Posted on January 3, 2019
A year filled with mega-deals and resurgent geopolitical tensions and price volatility is setting the stage for what the energy research and consulting firm Wood Mackenzie says will be a “fascinating” 2019 for the upstream oil and gas industry.
The recent plunge in crude oil prices justifies the sector’s conservative mindset in setting their portfolios to weather low prices, said Tom Ellacott, senior vice president. That has positioned the sector to adapt and thrive in what has become tumultuous times, he said.
One area where that conservative mindset may not apply will be tight oil, especially in the Permian Basin and particularly by the majors, Ellacott said.
“There could be as many as half a dozen multi-billion-dollar Permian deals alone in 2019 as the race for scale continues,” he told the Reporter-Telegram by email from his London office. “We expect more consolidation among the independents. Some of the majors may also look to scale-up and consolidate existing positions.”
Wood Mackenzie estimates nearly $35 billion was spent on tight oil acquisitions by the super-majors and large independents in 2018.
As the year was coming to a close, crude prices were roiled by a rising perception that economies worldwide were slowing, possibly reducing demand for crude oil at a time when producing nations, primarily the United States, Saudi Arabia and Russia, were producing oil at record levels. That has sent prices tumbling $30 from their four-year highs above $76 a barrel, in early October.
“We expect world oil demand growth to average close to 1.1 million barrels a day in 2018 and 2019,” Ellacott said. “This sits against a backdrop of rapid non-OPEC production growth of around 2.4 million barrels a day year-on-year in 2018 and 2019. This growth is mainly due to gains in the U.S. for both years. The strength of non-OPEC production growth creates pressure on OPEC to curtail its output for 2019 from recent levels.”
Because of above-ground challenges, his company expects Permian tight oil growth moderating in 2019 to just 650,000 barrels a day after surpassing 1 million barrels per day of growth in 2018. Wood Mackenzie said those challenges should continue until at least the third quarter of 2019, when new pipeline capacity begins entering service.
Ellacott predicted that operators will not budge from their commitment to capital discipline in 2019. Should crude prices recover, and especially if they return to $70 a barrel or above, it will generate a huge cash windfall that could test that commitment. That huge cash windfall could drive sentiment back toward growth, he said, but also could increase pressure to return that surplus cash to shareholders. Despite that pressure, he said companies will be cautious about raising shareholder distributions and investment too quickly. Many will “favour deleveraging to absorb future shocks and keep their powder dry for opportunistic mergers and acquisitions,” Ellacott said.
That conservatism could have a negative impact on future investment, he said.
“We forecast an oil supply gap of 26 million barrels a day in 2030, and conventional pre-Final Investment Decision projects have an important role in meeting this. There is a risk that more extensive greenfield oil projects do not proceed because of disciplined screening criteria. We expect prices to rise post-2026 because of the need for higher cost sources of supply,” he said.