Market Outlook: Striking the Balance

By Amy Chronis, Deloitte LLP

While the world underwent a big shift over the last few years, another realignment has been underway in the oil and gas industry.

The COVID-19 pandemic, geopolitical developments, and underinvestment in hydrocarbons have pushed energy commodity prices to record levels, causing a readjustment in energy markets, trading relationships, organizational priorities, and broader energy market narratives.

As a result, the industry is likely to generate its highest ever free cash flow of $1.4 trillion in 2022 (at an assumed average, Brent oil price stands at $106/bbl in 2022). Additionally, over the last few years, the industry’s attempts to improve its capital discipline have paid off—it is in one of its healthiest periods currently, with its lowest ever leverage ratio (20%) and one of its highest ever dividend yields (6%), compared to other sectors.

Armed with record cash flows and favorable financial health, oil and gas companies now have important decisions to make—where to invest, and how much. But evolving questions around energy security, diversification, and transition, and the uncertain trajectory of future oil and gas prices are creating a “trilemma” of concerns for companies. And while companies will have to make decisions to prioritize investments and balance the trilemma, they will also need to think about fulfilling their base priorities toward shareholders and other stakeholders.

The good news is that even after servicing their base corporate priorities, global upstream companies are still likely to have a cash war chest of $1.5 trillion between 2022 and 2030. This surplus is substantial enough to move the needle on the industry’s share of green capex from its current 5% to 30%, can potentially kickstart the lowcarbon economy, or can technically make the industry completely debt-free.

With net-zero goals looming on the horizon, low-carbon investments are likely to feature prominently among oil and gas companies’ priorities. And while the industry has already made strides in establishing and progressing on its low-carbon goals over the last few years, the expected cash surplus is likely to boost the momentum. It could also allow companies to be more amenable to any losses in returns as they transition to a low-carbon future.

Ultimately, a healthy and disciplined oil and gas industry could propel—and not hinder—the energy transition. It could help overcome problems of underinvestment and supply concentration by providing affordable and accessible hydrocarbons. And aided by a supportive regulatory environment, the oil and gas industry with its financial heft could likely drive an accelerated transition to a lowcarbon world.

For more information, please visit Deloitte.com/us/ strikingthebalance.

Amy Chronis is vice chair, the U.S. Oil, Gas & Chemicals (OG&C) leader, and the managing partner for Deloitte’s Houston practice. Chronis has more than 30 years of experience serving public and private enterprises from emerging businesses to Fortune 500 companies, with a focus on the OG&C, technology and manufacturing industries. Chronis served as Deloitte’s U.S. lead relationship partner for one of the world’s largest integrated oil and gas companies, as well as other Houston enterprises. In addition to her Houston practice leadership role, she is the U.S. lead relationship partner for several international oil, gas and chemical companies.