Wood Mackenzie: Industry needs to start adapting for the longer term

Most companies are currently focused on surviving at US$30/bbl by cutting costs and activity, but the industry also needs to start adapting for the longer term, according to a report by Wood Mackenzie.

Those looking to do “more than just survive in 2016 need to fashion portfolios that work at low prices as well as high”, A much greater degree of flexibility is required to adjust activity to an uncertain macro outlook. Wood Mackenzie said in a recent report.
Shaping future upstream portfolios
According to Wood Mackenzie, tight oil has all three attributes that future portfolios need: low-cost, long-life and investment flexibility. This flexibility is “integral to rapidly adjusting investment in response to volatile macro conditions“.

The adaption process will continue to evolve. Wood Mackenzie expects that the center of gravity for most US-listed companies will continue to shift inexorably towards US unconventional. Larger players will also look to get a greater piece of the action in tight oil.

The adaptation process in action
The Shell-BG deal is a classic example of how early movers are adapting to low prices, Wood Mackenzie said. The addition of BG’s low breakeven Brazilian pre-salt volumes will establish Shell as the leading IOC deep-water player, adding over 500,000 boe/d of production at peak and lowering the aggregate corporate cost curve.

Devon’s bolt-on acquisition of early-life, low-breakeven tight oil assets in the STACK and Powder River Basin is another example. The company was willing to pay a price aligned with 2014 deal valuations in order to strengthen the long-term health of its portfolio. Plans to fund the deal with subsequent asset sales of lower-quality, non-core assets will help to sharpen Devon’s focus, Wood Mackenzie said.

Shifting capital allocation
According to Wood Mackenzie, tight oil has emerged as a key strategic lever in the response to the downturn. Those that can are rapidly adapting spending strategies, lowering activity and capturing cost deflation. The capital allocation strategies of the US majors are also shifting towards short-cycle opportunities, in particular in tight oil.

As reported from its Q4 results, Chevron will not re-enter another capital intensive investment cycle in which multiple complex, high cost developments are running concurrently.

This makes for a fast-moving competitive landscape in 2016. Activity levels will continue to adjust and sustained low prices will spark a new wave of M&A activity as financial distress builds, Wood Mackenzie said.
Source: Wood Mackenzie