UK-based analytics firm Wood Mackenzie says while investment growth in the oil and gas sector is set to continue, it will occur at a slower pace than in previous years.
Capital allocation in the oil and gas sector has become increasingly complex due to the Paris Agreement and ongoing Middle East conflicts, necessitating a careful balance between upstream development, new energy initiatives, and shareholder expectations. To aid in this process, Wood Mackenzie said it launched its Corporate Strategic Planner, designed to help decision-makers navigate these challenges and identify key themes for capital allocation.
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Tom Ellacott, Neivan Boroujerdi, Alex Beeker, and Raphael Portela from Wood Mackenzie’s Corporate Analysis team provided insights into the future of investment in the sector. “We’re about to enter the fifth year of an upcycle,” they said.
By the end of this year, annual investment for the 32 companies analyzed will have risen more than 60% from the 2020 low during the pandemic. However, the analyst expects growth to decelerate to about 5% in 2025, assuming Brent crude prices hold steady at US$75 per barrel. They said this anticipated slowdown reflects the industry’s disciplined approach to investment, balancing the need for adequate returns to shareholders.
The analysts noted too that companies are converging around an average reinvestment rate of 50%, with Majors slightly above this figure and National Oil Companies (NOCs) slightly below it. “Returns to shareholders average between 35% and 60% by peer group, either in the form of dividends or buy-backs,” they explained. A few companies with substantial development projects may invest as much as 80% of their cash flow, potentially requiring asset sales to maintain shareholder distributions.
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Upstream spending continues to dominate across all groups, comprising 60% of total investment for EuroMajors and nearly 90% for Emerging Majors in 2024. The analysts indicated that “organic spend in upstream is already at its highest level since 2015 in absolute terms – and we expect it to go higher still in 2025, albeit marginally.” They attributed this focus to the realization that the energy transition is unfolding more slowly than expected, leading to sustained oil and gas demand.
However, exploration spending remains subdued, tracking at about half the levels of a decade ago, with only a few NOCs increasing their investment. The analysts cautioned that the Majors may need to consider increasing their exploration budgets to sustain their portfolios for the next decade.
