvestment rates will remain at near-record low levels during 2022, and companies are expected to maintain rationalization of spending and pay more attention to climate pressures and shareholders for carbon sequestration operations.
dominance of capitalist discipline
After the recovery that followed the 2020 crisis, the oil and gas industry is generating record or near-record cash flows these days.
Cash flows are allocated for higher payments to shareholders in the form of share repurchases and increased profits instead of large increases in drilling activities, and it is not new for major oil companies to use high cash flows to buy back shares and increase profits, and the previous year it was found that the oil industry US shale has focused on investor returns and abandoned its ongoing drilling and investing all cash flow (and even borrowing to invest) in new wells.
The writer stated that American producers who focus on shale oil, as well as major international oil companies and national oil companies, are still cautious in production spending despite the fact that oil prices have remained above $70 a barrel for the past six months.
According to Wood Mackenzie, capital discipline will remain a major issue in the oil and gas production sector during 2022, and the total global production investment is scheduled to increase by 9% to exceed $400 billion, and this will be the first time that total spending on production exceeds 400 billion annually for the first time. Since 2019
According to this company, too, despite rising investment expectations for next year, the global reinvestment rate (calculated by dividing investment capital by operating cash flow prior to the distribution of profits after tax) will remain close to record lows.
And none of the major oil companies pride themselves on investing these days, unlike the years before the 2015 price crash, when companies were spending as if oil would forever be at $100 a barrel.
The writer explained that the capital expenditures for 2022 are set to be higher for the five major companies: ExxonMobil, Chevron, Shell, BP, and Total Energy compared to 2021 and 2020, but Far from the levels recorded in 2014.
The top 5 international companies are also raising capital spending on low-carbon energy, including major US companies that differ from their European competitors in terms of strategy, as they have shown an unwillingness to invest in any solar and wind generation.
Instead, Exxon and Chevron plan to focus on renewable fuels and CCS technologies, either to reduce their carbon footprint or to jointly develop regional industrial CCS centers.
According to Fraser Mackay, vice president of Wood Mackenzie and researcher in production operations, oil and gas cash flows will be at near-record levels if the price of Brent crude remains at $70 a barrel. At $80, cash flow would rise to $1 trillion.
The company asserts that despite record cash flows, the oil and gas sector faces “peak uncertainty” over the coming year, amid pressures from the climate and shareholders. The industry is facing mounting pressure to cut emissions on the one hand as it struggles to show investors it is part of the solution, not the problem, in the global campaign to reduce carbon emissions.
In a new report on the 2022 outlook, researcher Tom Elacott, vice president of Wood Mackenzie, says that strategic choices in investing in clean energy solutions, in response to pressures around decarbonization, and reassessing investment opportunities, will be the main topics next year for all oil and gas companies, starting with Major commercial corporations and national oil companies all the way to independent oil and gas producers in the United States.
The oil industry is set to recover, but the total investment of $400 billion is still far from the $540 billion that the industry needs in order to avoid supply shortages for the next few years, and the pressure to decarbonize will contribute to shaping the industry’s future investment options, whether in 2022 or later. at the long term.