Will the good times keep rolling? Top upstream trends for 2023

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After navigating the treacherous waters of the pandemic and the downcycle, upstream operators had their best year in decades in 2022, fortifying balance sheets and delivering cash flow surpluses that were the envy of the equity markets. But moving from zero to hero has furnished operators with a novel set of challenges as they seek to build on their success to show sustainable value. This report highlights our view of what will unfold in the year ahead both inside and outside the sector and will serve as a guide for the research topics we will tackle throughout 2023.

  1. Not screwing up the (last?) oil boom.

Cash will rain down again, but the blockbuster pace of capital returns in 2022 will decline as prices moderate and capital efficiencies erode due to continued service sector inflation and fewer DUCs available to liquidate. Importantly, companies will not "take the bait" and reinvest heavily to grow production. Global capex and project final investment decisions (FIDs) will reach pre-pandemic levels but won't adjust upward to account for the price upcycle, the 2020 investment hole, or the downshift in shale reactivity.

  1. Right or wrong, it is tough to bet on long-term oil.

The growing uncertainty around the trajectory of long-term oil demand tends toward less greenfield exploration and more exploration of green businesses. As governments and industry both accelerate promises of net zero, the perception of the risks to the future of oil and gas profitability rises.

  1. The new pricing rules create a playing field between $70/bbl and $120/bbl WTI. Less energy price panic and more acceptance of "higher for longer."

The global oil market continues its search for a new, reliable price formation mechanism as the 2015-2019 model–in which shale delivers all marginal barrels below $60/bbl–has disappeared. Finding the new mechanism and equilibrium will take time and the road will be bumpy. Yet we believe the market is learning about how supply and demand react at different bands of oil and gas pricing.

  1. "I'm not dead yet": Shale refuses to go on the cart and the sweet spot exhaustion story is overdone.

At WTI prices above $85/bbl, US shale outperforms the current (low) growth expectations. Even limited to less than 320 completion crews, the industry can deliver 700,000+ b/d of entry-to-exit growth for the next several years. Furthermore, our analysis suggests that well quality degradation is limited to the Eagle Ford, with other areas unable to improve much but maintaining recent productivity levels.

  1. North Americans and NOCs push harder on energy transition investment but stay close to core skillsets.

Meanwhile, the divergence of the aspirations and portfolios of European IOCs continues to grow. All sides of the energy transition debate are interpreting the upheavals of 2022 as validating their view of the need for change. In reality, everyone is in a better spot than a year ago and is moving faster.

  1. Buy ‘em back.

With balance sheet repair completed and regular dividends re-established, companies will increasingly favor the flexibility and perceived permanence of share buybacks over special dividends, acquisitions, and increased capex.

  1. Looking for a piece of the global LNG bonanza.

The explosion of LNG prices in 2022 and the drive to disconnect Europe from the lifeblood of Russian gas is impacting portfolio decisions across the upstream sector.

  1. "We must carbonize before we decarbonize."

Producing countries in the developing world will become more vocal in the debate over the energy trilemma (clean vs. secure vs. affordable) and on their plans to leverage their hydrocarbons for development. Gulf countries/NOCs will position themselves as winners in all three dimensions.

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Twenty states ask a federal court to halt Biden administration changes to NEPA implementation

A collection of 20 states on May 21 asked a federal court to vacate the Biden administration's recent changes to how infrastructure projects are reviewed under the National Environmental Policy Act, with Republican attorneys general asserting that the changes unlawfully alter the requirements of the statute to favor policy goals of the White House. The changes from the White House Council on Environmental Quality allegedly violate the Administrative Procedure Act by substantially altering agency review procedures that will result in higher costs for infrastructure development and delays in adding facilities, according to the states. The lawsuit filed with the US District Court for the District of North Dakota was led by Republican Attorneys General Drew Wrigley of North Dakota and Brenna Bird of Iowa. It asks the court to vacate the May 1 final rule from the CEQ, halt enforcement of it and reinstate the 2020 regulations on NEPA that were adopted by the CEQ under former President Donald Trump. The CEQ's final rule directs agencies to take into account project impacts on climate change and environmental justice communities. It has drawn fire from members of Congress and some in the energy sector, who claim that it will stifle infrastructure development, increase litigation and favor projects aligning with Biden administration clean energy policy preferences. A bipartisan group of lawmakers that includes Representative Garrett Graves, Republican-Louisiana, and Senator Joe Manchin, Democrat-West Virginia, announced plans this month to introduce a resolution under the Congressional Review Act to block the rule from taking effect and force the Biden administration to adhere to NEPA reforms outlined in the Fiscal Responsibility Act of 2023. The attorneys general assert that the CEQ is attempting to rewrite legislation through NEPA regulations to create roadblocks for projects that use fossil fuels. "Among other flaws, the final rule creates distinctions between favored and disfavored projects that are intended to reshape national policy (such as the nation's mix of electric generation sources) and are not based on NEPA's text," according to the court filing. 'Hard look' Stating that NEPA is a procedural statute that requires agencies to take a "hard look" at environmental consequences of proposed major federal actions, the states say the new regulations from the CEQ illegally transform procedures into stringent and unworkable requirements that will stymie development of certain projects and resources within their borders and across the country. During a May 16 hearing before the House Natural Resources Committee, CEQ Chair Brenda Mallory defended the rule, stating that it will improve infrastructure permitting at federal agencies, with provisions for agencies to identify impacts on climate change and environmental justice communities. The rule includes page limitations for environmental review documents, faster timelines for agency reviews and categorical exclusions for certain projects that can speed up the permitting process under NEPA, Mallory said. But the CEQ rule frustrates efforts to improve infrastructure development through the Fiscal Responsibility Act, the Inflation Reduction Act and the bipartisan infrastructure law, the states told the court. They asserted that elevating the importance of voices in environmental justice communities without any statutory basis and forcing agencies to examine environmentally preferable alternatives that maximize environmental benefits will be unworkable for agency reviews. "That open-ended obligation and impossible-to-meet standard guarantee regulatory and schedule uncertainty and predictable litigation surrounding any controversial or disfavored project," the states said. "The final rule's injection of ambiguity, new requirements, and unbounded agency discretion will also needlessly foster more development-crippling litigation by opportunistic project opponents using NEPA as a convenient tool to challenge federal agency approvals," the states said. Joining Iowa and North Dakota in the legal petition were attorneys general from Alaska, Arkansas, Florida, Georgia, Idaho, Kansas, Kentucky, Louisiana, Missouri, Montana, Nebraska, South Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia, and Wyoming.


Russian refinery damage escalates after latest Ukrainian drone strike

Strikes affect almost 1 million b/d gross capacity Ukraine using bigger explosives with 'steel balls' in drones Russian oil products exports at postpandemic low Russian refining capacity damaged by Ukrainian drone strikes rose further over the weekend May 18-19 to almost 1 million b/d after the 70,000 b/d Slavyansk oil refinery in the southern Krasnodar region was forced offline, according to local reports. The Slavyansk refinery -- which was previously struck on April 27 and March 17 -- was targeted by six drones May 18-19, Russia's state-run news agency TASS reported May 20, citing a company security official. TASS quoted the security official, Eduard Trudnev, as saying that the Ukrainian drones were bigger and more powerful than in previous attacks. "This time the drones were bigger, the charges were bigger too, and they were stuffed with steel balls," TASS cited Trudnev as saying. TASS cited the press service of the regional administration saying, however, that no fires were recorded after the drone attack. Slavyansk, a small export-oriented plant near the Black Sea, was last targeted three weeks previously, when an April 27 attack was suspected to have left a naphtha separation column damaged. A previous attempt on the site left a crude distillation unit and a vacuum distillation unit offline, though full operations were restored within a month. The attack comes two days after Ukraine launched a major strike on oil infrastructure in occupied Crimea and other Russian Black Sea oil infrastructure. Drone strikes May 17 caused fires at Rosneft's 240,000 b/d Tuapse refinery, which had only recently been restarted following a previous incident in January. Russia has alleged that French-made missiles were discovered in the Yubileiny settlement in occupied Luhansk May 20, while US artillery has been fired over Crimea, according to TASS May 20. Meanwhile, attacks deep within Russian territory continue to be conducted with domestically-produced Ukrainian drones even as its Western allies have stipulated military aid should only be used for defensive purposes. Export impact Combined, Russia's gross refining capacity potentially affected by drone strikes now stands at almost 1 million b/d, up from about 680,000 b/d on May 10, according to S&P Global Commodity Insights estimates. Russian oil products exports slumped to a postpandemic low in April, according to tanker tracking data, as Moscow battles to repair its western refineries under siege from Ukrainian drones. Russia's biggest fuel exports -- diesel and gasoil -- have continued to shrink this month, averaging 686,000 b/d to May 20, down a further 130,000 b/d from April and 405,000 b/d lower than in January, according to S&P Global Commodities at Sea. High stock levels, in excess of 2 million mt, coupled with ample availability on the exchange floor were keeping a cap on gasoline prices in Russia's domestic market and offsetting the upside momentum linked to the expected lifting of the export ban, according to sources May 17. Strikes on the month/ongoing damage: Date Name Capacity (b/d) Impact Status Domestic/export focus Approximate distance from Ukrainian border Previous attacks 18-May, 19-May Slavyansk (Slavyansk Eco) 70,000 Refinery damaged by attack, units unspecified Offline Export 350 km April 27 - suspected damage to naphtha separation column. March 17 - CDU and VDU outages - units back online within a month 17-May IPP oil products export terminal - Operations temporarily suspended Fully operational Export 400 km 17-May Transneft Grushevaya oil depot - Gasoline storage tank damaged Partly operational Export 400 km 17-May Novorossiisk fuel oil terminal - Debris hit two fuel oil storage tanks Partly operational Export 400 km 17-May Tuapse (Rosneft) 240,000 Fire caused by downed drone, suspected to reach CDU Partly operational Black Sea export hub for refinery feedstocks 400 km Jan 25 - VDU outage due to fire. Unit brought online within around 3 months 12-May Volgograd (Lukoil) 314,000 Fire at site Partly operational - AVT-1 CDU expected back online by end of May. Planned works on CDU AVT-6 expected until June Domestic fuel source to Southern Russia, pipeline connection to Novorossiisk for diesel exports 350 km Feb 3 - CDU VDU 5 unit set fire. Unit brought online within around one month 10-May Rovenky, Luhansk oil depot - Fire at site Partly operational Domestic 110 km 10-May First Plant 24,000 Three diesel tanks and one fuel oil container set fire Partly operational Domestic 260 km 9-May Salavat (Gazprom) 200,000 Fire in FCC unit Fully operational Exports to Central Asia, Arctic, Baltic and Black Sea ports 1,300 km 9-May Krasnodar oil depot - Several storage tanks damaged Partly operational Domestic 350 km 8-May Luhansk oil depot - Fire at site Partly operational Domestic 130 km 1-May Ryazan (Rosneft) 342,000 Fire at site Partly operational - one CDU offline though production unaffected Domestic - fuel supply source to Moscow, Pipeline connection to Primorsk for diesel exports 460 km March 13 - Two CDUs damaged. Units brought online within around two months 27-Apr Ilsky (Kubanskaya Neftegazovaya Kompaniya) 132,000 Suspected damage to AT-1 unit Fully operational Black Sea export hub 340 km Feb 9 - CDU, oil products tank damaged. Unit back online within a month 23-Mar Kuibyshev (Rosneft) 140,000 Both CDUs offline after fire One CDU resumed, second undergoing repairs, plant operating around 50% capacity Domestic diesel source, heavy fuel exporter 920 km 16-Mar Syzran (Rosneft) 178,300 Fire at processing unit, CDU offline Main CDU, AVT-6 offline, operating around 30% capacity Diesel exporter to Eastern Europe, domestic supply to central Russia. 700 km 12-Mar Norsi (Lukoil) 340,000 Fire extinguished at site, CDU halted FCC unit repairs expected to last until summer, CDU AVT-6 expected back June Domestic -- key gasoline supply source 800 km Source: S&P Global Commodity Insights, local reports


Oil, gas groups take to court fight over BLM's rule raising production costs on US federal lands

Rule raises royalty rates, auction minimums BLM calls rule balanced; critics say it is excessive Conservation groups confident lawsuit will fail A coalition of oil and gas groups representing the industry's interests in western US states are taking the Interior Department to court over a rule that raises the costs of producing oil and natural gas on federal lands. At issue is the Fluid Mineral Leases and Leasing Process rule released in April by the Bureau of Land Management that codifies aspects of the Inflation Reduction Act calling for changes to how fossil fuel production on nearly 700 million acres of federal lands is overseen. But conservation groups supportive of the rule were confident May 17 that the lawsuit would not succeed. The rule raised the royalty rates companies must pay to produce on federal lands to 16.67%, from the 12.5% that had been in place since the 1920s. Auction bid minimums were increased for the first time since 1988, to $10/acre, up from $2. Bonding requirements, the money companies must front to pay for cleanup of old projects, were reworked from the $10,000 lease bond amount set in 1960. The new minimum lease bonds are $150,000, with the minimum statewide bond rising to $500,000. The rule also includes provisions designed to concentrate leasing in areas that are most likely to be developed or feature existing infrastructure, and away from areas with sensitive wildlife, recreational uses, or other conservation designations. The BLM has touted the rule as a balanced approach to lands management that ensures a fair return for American taxpayers and cuts down on speculation. But independent oil and gas producers said in a petition filed May 15 with the US District Court for the District of Wyoming that the rule "represents a sea change to BLM's oil and gas leasing program" that will "deter development of federal oil and gas, disproportionately affect small companies, effectively close eligible and available lands to new leasing, and violate BLM's duty to promote oil and gas development as a multiple use of federal lands." The groups behind the lawsuit – the Western Energy Alliance, Independent Petroleum Association of New Mexico, New Mexico Oil and Gas Association, North Dakota Petroleum Council, Petroleum Association of Wyoming, and Utah Petroleum Association – have asked the court to invalidate and vacate the rule for being procedurally deficient, arbitrary and capricious, and contrary to law. Opinions differ on lawsuit's prospects "BLM issued a final rule that prices small producers out of the market and off public lands," Kathleen Sgamma, president of Western Energy Alliance, said in a statement May 16. "The bonding amounts are excessive when there are just 37 orphan wells out of more than 90,000 wells on federal lands. Increasing bonding amounts 20-fold in order to take care of a problem on just .04% of wells is way out of proportion." She added: "Companies are already responsible for reclaiming wells, and one of the primary reasons there are so few orphan wells on federal lands is because our members clean up old wells even when they weren't the party that abandoned them in the first place." Rikki Hrenko-Browning, president of the Utah Petroleum Association, called the rule "punitive, unnecessary, and overreaching," and said she was "confident the courts will agree with us and rightfully strike it down." The BLM declined to comment on the pending litigation, but conservation groups chimed in that the lawsuit was "laughable," with little legal footing to stand on. Aaron Weiss, deputy director of the Center for Western Priorities, noted that the petition never mentions the Inflation Reduction Act, even though "the vast majority of what the industry is whining about here, including minimum bids, rental rates, and the fee for nominating parcels for leasing, is required by the new law." "BLM has zero discretion in that," Weiss told The Energy Daily May 17. "What's left are bonding rates ... That's something that hadn't been adjusted in 50 years, and the Government Accountability Office recommended that BLM fix. The oil industry made billions of dollars in profits last year. Cleaning up after themselves is literally the least they can do." Western Environmental Law Center Executive Director Erik Schlenker-Goodrich said the petition essentially took on a "the-sky-is-falling" approach, with "weak" legal claims, "more akin to political rhetoric than well-reasoned law and fact." "The fact of the matter is, the vast majority of public lands remain open to mineral extraction, and these companies are already sitting on thousands of acres of unused leases," Sierra Club's Director of Conservation Programs Dan Ritzman said in an email. "If they want to argue taxpayers shouldn't get a fair return for the use of public lands, they're welcome to try." Statutory duty However, the oil and gas groups claim in the petition that the BLM failed to adequately respond to public comments, especially those from the regulated industry; fell significantly short in its economic analysis; and erroneously opted not to perform reviews required by the National Environmental Policy Act. "BLM has not taken a hard look (or any look) at the environmental impact of shifting production from federal lands to non-federal domestic and foreign sources, where environmental standards may be less stringent and production less sustainable," they said in defense of their NEPA argument. Further, there was no examination of "environmental justice impacts of shifting production from often rural and remote federal public lands to population-adjacent locations where privately owned minerals predominate," nor was there any consideration of the loss of revenues from federal leases that fund conservation efforts, they argued. They also allege that the BLM is violating its statutory duty to ensure development of domestic mineral resources and to account for the public's long-term need for fossil fuel resources.


Infographic: Ukraine invasion having profound impact on oil trade flows

Russia's invasion of Ukraine has had a profound impact on sour crude export destinations, and increased the appetite for sweet crudes among European refiners. Platts methodology has evolved to reflect this changing landscape. Click here to see the full-size infographic.