DNV GL: Industry plans increase in renewable, LNG investments

Feb. 8, 2021

A record two-thirds (66%) of senior oil and gas professionals report that their organization is actively adapting to a less carbon-intensive energy mix in 2021, up from just 44% in 2018, according to “Turmoil and Transformation,” DNV GL’s outlook for the oil and gas industry in 2021. Some 57% plan to increase investment in renewables, compared to 44% last year. Almost half (48%) expect to increase investment in green or decarbonized gas. Only a fifth (21%) expect to increase investment in oil projects in 2021.

Eight-in-ten (78%) believe there will be increased industry consolidation in the year ahead, with 63% expecting more demergers, divestments, and spin-offs. Transformational investments are expected this year despite a crash in industry confidence. Only 39% are confident for industry growth in 2021, down from 66% last year and 76% in 2019.

DNV GL’s report suggests priorities are shifting as investors reassess the risks of financing oil and gas projects, and as governments and industry pour billions into green recovery strategies following the COVID-19 pandemic. The research is based on a survey of more than 1,000 senior oil and gas professionals and in-depth interviews with industry executives.

“Net-zero climate policies began to proliferate in 2020, from Europe to China, and made it onto the table in the US. Long term, net zero policies have the potential to drive deep decarbonization of the world’s energy system, and they are already changing the direction of the oil and gas industry,” said Hans Kristian Danielsen, vice-president, DNV GL.

The oil and gas industry is moving through its third major downturn in 12 years, but the outlook for 2021 is influenced by the possibility that this downturn may be different from those of the past. Perhaps the most significant difference for the industry for 2021, is the shift in capital away from fossil fuels.

“The financial markets – through the effects of the COVID-19 pandemic – have seen what peak oil demand could look like and are increasingly factoring in changing sentiment in society towards a decarbonized future,” said Danielsen. “Decarbonization has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis,” said Danielsen.

Cost cutting will still be a universal priority (96%) for 2021, but the industry is already lean. A resilient 63% say their organization will still achieve acceptable profits if the oil price averages $40-50/bbl in 2021. However, there are signs that traditional cost cutting methods are hitting their limits.

The oil and gas industry is not hitting the spending brakes as hard as it did after the downturn in 2014, according to DNV GL. While the proportion of respondents expecting to maintain or increase capital expenditures (capex) in the year ahead has fallen to 62% – down from 72% going into 2020 – this is much higher than the 43% recorded following the last downturn.

The industry cut costs and waited for oil demand to rise during the last downturn, then renewed investment in oil and gas. While some in the industry are expecting a quick recovery, DNV GL’s research shows that most are looking longer term to transformational investments: to projects that will decarbonize the industry.

DNV GL’s modelling estimates that natural gas will grow its share of primary energy supply to 29% in 2050 from 26% in 2018 and become the largest energy carrier in 2050. Over the same period, the company expects oil’s share to fall to 16% from 29%.

The stronger investment outlook for gas goes beyond upticks in demand: there is also transformation at work. Gas will increasingly be traded as LNG, driving a surge in capex, which DNV GL expects to peak at around $250 billion for both 2024 and 2025. This comes as new sources of gas supply, particularly in North America, establish the infrastructure needed to sell gas to new centers of demand in China, India, and South East Asia, where investments are being made in terminals to receive the gas.

According to DNV GL, LNG may become – or already be – the fuel driving the most capital-intensive projects in the industry, taking the place of oil. The pullback on investment in new upstream oil and gas projects, however, has many concerned about future supply shortfalls. “The industry needs to be careful regarding upstream oil and gas,” said Ahmed Heikal of Qalaa Holdings in the report. “The lack of long-term investments could see shortages that can cause a lot of spikes in oil prices.” As a result, Heikal does not rule out the possibility of a return, for a brief volatile period, to $100/bbl oil: “I don’t think that is farfetched,” he said.