Oil & Gas

According to Wood Mackenzie, investments in oil and gas among the world's 23 largest producers are expected to surge by over 60% by next year. Consolidation is emerging as a key strategy for expanding asset portfolios, as direct exploration spending remains lower than a decade ago.

Despite this renewed focus on core operations, oil and gas companies are still allocating substantial funds to the energy transition. Crude oil and natural gas producers will increase investments next year, even as the shift away from hydrocarbons falters. This development might seem surprising in light of governments' ongoing transition commitments, but it highlights a fundamental truth: as long as there is demand, there will be supply.

The 60% rise in investment, compared to the lows of 2020 during the pandemic, is based on Wood Mackenzie's forecast, with annual growth expected to be 5%, signaling a deceleration in investment increases. Large oil firms are reinvesting around 50% of their income on average, while returning between 35% and 60% to shareholders via dividends or buybacks. Most of the investment, particularly from companies Wood Mackenzie labels as "emerging majors," is directed toward the upstream segment, with up to 90% going into production and exploration.

This situation might seem at odds with global commitments to phase out oil and gas, but, as Wood Mackenzie analysts point out, it is far from unusual.

"The primary factor is the growing recognition that the energy transition is progressing more slowly than anticipated, which suggests that oil and gas demand could remain robust for longer," Wood Mackenzie noted. European oil majors are addressing production and cash flow shortfalls by increasing upstream investments, while U.S. majors and some emerging companies have already expanded through mergers and acquisitions. Further consolidation in the sector is expected by 2025.

Consolidation is becoming a popular approach for expanding assets, especially as exploration spending remains below historical levels, raising concerns about long-term reserve replacement. As the energy transition continues to lag, the long-term prospects for hydrocarbons, including coal, strengthen evidenced by China's record coal imports in September, despite also leading in wind, solar, and electric vehicles.

The shift back to core business was underscored recently when BP announced it would abandon its plan to cut oil and gas production by 40% by 2030, a goal set in 2020. BP revised the target to a 25% reduction but has now decided to forgo it entirely in favor of boosting production in key areas such as the Gulf of Mexico and the Middle East.

Even as oil and gas companies refocus on their core business, they continue to invest in the energy transition, though some at a slower pace than before. Wood Mackenzie highlights that five major companies like Aramco, Adnoc, BP, Shell, and Totalenergies are each investing around $5 billion annually in low-carbon projects. Interestingly, national oil companies like Aramco and Adnoc are spending more on transition projects than private firms, reflecting their government ownership and role as champions of alternative energies. Yet, despite these investments, oil and gas companies seem to be retreating from the idea of fully moving away from hydrocarbons.