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Rystad Sees Global E&P Players Investing $380 Billion in 2021, Says About 20% Is at Risk

Investments from global exploration and production companies (E&P) in 2021 are projected to reach around $380 billion, almost flat year-on-year, a Rystad Energy report shows. About 20%, or $76 billion, of the estimated 2021 investments could be at risk of deferral or reduction, with the remaining amount being categorized in the safer tiers of low and medium risk.

The amount is Rystad’s base-case scenario, but, with 2020’s market turbulence fresh in mind and the currently uncertain rollout timing of the recently announced COVID-19 vaccines, it is worth expanding the forecast to a range of $350 billion to $430 billion, incorporating some scenario deviation.

Investments may rebound to the precrisis level of $530 billion by 2023 if oil prices rise to around $65/bbl—though, after the previous market crisis in 2014, annual E&P investments never recovered to the precrisis level of about $880 billion and instead settled at $500 billion to $550 billion.

Much of that reduction was because of supply chain and efficiency improvements, leaving little scope for further such reductions this time around. Instead, E&P players are pulling other levers to weather this market downturn, such as deferring infill drilling programs, project final investment decisions, and startups, reporting significant write-offs on stranded assets, and reshaping their portfolios to stabilize returns.

As E&Ps are also speeding up a transition into low-carbon energy, it is possible that this time, too, upstream investments will not return to precrisis levels in the long term, even if they do recover somewhat over the next few years.

To provide a deeper insight into next year’s expected E&P investments, Rystad has made a risk-weighted analysis of the most critical market indicators to see how much of the total expected 2021 investment is high risk, medium risk, and low risk, based on the commerciality of the projects or wells (Fig. 1).

Source: Rystad Energy UCube.
Fig. 1—2021 E&P investments by level of risk.

 

Of the total $380 billion of projected investments, about 60% ($234 billion) is likely to come from producing assets, which have two main spending channels: facility and well capital expenditures (CAPEX). Within facility CAPEX, about 38% is spent on facility maintenance. This is believed to be a low-risk category because operators were forced to postpone most of their planned maintenance programs in 2020 because of coronavirus restrictions and lower oil prices. Maintenance work, therefore, will have high priority in 2021 to avoid unplanned outages in the future.

Well CAPEX is split by the wells’ breakeven price, which gives a clear idea of how much of it might be at risk of deferral or repeal because of lower oil prices. About 23% ($37 billion) of the total well CAPEX is assigned to wells with a breakeven price higher than $55/bbl, which puts this spending at a high risk of deferral. Wells with breakeven price in the range of $30 to $55/bbl are seen as medium risk, while those with a breakeven below $30/bbl are low-risk drilling opportunities.

A similar logic is applied for the underdevelopment discovered and undiscovered projects but with the projects’ breakeven price as a reference point. Rystad sees that 10% of the CAPEX associated with projects under development and 30% of the CAPEX for discoveries and undiscovered projects may face deferral because of weak economics.

All in all, this analysis shows that about 20%, or $76 billion, of the estimated 2021 CAPEX could be at risk of deferral or reduction, while roughly $300 billion is considered low or medium risk.


Olga Savenkova is an upstream analyst with Rystad Energy. She can be contacted at olga.savenkova@rystadenergy.com.

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