What the Oil Industry Should Look Out for in 2021

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A year ago, PIW flagged 10 key issues to watch for 2020, including an acceleration of the energy transition shake-up, challenges for US shale and the US presidential election as a pivotal event (PIW Jan.10'20). We hit the mark on all 10 of our predictions. Although the "black swan" Covid-19 pandemic influenced the industry more than anything else last year, this hit rate illustrated its primary impact of accelerating existing trends. Here are 10 new themes we think will define the industry in 2021. • Opec-plus will have a fractious year but will hold together. The shock of the pandemic and Saudi-Russian price war cemented discipline behind historic production cuts in 2020, but “compliance fatigue” will deepen in 2021. Higher prices, recovering demand, and Covid-19 vaccines will undermine discipline, while rising supply from Iran and Libya will add new challenges. Background tensions will remain with Russia and the United Arab Emirates over long-term production restraint. All this adds up to messier Opec-plus dynamics and more flexible market management. Saudi Arabia will deploy a combination of compromises and the implicit threat of a renewed price war. Some rocky moments are likely. But the overall accord is likely to survive intact -- helped by a firm Saudi belief that Opec-plus is essential to navigate challenging markets ahead. • ESG pressures will accelerate, further shaking up corporate strategies. Covid-19 has focused investors’ attention on risk and will intensify demands for stronger climate strategies. European majors have led on strategic repositioning to meet net-zero emissions targets by midcentury but will face stronger pressure to define how absolute Scope 1-3 (operational and consumer) emissions reductions will be met -- with implications for production trajectories. Biden's win has galvanized climate stakeholders in the US, and producers will face mounting pressure in 2021 to adopt net-zero operational emissions targets at minimum. Majors Chevron and Exxon Mobil will also be pressed on Scope 3 (PIW Dec.4'20). National oil companies (NOCs) will need to start showing stronger emissions stewardship to maintain market access. • The Biden administration will not besiege the US oil industry, but the tone of policy will shift fundamentally. President-elect Joe Biden’s Democratic party doesn’t have enough control over Congress to enact his boldest energy reform proposals, and the state of the economy will also encourage caution. But Biden will still be able to do a lot through executive actions and has put together a strong team in the White House and relevant departments that is likely to push for climate action (PIW Dec.25'20). Much may be on the demand side, such as auto standards and electric vehicles. But the oil industry will not escape, with options to watch include methane regulations, lease sale restrictions, environmental reviews on drilling permits and pipelines, and climate risk disclosures. Combined with investor pressures, US firms will face a highly challenging year. • Stronger clues will emerge on the timing of peak oil demand. Most analysts accept that Covid-19 has accelerated the timing of peak demand. But they remain divided over whether demand will rebound beyond pre-pandemic levels of 100 million barrels per day in the coming years or has already effectively reached a peak. The rollout of vaccines this year will offer greater clues on the lasting impact of changes in consumer behavior and the trajectory should be clearer by the end of the year. Energy Intelligence sees demand averaging 97 million b/d in 2021 -- up 5.2 million from 2020 -- and 98 million b/d in the fourth quarter. We see a recovery to pre-Covid-19 levels in 2022-23, and modest growth to a plateau of 105 million b/d late in the decade. • Corporate M&A will surge, led by global independents. Shut out of capital markets and with prices still too low to thrive, independents will increasingly face existential crises. In US shale, investors have already accepted “zero-premium” deals if they deliver enhanced scale, improved balance sheets and lower costs. Demands for both higher returns and climate strategies will force further consolidation, while more bankruptcies loom for the weakest players. Ownership will factor, too, particularly for international E&Ps, as private equity, hedge funds and sovereign wealth funds seize opportunities to acquire assets on the cheap. With majors trying to sell some $70 billion of assets, they are less likely to be buyers -- and may struggle to hit divestment targets. • New capital priorities will limit upside for US shale. The pandemic accelerated the arrival of Shale 2.0 -- a self-funding, returns-oriented US onshore sector. Energy Intelligence expects US production to grow by just 500,000 b/d from end-2020 to end-2021 and be roughly flat on a full-year average at around 11.5 million b/d. Debt repayment, dividend repair, and medium-term drilling inventory management needs will constrain investment in growth, although some incremental output is possible through sustained cost reductions (PIW Dec.18'20). • Upstream spending will favor “advantaged” oil and gas. The Covid-19-led downturn has accelerated a shift in industry investment to the most resilient oil and gas resources. Producers will increasingly favor developments that, in some combination, (1) are shorter cycle, (2) have low per-unit costs, (3) are highly productive, (4) boast generous fiscal terms, (5) have a lower carbon footprint, (6) carry low aboveground risks, and (7) have existing infrastructure or robust market access. Host countries with such characteristics (Brazil, Guyana, Abu Dhabi, the US, Qatar) will attract capital. Those with less-attractive resources or significant aboveground challenges (Iran, Venezuela, Nigeria, Canada) will fall further behind, with rising risk of stranded assets. • Tight upstream spending will heighten risks of a future supply crunch. Fears of insufficient investment have been around for years but are starting to look more potent -- even amid demand uncertainty -- as upstream investment slows (related). Energy Intelligence sees upstream capital expenditure falling again from $370 billion last year to $345 billion in 2021. If capital market access tightens as demand recovers, the likelihood of a medium-term crunch will rise up the industry agenda. • Hydrogen will be the buzzword of the year. After decades of false starts, policymakers and energy companies in 2020 latched on to hydrogen’s potentially game-changing role as an energy carrier -- from power generation and electricity storage to industrial use and multiple segments of transport. Policy support, net-zero targets and declining renewable costs have aligned to push hydrogen forward in 2021, attracting interest from Mideast NOCs to investors. The key question to watch is whether “blue” hydrogen (from gas with carbon capture) gets sufficient policy and corporate support to take off, or will be leapfrogged by green hydrogen (from renewable power) as costs fall (PIW Dec.11'20). • Global climate policy will see a boost in momentum. The biggest impact of the 2015 Paris conference was indirect -- its elevation of climate on the agenda of policymakers, investors and the public. The emerging alignment of the US, China, Europe and others on net-zero emissions targets means November’s COP26 climate conference in Glasgow should give a similar boost to momentum, resulting in stronger policies to drive the transition and even greater pressure from investors.

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