The changing face of upstream value

The first decade of the new millennium brought its share of risks and uncertainties to the international upstream industry. Even before the economic crisis of 2009, many industry observers expressed an underlying pessimism in the opportunities available to oil and gas companies, and cited concerns for their prospects for replacing reserves and providing sustainable value growth for investors.

At the core of this concern was a perception that much of the world's, large-scale, conventional reserves was under the stewardship of assertive national oil companies, where international company access is either impossible or managed under contract terms that offer little scope for large-scale, long-term value generation. Furthermore, several "new geographies" which offered giant growth opportunities in the 1990s, such as Russia and the Caspian states, were being devalued by resurgent resource nationalism and tightening fiscal terms.

But these fears may have reckoned without the industry's innate resilience, and capacity for innovation and renewal. Most companies have adapted their portfolios to the new political and economic realities, and many have enhanced their value expectations in real terms.

Wood Mackenzie's latest estimates of the net present value (NPV) of global upstream portfolios is around $3.2 trillion – more than 23% higher than in 2010, and beyond the impact of our increased oil price assumptions. This progress is impressive, and the story behind it is revealing. The positive signals in the industry today are the product of a process of portfolio evolution that began more than a decade ago.

In the first five years of the millennium, the international industry was investing almost two-thirds of its upstream development capital in conventional oil or gas fields, onshore or in shallow water. By 2011, this share had fallen to around 50%, and will be closer to 40% by 2016, based on companies' current investment plans. A comfortable majority of new expenditure in 2011 has been earmarked for four "modern" resource themes – deepwater, LNG, unconventional gas, and unconventional oil.

The evolution is illustrated in the majors' investment plans. Since 2001, the balance of development spend has shifted steadily from conventional assets to more complex projects associated with these contemporary resource themes. In 2011, conventional oil and gas projects comprise 48% of total NPV, but this is expected to fall to less than 40% by 2016. Value growth for the majors is driven increasingly by those "modern" themes, although each company pursues its objectives through its own distinct strategy, with different thematic priorities.

A large proportion of the world's new oil and gas reserves and many of the largest discoveries are in deepwater. Worldwide, 40 Bboe reserves were discovered worldwide in 2010, and 22 Bboe were in water depths of over 1,000 m (3,281 ft). Deepwater provinces are prominent sources of future value for the international industry. These include the Gulf of Mexico, Australia's Carnarvon and Browse basins, the Nigerian and Angolan Atlantic margins, and Brazil's Santos basin. While less than a quarter ($145 billion) of prospective upstream value in the United States is in the Gulf of Mexico, it is still the world's most valuable deepwater province.

Several major "value-centers" for the international industry have prominent LNG businesses, and in most cases these have ambitious plans for capacity growth. Qatar, Russia, Norway, Nigeria, and Angola all have major, current projects. The fastest growth is in Australia. Three major projects are under construction there and several more should get final investment decisions in the next three years.

Unconventional gas and unconventional oil projects have been the source of much of North America's value growth in recent years. Canadian oil sands are already one of the most valuable sectors in our global assessment, with an NPV of around $180 billion. In the gas sector, advances in technology and reductions in operating costs in the United States illustrate the huge potential for commercial shale gas and coalbed methane production in other parts of the world.

Another consequence of the focus on new resource themes has been a subtle geographic shift in portfolios, in favor of some of the industry's traditional heartlands, where fiscal and legislative risks are perceived to be lower. Over 50% of future upstream value for international companies is in North America, Australia, and Europe.

It could be argued that the evolution of the last 10 years has merely shifted the balance of risks; exchanging concerns over political and legislative stability for greater subsurface risks. The argument is valid, at least in part, but the emergence of these themes provides a solid foundation for growth, and promotes confidence that this growth can be sustained through the next decade and beyond.

Iain L. Brown
Manager – Middle East, North Africa, Russia and Asia-Pacific Energy Research
Wood Mackenzie

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