Navigating the evolving upstream landscape

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"

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.