Wood Mackenzie recently published the key findings of an insight report focusing ...

Wood Mackenzie recently published the key findings of an insight report focusing on the oil and gas majors’ portfolios. According to the report, a significant qualitative shift in investment is underway, with development capital progressively moving from conventional assets to more complex projects associated with new resource themes. The majors generally will become more dependent on LNG, deepwater and unconventional oil and gas to drive value and production growth. The portfolios of some companies in particular are now entering a period of profound structural change, states the analyst.
The study’s key findings include:
Investment in conventional assets accounted for 63% of the majors’ total capital expenditure between 2001 and 2005. The proportion falls to 40% in 2011 to 2015. Increasing investment in the deepwater (23% versus 17%) and LNG sectors (18% versus 11%) makes up the largest difference, with heavy oil/oil sands (9% versus 6%) and unconventional oil/gas (9% versus 3%) accounting for most of the remainder.
The changing investment mix is one factor leading to lower returns on new developments, along with fiscal and cost effects. Weighted average new-field project returns for the majors fell to 18% in 2011, down from 23% in 2005. Typically, growth resource themes such as LNG and deepwater are more technically challenging and have longer lead times to first cash flow than conventional projects.
The majors’ portfolios in 2011 remain dominated by the value of conventional oil and gas assets, which make up 48% of the total net present value (NPV) of the group. The other 52% of value is spread across deepwater (18%), LNG (17%) and heavy and unconventional oil (9%). Unconventional gas, at 5%, is a theme that is destined to expand given the inherent resource potential.
The investment cycle now underway will reshape the majors’ portfolios over the next few years. By 2016, Wood Mackenzie expects the proportion of conventional assets across the majors’ portfolios to fall from 48% to 39%. LNG is the biggest growth theme by a distance over this period, rising from 17% to 23%, while deepwater increases from 18% to 19%.
All of the majors will be producing at, or above, current levels in 2020. This contrasts with the ‘International Large Cap’ peer group (ex-BG) where the analyst expects production to be 14% lower in 2020. Part of the difference reflects the majors’ increasing focus on resource themes with long reserves life such as LNG, whereas as the ‘Large Caps’ are more dependent on conventional assets with front-loaded production. Wood Mackenzie expects combined production for the majors to climb slowly to a peak of 24.3mn boe/d in 2017, compared with 21.9mn boe/d in 2011 - a 1.75% CAGR.
Post-capex free cash flow margins in 2011 are set to recover to 2006/2007 levels - and could exceed the $17/boe 2008 peak if prices remain at current levels. Rising cash flow is likely to lead to incremental investment across the board. This could increase further if oil prices remain around current levels and above planning assumptions.
Overall, Wood Mackenzie expects a balanced approach to creating growth for 2020 and beyond, using a combination of the exploitation of existing resources, exploration, the capture of new resources and M&A. All of the majors are increasing exploration activity.
Chevron’s portfolio is going through the biggest transformation. A heavy investment programme focused on greenfield LNG and deepwater will deliver the strongest post-2015 growth in the peer group. Chevron will have the biggest portfolio weighting to LNG of any of the majors by 2016, a significant shift from its current portfolio make-up.
Shell’s upstream portfolio ($274bn) is just eclipsed in size by ExxonMobil’s ($280bn), which is the biggest in terms of NPV. Shell’s is the most diversified by resource theme, with material positions in LNG, deepwater, oil sands and GTL as well as conventional assets. Shell’s sub-commercial resource life is a peer leading 32 years, which includes a wide range of opportunities to develop key strategic themes of LNG and unconventional oil and gas into the longer term.
ConocoPhillips’ portfolio restructuring is taking shape through the ‘shrink-to-grow’ strategy. Addressing an underweight deepwater position and unlocking the value of a leading resource base will be key success factors as it refocuses on organic-led growth, states the study.

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