Energy transition could push oil majors to sell or swap oil and gas assets of more than $100bn

The global energy market is on the brink of a major transition to cleaner sources of energy. To adjust and transform, the world’s largest oil and gas firms are revising their long-term oil price and demand outlook and need to streamline their portfolios significantly to improve cash flow, cost efficiency and competitiveness. As a result, several billions of dollars in assets are about to change hands, reports Rystad Energy.

According to the market analyst, a study of the geographical spread of ExxonMobil, BP, Shell, Total, Eni, Chevron, ConocoPhillips and Equinor – referred to as the ‘Majors+’ in its analysis – reveals that to adjust to the energy transition, the eight companies may need to divest combined resources of up to 68bn boe, with an estimated value of $111bn and spending commitments in 2021 totalling $20bn.

Rystad Energy’s key criteria for determining whether a Major+ would benefit from staying in a country are the company’s cash flow over the next five years, the potential growth in its current portfolio, and its presence in key E&P growth countries towards 2030. Based on this it suggests that the Majors+ may seek to exit 203 country positions and, as a result, reduce their number of country positions from 293 to 90.

‘Companies will look to expand in the prioritised countries through exploration, acquisitions or asset swaps with other Major+ players. However, to stay in a country that our criteria exclude, a company may instead seek to grow its local business more aggressively to make sure the portfolio will have a positive and more significant impact on overall performance,’ says Senior Vice President Tore Guldbrandsoy.

Based on the criteria, it is forecast that the Majors+ altogether need to exit 203 country positions in 60 countries. The remaining countries after the screening vary from six to 16 countries per company.

Rystad Energy’s study shows that all the Majors+ companies are likely to keep a presence in the US, and most of them may also remain in Australia and Canada. On the other end of the scale, quite a few countries have only one oil major present, including Argentina (BP), Ghana (Eni), Thailand (Chevron) and Guyana (ExxonMobil). In some of these countries it could be tempting for others to stay or increase their presence as the competition may be more limited. At the same time, these countries could also be growth targets for other companies than the Majors+, notes the market consultancy.

The results of the study also indicate a number of potential deals among Major+ players buying portfolios from each other to boost their position in a key country. For example, BP, Eni and ConocoPhillips could consider acquiring the Indonesian portfolios of ExxonMobil, Total and Shell. Shell’s and Total’s portfolios could be of interest to BP if the UK-based company wants to enlarge its Indonesian LNG asset base and take on a new growth asset.

A further analysis of other parameters of the portfolios, like hydrocarbon type, supply segment, size and asset location, will help identify the best acquisition target for each region. Indonesia is clearly a place to stay for gas assets, with a mixture of onshore, offshore shelf and deepwater assets across all lifecycles – but a company’s portfolio needs to be material over the longer term.

In recent months the Majors+ have already been putting larger portfolios up for sale – like ExxonMobil, which is planning several country exits including the UK, Romania and Indonesia; and Shell, which was trying to exit a key LNG asset in Indonesia in 2019. This shows that the Majors+ are well aware of the need to focus their portfolios to improve cash flow, efficiency and competitiveness as the energy transition accelerates – but so far, the steps may be too small, states Rystad Energy.

The current market situation means that the cash available for acquisitions could be limited, and price volatility could make it difficult for buyers and sellers to agree on a valuation. An alternative way for the Majors+ companies to exit some countries and grow in others could be to do swaps between country portfolios. This could include two or more countries to align values and reduce the cash element of a deal.

The market analyst sees several such opportunities – for instance, BP could swap its position in Algeria for Eni’s holdings in Australia. As BP’s Algerian portfolio is valued at around $320mn and Eni’s Australian portfolio at about $466mn, the companies would have to find additional conditions to even out a swap. Another example could be Shell swapping its assets in Norway for Total’s portfolio in Oman.

Rystad Energy also expects that the Majors+ will divest assets with high emission intensity to meet long-term targets for reducing emissions. However, this consideration is not included in the study.

Figure 1: Energy transition’s projected effect on major’s global oil and gas portfolios
Source: Rystad Energy

Project sanctioning set to recover
Meanwhile, Rystad Energy also reports that global oil and gas project is sanctioning set to recover and exceed pre-pandemic levels.

The COVID-19 pandemic has devastated global oil and gas project sanctioning this year and will cause total committed spending to drop to around $53bn from 2019’s $190bn, according to the market analyst’s projections. Postponed plans will, however, cause the total worth of final investment decisions (FIDs) to double next year and exceed pre-pandemic levels already from 2022.

Offshore commitments are now expected to reach $34bn in 2020, down from 2019’s $101bn. Onshore sanctioning is likely to fall to $19bn this year from $89bn last year.

Rystad Energy estimates total sanctioning to bounce back to around $100bn in 2021, primarily supported by offshore projects, whose value is forecast at $64bn for the year. Although lagging onshore projects are projected to only account for $36bn in 2021, they will see a steep rise in 2022 to around $100bn, topping the expected $95bn worth of offshore commitments that year.

The market analyst has revised up its earlier 2020 offshore sanctioning total from $26bn to $34bn, driven by the Mero-3 sanctioning in Brazil, which is estimated to cost $2.5bn to first oil. MISC has a letter of intent in place with Petrobras for the charter of the FPSO. The contractor will subcontract the vessel construction work to Chinese yards, with China Merchants Heavy Industry (CMHI) leading the race to build both the hull and topsides. Siemens will deliver the power generation modules, while Aker Solutions is performing front-end engineering and design (FEED) and engineering work on the FPSO topsides.

Rystad Energy also expects commitments worth $3.6bn related to the Payara development off Guyana in 2020. SBM Offshore is operating under an advanced commitment on the FPSO with ExxonMobil and its partners and the contractor has started procurement activities in collaboration with Chinese and Singaporean yards. The Chinese yard Shanghai Waigaoqiao Shipbuilding (SWS) is responsible for supplying the hull for the FPSO and the topsides will be built by Dyna-Mac and Keppel. It is now only a matter of when the FID takes place, and the market analyst expects it to happen soon.

Before the oil price crash, Shell had awarded a major contract to Sembcorp Marine for construction of the topsides and hull of a floating production unit (FPU) for the Whale project in the US Gulf of Mexico. However, uncertain economic conditions have forced Shell to defer FID for the project to 2021. Whale has a breakeven of over $40/b. As the second wave of COVID-19 surges through Europe, America and South Asia, it is uncertain whether the new development will start anytime soon, as the social distance norms and quarantine requirements will not only hamper the pace of development but could also lead to cost overruns, notes Rystad Energy.

When it comes to recent developments, Gazprom Neft has started development activities on its Chayandinskoye oil-rim development in Russia. The well construction programme is under way and the expansion of the existing central processing facility at the main field is likely to start soon. The onshore development is estimated to cost around $1.3bn and the field is expected to come online by 2022.

Recently, the Norwegian Ministry of Petroleum and Energy approved the plan for development and operation (PDO) of the Balder Future project. The partners, Vaar Energi and Mime Petroleum, submitted a revised PDO in December last year and selected their preferred contractors in 2019. The $2bn development plan includes an upgrade of the Jotun FPSO vessel which will operate between the Balder and Ringhorne fields. The FPSO is being upgraded by Worley, while Baker Hughes and Ocean Installer are responsible for supplying the subsea facilities.

Lastly, China Offshore Oil Engineering Company (COOEC) confirmed the start of development activities on CNOOC’s Luda 6-2 oil field off China in its second-quarter results. The Luda 6-2 development will entail a central processing platform and is estimated to cost nearly $170mn in greenfield commitments. Production is likely to start in early 2022.