Energy Security Won't Trump Transition Strategies in 2023

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Russia’s invasion of Ukraine brought unexpected challenges — and profits — to much of the global energy industry last year, and has cemented energy security as a top priority in 2023. Whether stellar profits will endure is less certain, but regardless, oil and gas corporates will find themselves expected to both attend to immediate global needs for fossil fuel supplies while also staunchly preserving existing low-carbon transition plans. Here is what Energy Intelligence will be specifically watching over the next 12 months for each of our core covered peer groups.

  • US majors’ transition strategies have found wider acceptance post-Ukraine but must keep a laser-like focus on material low-carbon progress.

Exxon Mobil and Chevron’s "and" strategies featuring this-decade oil and gas production growth and accelerating low-carbon investments tick boxes for a wider audience than they did a year ago. The energy crisis has tempered more mainstream demands — particularly in the US — for an immediate supply-led transition away from fossil fuels. Yet longer-term climate objectives remain unchanged. The result is a likely continued easing of calls for more robust low-carbon strategies that emphasize absolute Scope 3 (end-use) emissions reductions.

That said, we expect rigorous investor scrutiny of existing emissions-focused strategies to remain in place, requiring Exxon and Chevron to demonstrate how earlier stage low-carbon solutions are going to materialize into viable decarbonization businesses. This will include moving concrete investments from MOU toward FID. At the same time, both US majors will face traditional scrutiny over their ability to drive higher returns and cash flows from conventional oil and gas growth.

For Chevron, 2023 will need to see robust sequential output growth return to the US Permian Basin if medium-term plans are to remain intact, all while navigating double-digit cost inflation and operational challenges that have to be managed by other parties on its nonoperated positions. Exxon also has big Permian growth plans to execute but is leaning on a more diverse pool of projects to drive medium-term growth. The accelerated start-up of Payara off Guyana this year alongside continued progress at Golden Pass LNG (US) and the Equinor-operated Bacalhau (Brazil) ahead of 2024 start-up top our radar for 2023.

  • Stronger transition pressures on European majors will limit their flexibility on oil and gas capex.

Despite Europe's immediate needs for new oil and gas supplies to displace Russian volumes, the continent sees strengthened energy security longer term happening through an accelerated shift from (imported) fossil fuels. That means pressures on Europe's leading majors — BP, Shell and TotalEnergies — to toe the line on more aggressive transition strategies remain intact, even if calls for an even more accelerated retreat from oil and gas have tempered, for now.

This Trans-Atlantic divide makes the balancing act trickier for the bunch, given still-relevant short-term investor demands for maximized returns amid robust hydrocarbon pricing. On one hand, we see the European majors continuing to squeeze out incremental capex this year for short-cycle oil and gas and potentially higher medium-term output as a result of Europe's immediate energy needs. At the same time, though, the marginal dollar will come from within existing, transition-minded frameworks that cap overall upstream spending far below historical levels.

Total is arguably positioning itself to have the most wiggle room within this; its oil-directed capex is evaluated on a "net" basis that would back out any proceeds from oil-weighted asset sales, and its overall capex guidance has edged higher. CEO Patrick Pouyanne has acknowledged he does not want to limit his company's growth because of absolute Scope 3 targets that are not in step with the pace of society’s energy transition.

Other key areas to watch for include: (1) Shell's direction under new CEO Wael Sawan, who has vowed to keep the company on a "bold" and "innovative“ course, and could perhaps look to make his mark early on by pulling off a marquee (likely low-carbon) M&A deal; (2) pushback on BP's goal of cutting oil and gas production by 40% from 2019 levels by 2030, which has already softened to a divestment-led reduction versus a mix of sales and constrained investment, and (3) wider impacts of heightened European government intervention, including windfall taxes, and political pressure to completely abandon remaining assets in Russia.

  • Russian corporates will face unprecedented challenges navigating price caps and import bans in search of new markets.

Russian officials have criticized Western price cap mechanisms, imposed in the wake of the Ukraine conflict, as non-market measures doomed to fail. However, the strategic nimbleness of Russian oil producers such as Rosneft and Lukoil — whose European refineries remain at risk of nationalization — will be put to the test as the almost one-month old EU oil embargo on Russian crude and $60 per barrel G7 price cap are embedded into the trading landscape. The challenge will be to maintain handsome earnings despite these barriers, finding buyers for their crude and — from Feb. 5 — products that can no longer be sold to Europe. Producers will need to smartly manage wells, cutting output if demand from “friendly countries” cannot absorb all their supply, and restoring it when needed.

Although the EU gas price cap will only be triggered under certain conditions, Gazprom knows its already sharply reduced flows to Europe are only another diplomatic escalation away from a full cutoff. The company will spend more money to build out infrastructure enabling it to supply more gas to markets in the east in years to come.

  • Regional integrateds will prioritize extracting more value from standalone entities.

As Europe's regional integrateds continue to plan and roll out standalone entities with separate business models, all eyes will be on where proceeds are channeled from any sell-downs or spinoffs. Investing in the energy transition — as Eni has pledged to do with the proceeds of its suspended Plenitude IPO — will make them appear forward-looking and evolutionary, albeit with a long-dated payoff for investors. Yet directly returning the money to shareholders smacks of all-out liquidation of a dying business. These firms will likely try to strike a balance between the two to keep shareholders happy.

Eni — which has this year already announced the creation of a new company, biofuels-focused Eni Sustainable Mobility — will be keeping tabs on how rival Repsol fares with outside investors on board in its renewables business; the Spanish company has opted — at least for now — for a private sale instead of an IPO. It did something similar with its upstream business, selling 25% to private equity firm EIG in a transaction set to close early this year, also pledging to invest the proceeds in the transition. The success of that deal — and the $19 billion upstream valuation — will be of great interest to other integrated companies, including majors, and could lead some to follow suit. OMV, one of the few fossil fuel firms to explicitly state its intent to no longer produce oil and gas by 2050, has also seen its upstream business attract interest from the private-equity sector and beyond, and may decide 2023 represents one of its last opportunities to secure a bumper payday by selling it.

  • National oil companies (NOCs) are broadly targeting higher output, but decarbonization remains a critical addendum to preserve long-term market share.

Mideast Gulf NOCs are acting fast to cash in on a bullish medium-term outlook for oil and gas that could see the withering of Russia's standing in the global energy mix. Abu Dhabi National Oil Co. (Adnoc) is fast-tracking its push to 5 million barrels per day of crude production capacity and beyond, while Saudi Aramco is pursuing a 1 million b/d expansion and QatarEnergy is adding 48 million tons per year of liquefaction capacity. But even with these conventional tailwinds behind them, decarbonization plans continue to filter through, largely in the form of accompanying carbon capture and storage (CCS), hydrogen and ammonia investments. Adnoc’s targets are arguably the toughest: its investment last June in Masdar came with a commitment to build some 100 gigawatts of renewables power and 1 million tons/yr of green hydrogen capacity by 2030.

In Latin America, we're keeping a close eye on Colombia and Brazil, where recently elected left-leaning presidents could dramatically shift the strategic directions of Ecopetrol and Petrobras, respectively. Mexico's Pemex will have its hands full trying to grow oil output while also shifting its supplies exclusively to its own refineries, but interestingly, the company is also ringing in the new year with a fresh commitment to attend to environmental, social and governance matters. Asia's leading NOCs, such as China's Big Three and Thailand's PTT, firmly see higher domestic oil and gas output as critical to supporting heightened state energy security concerns. But all should be watched closely for their evolving energy transition strategies, too. Southeast Asian NOCs, for example, continue to see natural gas as crucial to their transition stories, leaving the door open to greater exploration and M&A activity this year. Similarly, Chinese NOCs will focus their international activity around firming up supplies of LNG and could be tempted to purchase upstream stakes in Russia — although efforts in areas like green hydrogen will take greater strategic prominence as well.

  • Policy perks will likely solidify earlier stage decarbonization investments at US independents.

After a year of bumper free cash flow tempered by rapid cost inflation, capital discipline and shareholder returns will remain top priorities for US independents. But as they look to mitigate inflation impacts as best they can, these producers are also expected to maximize benefits from the landmark Inflation Reduction Act (IRA) in supporting their own operational decarbonization commitments. Topping our radar will be ConocoPhillips and Occidental Petroleum.

The former was the first major US producer to adopt a net-zero Scope 1 and 2 emissions target, yet details have remained thin on how it plans to get there. We expect more insights in the coming months around the potential role of CCS and hydrogen. Oxy has meanwhile significantly accelerated its anticipated pace of deploying direct air capture (DAC) kit on the back of IRA supports. Its initial plant, in the Permian Basin, should be watched closely given early indications of cost inflation pressures to see how the economics of future plans may stack up.

Adnoc(1) Clarity around ultimate size of oil capacity expansion (6 million b/d potential) + early execution of fast-tracked plans for 5 million b/d by 2027; (2) potential partner selection for Fujairah LNG; (3) transition strategy positioning ahead of COP28 in Dubai
APA(1) Potential materiality of Suriname, based on project size for Sapakara South if FID'd + further drilling; (2) Egypt's returns, cash-flow potential once operating efficiently; (3) ability to execute mid-single-digit production growth following years of declines
BP(1) Whether its upstream portfolio reduction plans (~flat through 2025, minus 40% by 2030) still comply with investor demands given divestment dependency; (2) fate of 19.75% Rosneft stake
CNOOC(1) Ability to execute divestments (Gulf of Mexico, Canada, North Sea) to advance shift toward domestic portfolio; (2) success in focusing on high-return, less geopolitically-sensitive developments overseas, such as in Guyana
CNPC(1) Details on how listed arm PetroChina plans to peak Scope 1+2 emissions by 2025 + on interim plans to cut Scope 3 emissions; (2) whether it shrugs off the threat of secondary sanctions and takes more upstream stakes in Russia; (3) signs of a downstream recovery as China ends "zero-Covid" policy but sees cases rising exponentially
Chevron(1) Whether it can shift to more aggressive sequential Permian (US) growth to track 2025 plans while preserving capital efficiency; (2) concrete progress on substantial this-decade CCS plans + clarity around clean hydrogen strategy
ConocoPhillips(1) Firm medium-term actions and targets to achieve achieve net-zero operations by 2050; (2) greater clarity over LNG strategy following Qatar, US plans; (3) future of Alaska investments given heightened envrionmental pushback
EOG Resources(1) Progress on CCS pilot + potential for scaled-up deployment to address operational emissions; (2) wider clarity over international portfolio potential (incl. exploration drilling off Australia); (3) materiality of Utica Combo (US) based on delineation
EcopetrolStrategic implications of appointments/mandates made under Colombia's new leftist President Gustavo Petro on upstream + low-carbon priorities
Eni(1) Whether the postponed IPO of Plenitude is revived; (2) potential for the creation of other “satellite” companies and JVs (like Azule) + how they'll seek investment; (3) ability to leverage African gas to meet Europe's heightened needs
EquinorCapital markets update in February, unveiling shifts in how it runs its renewables business to improve profitability
Exxon Mobil(1) Areas beyond Permian (US) where net-zero operations could be expedited, following global asset review; (2) ability to advance pipeline of concrete CCS opportunities given significance to low-carbon plans; (3) any movement on Rovuma LNG (Mozambique)
Gazprom(1) Whether the Russia-EU standoff over Ukraine results in further cuts to gas exports to Europe; (2) how waning export margins affect corporate spending; (3) efforts to diversify sales into China, Central Asia and elsewhere
Hess(1) Start-up of a pilot EOR in the Bakken (US); (2) continued execution successes off Guyana
Inpex(1) Ability to sucessfully diversify LNG supplies beyond Australia; (2) success rebooting Abadi LNG (Indonesia) with new potential partners + CCS plans
Kosmos(1) Successful launch of Phase 1 of Tortue FLNG (Mauritania/Senegal) + ability to advance delayed FID for Phase 2; (2) opportunities to apply modular LNG approach elsewhere in Africa, including via M&A of new gas resources
Lukoil(1) Potential sale of the Isab refinery (Italy) and other foreign assets at risk of being nationalized; (2) possible separation of Russian and overseas assets to protect the latter from a Kremlin-led takeover of the company at home; (3) whether it can continue to function as Russia's largest independent oil producer amid rising pressure from all sides
OMV(1) Whether the sale of a majority stake in the bulk of its upstream business proceeds; (2) FID on Neptun Deep project in Black Sea (Romania); (3) ramp-up of production and sales of sustainable fuels, including sustainable aviation fuel (SAF)
Occidental(1) Execution of its first DAC project in the Permian (US), including cost control + potential for new equity partners or other monetization strategies; (2) customer interest in "carbon neutral" crude vs. specific support for non-EOR CCS/DAC
PDVSA(1) Extent production/operations can improve at Chevron-shared JVs given US major's new operational control; (2) further loosening of US sanctions on PDVSA oil sales and partner investment
PTT(1) How upstream arm PTTEP will reconcile emissions targets with plans for record output in its new five-year plan; (2) successful start-up of Thaioil's Clean Fuel Project to upgrade fuels produced at Sriracha refinery
Pemex(1) Feasibility of halting crude exports to non-Pemex facilities by end-2023, including build-out of domestic refining infrastructure; (2) progress expediting Zama with an eye toward a 2024 start-up; (3) concrete plans to enact new ESG priorities
Pertamina(1) Successful IPOs for its geothermal and upstream units, aimed at funding expansion (geothermal delayed from 2022); (2) FID on Tuban refinery despite partnership with Rosneft + G20 pressure to limit involvement with Russia
PetrobrasStrategic implications of appointments/mandates made under the left-leaning Lula administration, including on Petrobras' dividend and fuel pricing policy + ability to focus its portfolio/capex more exclusively around pre-salt
Petronas(1) Ability to plot 25% absolute emissions reductions this decade, including additional CCS projects like Kasawari; (2) whether cost inflation continues to delay FID on the floating ZLNG project (Malaysia)
QatarEnergy(1) Geographic mix + pricing power in LNG sales contracts signed for the North Field expansions; (2) whether NFE equity stakes are extended to Chinese NOCs
Repsol(1) How the company integrates the views of its new investor partners in its renewables business (EIP and Credit Agricole Assurances) + in its upstream business (EIG); (2) where the proceeds from the sales of these stakes are spent
Rosneft(1) Success attracting new foreign partners into the Vostok Oil Arctic project given Western pressures/sanctions; (2) potential ability to begin exporting gas via pipelines to China (now exclusively Gazprom)
Saudi Aramco(1) Progress expanding oil capacity to 13 million b/d + putting Phase 1 of Jafurah on pace for 2025 start-up; (2) decision to list additional shares domestially or list in China; (3) concrete advancement of big CCS, blue hydrogen + ammonia plans
ShellDirection taken by new CEO Wael Sawan, including potential to alter transition + emissions targets, as well as execute marquee M&A deals to make an early imprint on the company
Sinopec(1) Initial plans to become one of the industry's leading green hydrogen producers; (2) success securing an LNG equity stake in Qatar's NFE; (3) whether an MOU with Saudi Aramco for another refining and petchem project in China goes any further
Sonangol(1) Progress separating financings from the state + early work to study a future Sonangol EP IPO; (2) success finalizing upstream divestments to raise funds for remaining E&P operations
TotalEnergies(1) Large-scale renewables M&A; (2) how much capex will go toward short-cycle oil projects after CEO Patrick Pouyanne expressed a wish not to be "limited" by absolute Scope 3 emissions targets; (3) how a shift in its renewables strategy to take on more merchant risk in pursuit of higher returns starts to play out
Wintershall Dea(1) Whether conditions will improve for a possible IPO, delayed from 2021 (not expected in early 2023); (2) ability to further replace Russian gas, particularly in Norway alongside CCS plans
Woodside(1) Early successes driving 4% annual production growth following strategic review/portfolio high-grading; (2) FIDs on Trion (Mexico) -- postponed due to cost inflation -- and H2OK (US), Woodside's first hydrogen facility

Corporate Strategy , CO2 Emissions, Majors, Regional Integrateds, Independent E&Ps, NOCs
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