Illustration; Source: Westwood

Volatility in oil & gas prices on the cards for 2023 after roller-coaster ride in 2022, says Westwood

Westwood Global Energy, an energy market research and consultancy firm, has outlined in its 2022 review of upstream oil and gas that the previous year was a turbulent one for the industry, which was caught between a rock and a hard place trying to tackle both the increasing urgency to transition away from fossil fuels and societal pressures to maintain affordable levels of energy supply.

Illustration; Source: Westwood

In its report, which reviews the volatility of commodity prices in 2022 and its impact on the finances and equity valuations of oil companies as well as the deal space of upstream mergers and acquisitions while considering how the events of 2022 may impact the sector in 2023, Westwood explains that 2023 will also be marked by oil and gas price volatility.

Graeme Bagley, Head of Global Exploration and Appraisal, Westwood said: “The impact of high and volatile oil prices on the industry and society has well and truly been brought to bear. Pivoting from an oil price crash sparked by the pandemic, to a war-related, sanctions-driven collapse in supply and an oil price peak all in two years is extraordinary – even in the context of the oil price roller-coaster seen over the last 12 years.

Even though high oil and gas prices in 2022, enabled oil and players to rake in record-high profits, the report outlines that energy firms are focussing their attention on returning value to shareholders and reducing debt rather than reinvesting. Westwood says that a supply shock in Europe induced by the Ukraine crisis drove oil prices up to an average of $101/bbl in 2022 with European spot gas prices up to an incredible $623/boe in August.

The impact of high energy prices on society at large forced governments in Europe into massive support programmes, subsidising gas and electricity for consumers, paid for in part by windfall taxes on energy producers,” highlighted Bagley.

Cash gushing from oil & gas a bonanza for shareholders

Based on Westwood’s report, the average Brent oil price increased by 42 per cent in 2022 while gas prices also reached very high levels. The firm underlined that 44 cents in every dollar of cashflow went to shareholders and 12 cents to increased capital expenditure.

The oil majors – Shell, BP, Chevron and ExxonMobil – have come under fire after releasing their full-year results for 2022, as they are accused of funnelling billions back into shareholder pockets in the form of buybacks, instead of investing their profits back into “clean, cheap renewable power which could alleviate bills, shore up UK energy security, and ease the climate crisis,” as outlined by Greenpeace.

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As pressure mounts to increase green investments, oil and gas players will try to keep the balancing act in place to fulfil the demand for oil and gas. Westwood also underlines that big energy players will be more likely to invest in accelerating energy transition strategies than to boost oil and gas activities.

Westwood’s report highlights that cash was king in 2022 while supermajors slowed down their asset sales and smaller cash deals dominated with private equity remaining a net buyer.

What’s in store for 2023?

Furthermore, Westwood underlines in its report that uncertainty in demand and supply will continue to be an issue in 2023. Whilst a range for Brent of US$70-90/bbl seems reasonable, gas prices will remain volatile and hard to predict, according to the report.

On the other end, capex budgets are expected to increase through 2023 with increases likely to be modest, says Westwood while adding that the portfolio rationalisation of the supermajors may come to an end, although E&Ps that continue to focus on hydrocarbon production will be willing buyers of assets. The company claims that further exits from upstream by companies that have prioritised the energy transition may take place in 2023.

“Looking ahead to 2023, European gas prices will continue to be volatile and hard to predict, whilst shareholder pay-outs are expected to continue. Companies that have prioritised the energy transition may exit the sector whilst those that choose to remain will be willing buyers of attractive assets,” concluded Bagley.