Wood Mackenzie expects strong prospective value growth in upstream oil and gas

Research and consulting firm Wood Mackenzie dispels talk that the oil and gas business is a “sunset industry” in a new report titled “The changing face of upstream value.” The report documents strong, prospective value growth in the upstream industry, with a 23% increase on Wood Mackenzie’s 2010 forecast.

The sector is valued at approximately US$3.2 trillion, not including exploration acreage or assets owned by national oil companies and governments. This value increasingly comes from four “modern” resource themes that have rapidly become prominent in international companies’ portfolios.

Iain Brown, Wood Mackenzie’s regional upstream manager, says, “Most oil and gas companies expect higher oil prices to be maintained in the medium-term. This is reflected by the number of acquisitions in the second half of 2010, and a strong flow of new development plans and approvals. It has become increasingly difficult for international oil companies’ to access conventional, shallow-water and onshore projects, and where this is possible, prospects for value generation are often modest. There is therefore strong motivation to seek alternative opportunities and promote technological innovation.”

“We have seen a shift in international companies’ portfolios over the past decade, towards four key themes – deepwater, LNG, unconventional gas, and unconventional oil. These now make up between 30% and 70% of future upstream value for the international majors. It is also notable that value prospects are still high in the traditional producing regions of North America, Europe, and Australia. Together these regions account for more than half (US$1.7 trillion) of future upstream value for international companies.”

Deepwater provinces are one of the leading sources of value growth. The Gulf of Mexico remains the world’s most valuable deepwater province, even after many spectacular recent discoveries in countries such as Brazil and Australia. LNG is the preferred solution for developing large-scale gas reserves in remote locations, and huge growth is forecast in Australia over the next five years. Unconventional gas is rapidly gaining in prominence. Shale gas has been a key driver of recent growth in the US, and advances in technology and reduced operating costs, have highlighted its potential in other parts of the world.

Wood Mackenzie’s long-term oil supply forecast shows a slow but steady shift towards heavier grades. This will include a major contribution from oil sands. Canada’s oil sands is one of the most valuable sectors in our global assessment – at around US$180 billion. Production in North America is now increasingly being supplemented by shale oil, which promises substantial value from reservoirs that were previously viewed as uneconomic.

Brown concluded, “The international industry faces many threats and uncertainties, including resource nationalism, restricted access to conventional resources, and governments seeking larger shares of revenues during periods of high oil prices. However, there are solid foundations for long-term growth in these four key resource themes, and as unconventional reserves rapidly become part of the mainstream. There will be significant growth in ‘emerging’ provinces such as Brazil, and in West and East Africa, but there is also huge potential to be realized in traditional heartlands such as North America and Europe.”

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