Oil Majors to Raise 2025 Exploration Investment by 60%
Oil and gas companies are preparing to spend 60 percent more on fossil fuel exploration, according to data and industry executives.
Analysts at Wood Mackenzie, a global oil sector consultancy, found that investments in oil and gas among the 23 biggest producers in the world are set to climb by over 60 percent by next year, compared to the trough of 2020 and the pandemic lockdowns.
“The main driver has been the dawning realisation that the transition is unfolding more slowly than expected, implying that oil and gas demand may be stronger for longer,” Wood Mackenzie’s analysts said.
It further said, “EuroMajors are looking to plug production and cash flow gaps by investing more upstream. US Majors and some Emerging Majors have already used M&A to expand and extend upstream exposure. We expect more sector consolidation to come in 2025.”
BusinessDay findings showed the renewed appetite for oil and gas reserves and production – among European majors in particular – comes after Shell and BP slowed down plans to shift away from their legacy business and invest in renewables as part of the energy transition.
Analysts said large oil companies are reinvesting as much as 50 percent of their income on average, and individual companies are returning between 35 percent and 60 percent to their shareholders in the form of dividends or share buybacks.
“Companies are coalescing around an average reinvestment rate of 50 percent, again assuming $75/bbl Brent – Majors a little higher, NOCs lower. Returns to shareholders average between 35 percent and 60 percent by peer group, either in the form of dividends or buy-backs,” Wood Mackenzie analysts further said.
The UK-based research and consultancy group also noted there are outliers as one or two companies with big development projects will invest up to 80 percent of cash flow and may require asset sales to support distributions.
“For IOCs, capital allocation fits within a conservative overall financial framework that includes target balance sheet gearing at or below 20 percent (the Majors’ average was 16% in Q2 2024, half the end-2020 peak),” Wood Mackenzie analysts noted.
BusinessDay gathered that exploration is a long-term, high-risk business. Big-ticket offshore projects typically take five years to develop from discovery and at least another 10 years to return the initial investment.
But as a source of profit, it has proved more reliable for the energy majors than the very different business model of producing renewable energy.
Upstream oil and gas have historically had returns of around 15 percent to 20 percent, while most renewables projects have delivered up to 8 percent, according to data seen by BusinessDay.
From Nambia to far-off Eastern Canada
Wood Mackenzie predicted the commitment of up to $185 billion to develop 27 billion barrels of oil reserves, with international oil companies focused on the higher-cost, higher-return deepwater developments.
It also anticipated the so-called Golden Triangle – U.S. Gulf of Mexico, South America and West Africa – as well as part of the Mediterranean will account for 75 percent of global floating rig demand through 2027.
Nambia, which has yet to produce any oil and gas, has attracted strong interest after Shell and TotalEnergies made discoveries off the coast of the southern African country.
Zoë Yujnovich, Shell’s head of upstream, said on June 14 2023 that results from drilling tests were encouraging.
Together with its partners, QatarEnergy, and Namibia’s national oil company, Shell plans to drill two further wells in Namibia by the third quarter of this year, a document seen by Reuters shows.
Shell has also applied for a licence to drill another 10 exploration and appraisal wells there, the document shows.
TotalEnergies made an oil discovery in February 2022 in the Venus well in Nambia’s Petroleum Exploration Licence (PEL) 56, which analysts at Barclays estimate holds 3 billion barrels of oil equivalent (boe).
Shell reported discoveries in the Graff, La Rona and Jonker wells in PEL 39 in Nambia, which together are estimated to hold 1.7 billion boe, according to Barclays.
As it tries to reverse a decline in oil and gas output after it shifted to renewables, BP has turned to the Gulf of Mexico and far off the eastern coast of Canada, where it is ramping up oil exploration activity in frontier prospects.
