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The Energy Transition is underway in earnest; but, as COP26
demonstrated, the pace of change and willingness of stakeholders to
act on decarbonization varies considerably around the world. The
year 2022 will see the continuation of a "cognitive dissonance", an
ongoing clash between those aiming for and promoting a pure form of
an accelerated and seamless transition, and those who believe that
compromises will need to be made for the globe to move forward in
unison on energy strategy and policy. Within this backdrop,
what are the key issues affecting the upstream sector in
2022?
The Energy Transition creates an increasingly challenging
investment environment for upstream in the face of evolving
government regulations, increasingly divergent long-term demand
narratives, and non-standardized ESG criteria. Financing options
will shrink further, potentially leading to underinvestment in
upstream oil and gas. This, in turn, will reduce the supply base
and likely force prices to rise to a level at which internal cash
flows would provide sufficient funding for all new projects, plus
the dividends necessary to attract shareholders. Importantly,
however, this will also complicate policy choices during the energy
transition.
Expect companies' strategic choices within the Energy
Transition to continue their intense focus on decarbonization,
capital efficiency, financial discipline, and restructuring toward
lower-carbon portfolios. Upstream companies are benefiting from
significantly higher cash flows than in recent years; how they
manage the cash and where they spend it will be the subject of
intense scrutiny in 2022.
Upstream companies will mostly continue to operate core
producing assets in harvest mode in 2022 and will focus
particularly on optimizing performance from their short cycle and
unconventional cash engines. For new developments, they will look
to reduce structural costs via more standardized/ modularized
designs and innovative practices; however, greenfield mega projects
will be few and far between.
The role of natural gas in the Energy Transition remains highly
uncertain, as evidenced by Europe's extended and heated debate on
the issue. Over 90% of global GHG emissions comes from markets that
have made net-zero pledges; long-term unabated use of natural gas
is inconsistent with these aspirations. Whether the current buoyant
levels of global gas and LNG pricing continue through 2022 is a
major uncertainty that has implications for future supply and
infrastructure investment, and demand growth. However, higher
commodity prices are expected to continue benefiting energy stocks
in 2022.
Download a summary of the 11 key issues for upstream in 2022,
extracted from IHS Markit report "Key Upstream Issues for
2022"
