After three years of fighting to survive the price collapse, companies are ready to deliver and to continue rebuild in anticipation of a new era of lower prices. We identify five key strategic themes for the new year that point to a turning point in the evolution from 'survive' to 'thrive'.
Now that the belt-tightening is done, corporate strategies will shift to delivering profitable growth and building for the future. The Majors will continue to cherry-pick opportunities, building on the great progress already made in repositioning portfolios for lower prices. We also expect more activity from the Asian NOCs as they tackle structural production declines. US Independents, having largely completed their great retrenchment to US tight oil, must now begin to show investors they can deliver on volumes and earnings.
The buzzword for 2018 will be 'resilience' - building portfolios that perform at low and high oil prices, providing a platform for the energy transition in the longer term. Optimising core business, keeping costs down and employing digital technology like predictive analytics will all play a part.
We expect further progress in accessing economically advantaged oil, spearheaded by multibillion-barrel opportunities in Brazil and the Middle East. Building exposure to gas will also be a core strategic objective for most larger companies as they transition toward low carbon. We also expect further small-scale investments in renewables to bring more optionality in wind, solar and power markets.
Tom Ellacott, Head of Corporate Research, joins Upstream Research Directors Angus Rodger and Malcolm Dickson to discuss growth strategies, the M&A market, and other key themes to watch for in 2018.
US tight oil production takes off in 2018, surging 1.2 million barrels per day (b/d) or 24% year-on-year. Yet tight oil will be a sector on trial in 2018. Most companies are in a better place to deliver on production targets and limit spending within cash flow. But cost inflation and technical issues could present a serious challenge as the sector embarks on its second great phase of growth. Producers will be under considerable pressure to prove their value propositions with disciplined strategies, especially if oil prices retreat.
There are some signs that 2017 may prove a better year for exploration - chiefly due to attractive oil finds in Guyana, Brazil, Mexico and Alaska, and gas discoveries in Mauritania, Colombia and the Netherlands. Exploration looks primed for delivery again in 2018, with lower costs and portfolio high-grading focused on the best prospects driving improved returns.
What's needed to win back investors after a year of dismal stock market performance? Firstly, the industry needs a pipeline of new projects that work at US$50/bbl, combined with proof that the industry can successfully execute them. Secondly, it needs free cash flow that can grow at US$50/bbl and fund growth in shareholder distributions. Finally, upstream companies must build compelling cases for long-term investment. This may not happen in one year, but they will need to show clear progress in 2018.