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Striking the balance: How and where will oil and gas producers deploy their cash?

Financial discipline and high O&G prices have turned the tide for the global upstream industry

While the world underwent a big shift over the last few years, another realignment has been underway in the oil and gas (O&G) 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 US$1.4 trillion in 2022 (at an assumed average, Brent oil price stands at US$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, O&G 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 O&G 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 US$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 low-carbon 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 O&G 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 O&G 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 O&G industry with its financial heft could likely drive an accelerated transition to a low-carbon world.

For more insights on the investment choices and strategies of global upstream O&G producers, download the main report.

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The authors would like to thank Stanley PorterNoemie TilghmanPeter BuettgenTom Bonny, and Bart Cornelissen from Deloitte Consulting LLP and Katie Pavlovsky from Deloitte FAS LLP for their subject matter inputs, and contributions toward the development of this study.

The authors would also like to thank Abhinav Purohit and Shreya Shirgaokar from Deloitte SVCS India Pvt. Ltd. for their extensive research and analysis support, Ashlee Christian from Deloitte Services LP for her inputs, Rithu Thomas from the Deloitte Insights team for providing support with the report’s editing and publication processes, and Katrina HudsonDario FaillaAlyssa WeirClayton Wilkerson, and Jennifer McHugh from Deloitte Services LP for their operational and marketing support.

Cover image by: Dana Smith

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