About 80% of the largest national and international oil companies will face significant production declines by 2040, according to a new study by the Boston Consulting Group (BCG).
Energy sustainability, affordability and security of supply, the elements of the “energy trilemma”, are increasingly threatened by reduced investment flows in the oil and gas sector, by oil and gas demand that is proving more resilient than expected, as well as by geopolitical events that generate uncertainty in supply chains, say the study’s authors.
“Up to 80 percent of the world’s largest national and international oil companies will face production declines by 2040. Most will see production declines of between 20 percent and 50 percent, while some could see declines of up to 60 percent or more,” says the study, “Securing the Oil and Gas Resources of the Future,” which identifies solutions to this longevity challenge and how they will reshape the industry’s competitive landscape.
“After a decade of discipline in capital allocation, targeted exploration and production investments are needed to replace existing production as it is depleted,” said Rebecca Fitz, BCG partner, director, and founding member of BCG’s Center for Energy Impact. “Without these investments, an orderly energy transition could be jeopardized by price volatility, energy scarcity, and reliance on higher-emission sources.”
Exploration is not the only way
Exploration can solve some of the problems related to the longevity of portfolios, but it is not a solution for all companies and is unlikely to be the main source of new reserves until 2040, the study authors say.
However, the returns from exploration activities are highly concentrated. BCG’s analysis shows that, despite similar levels of spending, the best-performing companies generate significantly more value than their weaker competitors through careful management of capital exposure and advanced skills in evaluating subsurface geological structures.
Options include phased development of projects, selecting targets close to existing infrastructure, and farm-down transactions before development, which limit capital exposure.
Technology can be a game-changer
Companies with strong technical expertise can create value in two ways: by extracting more of the resources they already have and by gaining access to resources that would otherwise remain inaccessible.
Some of the world’s largest conventional oilfield operators are recovering less than half the average of their peer group. Major advances in recovery technologies, particularly for shale resources, could significantly expand available reserves and help meet future demand.
Beyond improving recovery, technology is becoming a competitive differentiator.
Forty-five percent of the current net value of remaining upstream liquids globally is in countries with restricted access for foreign companies or in countries where access is through select partnerships. The same is true for 35 percent of cumulative gas production.
In many of these resource-rich markets, governments are increasingly looking for partners that offer technical expertise and development capacity, not just capital. For leading operators, technology could allow both the extension of portfolio life and access to some of the most attractive remaining resources in the world.
“Portfolio longevity is becoming a key factor in how oil and gas companies are valued,” Fitz said. “Companies that can extend the life of their portfolios through disciplined investment and technology will be better positioned to compete in the current energy transition,” she concluded.
