Producers finally got some relief in 2021. Oil and gas prices recovered from their pandemic lows and remained at high levels through most of the year, as increased production could not keep pace with a global demand recovery. It was a year when higher prices helped energy producers strengthen their balance sheets and improve their bottom lines.
“One of the most significant changes in 2021 is the behavior among the U.S. tight oil producers. We have seen these companies more focused on generating profit, paying out dividends and reducing debt; 2021 is the first year this industry is generating significant free cash flows,” said Olga Savenkova, senior upstream analyst with Rystad Energy in Oslo.
“This change in mentality has reduced tight oil’s role as a swing producer, as the activity and production have increased less than what the oil price should indicate. This fact has made it easier for OPEC to hold back volumes from the market and put upward pressure on oil prices,” she noted.
COVID uncertainty continued to affect the world’s economic and energy-demand outlook last year as new virus variants emerged. Also, pandemic-related economic stimulus programs were ending in a number of countries.
It was a year when cyber-hackers had their day. A ransomware attack in May led to the temporary shutdown of a major U.S. fuel distribution pipeline, and protection of data systems became a growing concern throughout the energy industry.
TC Energy Corp. confirmed in June that it had terminated its Keystone XL pipeline project, after the Biden administration revoked a key permit for the 1,200-mile line earlier in the year.
In November, in response to high fuel prices, the U.S., China, India, Japan, South Korea and the UK announced the orchestrated release of an estimated 71.5 million barrels of crude from national oil reserves.
Exploration rebounded from the pullback of 2020, but continued to lag in the overall number of major finds and play-opening successes.
“The industry is still recovering, and companies have been cautious in pushing their exploration pedal. Exploration spending has been relatively flat though an uptick was anticipated in the overall licensing and wildcat exploration activity,” Savenkova said.
“The ramifications of activity level can also be showcased from the cumulative discovered resource for 2021, which by far has recorded the lowest new volume find in decades. Some high-impact wells have failed to deliver,” and some wells may not be completed until early in 2022, Savenkova noted.
Eni scored a major oil discovery in Block CI-101 offshore the Ivory Coast (Cote d’Ivoire) and planned an evaluation program. As announced in September, its Baleine-1x successfully tested a new Cenomanian-Albian play concept. Eni initially estimated Baleine’s potential at 1.5 billion to 2 billion barrels of oil in place and 1.8 trillion to 2.4 trillion cubic feet of associated gas.
The year’s highlights included several other successful wells offshore Africa and multiple discoveries in the Gulf of Mexico. Pemex announced a significant onshore find, Dzimpona, a potential 500 million-to-1-billion-barrel field in the Mexican coastal state of Tobasco.
In South America, ExxonMobil made another sizable discovery offshore Guyana in the Stabroek Block with its Uaru-2 well, and Petrobras reported an additional deepwater discovery, Urissane, in the Campos Basin.
Favorable seismic and test-well results in Namibia and a light oil discovery in Trinidad and Tobago seemed likely to make those countries a focus of industry interest, or at least curiosity, as additional drilling takes place.
By late in the year, alarm bells were sounding over the lack of capital available for exploration. Oil and gas investment will need to return to pre-COVID levels and stay there through 2030 to restore market balance, according to a report by the International Energy Forum and IHS Markit.
Upstream investment in the oil and gas sector remained depressed in 2021 at $341 billion, well below the pre-pandemic level of $525 billion, the report found.
Sales and M&A
As expected, sales of unconventional resource assets, particularly in the Permian Basin area, dominated the U.S. property picture last year.
Pioneer Natural Resources announced it had entered into a definitive agreement with Continental Resources to sell all of its assets in the Delaware Basin for cash proceeds of $3.25 billion.
Assets encompassed approximately 92,000 net acres with net production of around 50,000 barrels of oil equivalent per day, including 35,000 b/o per day, Pioneer noted.
In December, ConocoPhillips reported it had completed the acquisition of Shell Enterprises’ Delaware Basin position for around $8.6 billion cash, after closing adjustments. It acquired about 225,000 net acres and producing properties in Texas, plus more than 600 miles of operated crude, gas and water pipelines and infrastructure.
ExxonMobil began selling its Barnett Shale oil and gas properties in north Texas, involving 2,700 wells on about 182,000 acres. The Barnett was the first significant shale play developed using a combination of horizontal drilling and hydraulic fracturing. Estimated asset value was $400-500 million.
“Sanctioning activities, investments and M&A (mergers and acquisitions) activity are increasing again after hitting record low values” in 2020, Savenkova noted.
“We still see that the players are conservative, and the comeback might be lower than expected based on the oil price levels,” she said.
In Australia, Woodside Petroleum proposed a merger with BHP Group’s petroleum business in a deal valued at $28 billion (Au $40 billion). Shareholders are expected to vote on the plan in the second quarter of 2022.
Cabot Oil & Gas Corp. and Cimarex Energy completed a $17 billion merger to become Coterra Energy, while Contango Oil & Gas and Independence Energy finalized their $4.4 billion merger to create Crescent Energy Co.
In offshore drilling, Noble Corporation and Maersk Drilling agreed to create a combined company with a fleet of 20 floaters and 19 jack-up rigs.
Buzzwords of the Year
It was a year when jargon abounded. Blue hydrogen, e-fuels, ESG, CCUS and scope 1 and 2 emissions all entered the standard energy-transition vocabulary.
Blue hydrogen results from splitting natural gas into hydrogen and carbon dioxide, typically through a reforming process. The CO₂ is then captured and stored. Gray hydrogen results from the same process, but the CO₂ is not captured.
Green hydrogen uses electrolysis powered by renewable energy sources to split water into hydrogen and oxygen. Yellow hydrogen results when the electrolysis is powered by solar energy or a mix of energy sources, pink hydrogen when powered by nuclear energy.
Turquoise hydrogen is produced by methane pyrolysis, using electricity. The process splits methane into hydrogen and solid carbon, or carbon black, which has a variety of industrial applications.
E-fuels production utilizes renewable energy, water and CO₂ from the atmosphere. In addition to their green energy characteristics, e-fuels are compatible with most existing transport, so current fuel infrastructure can continue to be used.
The buzz-acronym “ESG” stands for “environmental, social and governance.” In this case, “governance” reflects a company’s governance – its leadership, pay, internal controls, shareholder rights, etc. More and more, investors are using ESG criteria to evaluate energy company performance.
Carbon capture, usage and storage expands on the concept of carbon capture and storage. In CCUS, captured CO₂/carbon can be injected or it may be used on site or compressed and transported for other applications.
Scope 1 emissions include direct greenhouse gas emissions from basic company operations, including all owned and controlled resources, while scope 2 emissions are indirect GHG emissions generated from energy sold or supplied by the company.
An additional category, scope 3, pertains to indirect GHG emissions from other company operations and activities. Examples include emissions related to business travel and commuting, generated waste and purchased services and goods.
Consulting firm Deloitte forecasts the oil and gas industry will undergo substantial change as many companies transform their business models and practice capital discipline.
“The journey of transformation has just begun for the industry, and simply managing or riding oil price cycles aren’t options anymore,” said Kate Hardin, executive director for the Deloitte Research Center for Energy and Industrials.
The firm identified five trends from 2021 that will likely influence the direction of the industry in the future:
● High oil prices boost energy transition plans, challenging conventional wisdom.
Steady production and capital discipline are helping oil and gas companies maintain stable production levels while focusing on reducing debt. High oil prices can enable companies to fund their net-zero commitments through investments in riskier and relatively more costly green energy solutions.
● ESG plays a larger role in M&A transactions.
Companies could be looking to acquire low carbon-intensity barrels or to divest high-intensity ones. Increasingly, M&A activities need to be financially accretive and to support ESG goals. The industry can leverage advanced digital technologies to provide verifiable and auditable ESG information.
● Business models shift to enable a new energy era.
Oilfield service companies can leverage their expertise in subsurface and reservoir geology for application in new emission-abatement techniques such as CCUS. Partnership, alliances and consolidation become increasingly common as OFS companies develop new capabilities.
● Convenience and experience supersede fuel as the new anchor to attract customers.
Changing customer demographics shift fueling preference from brand and price toward convenience and user experience, while the energy transition accelerates the adoption of electric vehicles and low-emission fuels. Fuel retailers need to transform their operations for a new generation of customers.
● Greener jobs and differentiated benefits help secure the return and retention of workforce.
The U.S. oil and gas industry lost 107,000 jobs during the oil price crash of 2020, and only 50 percent of those jobs have returned, Deloitte reported. Other sectors such as construction, manufacturing and technology now compete for talent. Flexible and agile workforce structures, including cross-skilling programs, can help retain employees.
“In 2021, most E&P companies revised their long-term strategies and pivoted a part of their capital on the energy transition. A new investment cycle will most likely focus on portfolio transformation and decarbonization since most oil and gas players have pledged to emissions-reduction targets,” Savenkova said.
“Some E&P companies have already revised their targets and want to become net-zero not by 2050 but by 2030. We also see how more and more companies from the oil and gas sector are embarking on investments in clean energy and across the whole electricity value chain,” she added.
Orca, the world’s largest facility dedicated to removing carbon dioxide from the atmosphere via direct air capture, went online in Iceland in September. The Climeworks-built plant is expected to extract 4,000 metric tons of CO₂ annually.
The United Nations Climate Conference, COP26, dominated transition headlines in November.
Research and consultancy group Wood Mackenzie rated the meeting a qualified success, not without a few positives for oil and gas.
In a release, Woodmac Vice President Massimo Di Odoardo declared, “COP26 was positive for the (natural) gas industry, despite the lack of a clear statement on its role in the energy transition.”
To achieve a 1.5-degrees Celsius limit in world temperature increase, “gas use will inevitably need to reduce over time. However, the global methane pact facilitates direct Scope 1 and 2 emissions reductions. That would give gas a role as a transition fuel.
“Meanwhile,” he added, “the ‘phasing down’ of coal could encourage increased gas use in developing Asian markets. At the same time, global carbon markets could incentivize the scale-up of carbon capture and storage, as well as blue hydrogen.”
As 2021 drew to a close, the U.S. Energy Information Agency forecast that world consumption of petroleum and liquid fuels would increase by 3.5 million barrels per day in 2022 to average 100.5 million barrels/day, though many uncertainties lingered.
In the end, last year was a year when the world and the oil and gas industry regained some health, but as 2022 approached, both were still hoping for a full recovery.