Upstream Investment Research Articles

Corporate positioning in Australia for a new investment outlook

Government intervention and increased regulatory scrutiny have altered the investment environment for the energy sector in Australia. Asia’s efforts to decarbonise will drive long-term investment in Australia’s renewable, hydrogen and carbon capture potential. But as the energy sector shifts emphasis back towards security of supply and affordability, Australia remains a key destination for upstream investment. Looking closer at Australia’s oil and gas sector, how are companies positioned to manage the rising complexity and uncertainty faced when making long-term capital decisions? Are Australia’s homegrown players leaders or laggards when pitched against their international peers? And how competitive are Australia’s oil and gas champions in the context of the country’s wider natural resources sector? Benchmarking corporate positioning through the lens of near-term resilience and long-term sustainability, we will identify the challenges, opportunities and strategic implications for Australia’s corporate oil and gas landscape.

Patent eligibility after Alice: Evidence from USPTO patent examination

AbstractIn a series of decisions over the last decade, the Supreme Court of the United States altered the classes of inventions that are eligible for patent protection—a body of law called subject matter eligibility. One of the more contentious of these decisions, Alice Corp. versus CLS Bank International (Alice), questioned the patentability of a broad class of inventions involving abstract ideas, particularly in digital technologies. Exploiting a quasinatural experiment, we find that the Alice decision reduced favorable patent eligibility decisions by 31% and significantly and persistently increased legal uncertainty in patent examination by 26% for a broad set of technologies. Our analysis quantifies how legal decisions can limit patent protection and highlights the need for further research on how greater legal uncertainty affects upstream investments supporting invention and downstream innovations fueling growth.

Show me the money! Associations between tree canopy and hospital costs in cities for cardiovascular disease events in a longitudinal cohort study of 110,134 participants

Health benefits from urban greening are assumed to translate into reduced healthcare expenditure, yet few studies have tested this. A total of 110,134 participants in the Sax Institute’s 45 and Up Study in the Australian cities of Sydney, Newcastle, or Wollongong were linked with hospital cost data for cardiovascular disease (CVD) events (e.g., acute myocardial infarctions) up to 30 June 2018. Associations between percentages of total green space, tree canopy, and open grass within 1.6 km of participants homes and annual per person measured CVD-related hospital costs were analysed using generalised linear model (GLM) with gamma density as a component of a two-part mixture model, adjusting for confounders. Overall, 26,243 participants experienced a CVD-related hospitalisation. Incidence was lower among participants with 10 % more tree canopy (OR 0.98, 95 %CI 0.96, 0.99), but not with higher total green space or open grass percentages. Total costs of hospitalisations per year were lower with 10 % more tree canopy (means ratio 0.96, 95 %CI 0.95, 0.98), but also higher with 10 % more open grass (means ratio 1.04, 95 %CI 1.02, 1.06). It was estimated that raising tree canopy cover to 30 % or more for individuals with currently less than 10 % could lead to a within-sample annual saving per person of AU$ 193 overall and AU$ 569 for those who experienced one or more CVD-related hospital admissions. This projects to an estimated annual health sector cost reduction of AU$ 19.3 million per 100,000 individuals for whom local tree canopy cover is increased from less than 10 % to 30 % or higher. In conclusion, this longitudinal study is among the first to analyse measured healthcare cost data in relation to urban green space in general, and with differentiation between major types of greenery relevant to urban planning policies in cities around the world. In sum, this study advances an increasingly important and international focus of research by reporting on the lower burden of CVD and fewer associated hospitalisations stemming from upstream investments that protect and restore urban tree canopy, which not only translates into substantial reduced costs for the health sector, but also helps to create regenerative cities and flourishing communities.

Elephant Hunt: The Search for the Oil and Gas Supplies to 2050

_ The oil and gas industry is at a critical juncture in the evolving global energy landscape. As the world intensifies its focus on combating climate change and embracing renewable energy sources, traditional fossil fuel exploration faces unprecedented challenges. The energy transition is now a tangible reality, reshaping the foundations of the oil and gas sector. However, just as there is no shortage of proclamations that the end draws near for King Fossil’s reign at the top of the energy resource pyramid, an equally high number sees the old king hanging around beyond 2050. This back-and-forth between renewable and fossil energy proponents gives all a good bone of contention to gnaw on. In September, Fatih Birol, executive director of the International Energy Agency (IEA), wrote in the Financial Times that it is taboo to suggest that demand for fossil fuels could go into permanent decline. He announced that the relentless age of growth for fossil fuels is set to decline by 2030, according to new projections by the IEA set to be released this month in its World Energy Outlook. OPEC criticized the announcement, describing the narrative as “extremely risky and impractical to dismiss fossil fuels or to suggest that they are at the beginning of their end.” The oil-producing nations group said the IEA’s thinking on fossil fuels is ideologically driven rather than fact-based, and predictions like these are “dangerous” because they are often accompanied by calls to stop investing in new oil and gas projects. Upstream Investment: Too Little or Just Right? The IEA and OPEC did find a small patch of common ground, agreeing that there would still be demand for oil and gas in 2050 and that continued investment in new oil and gas projects is needed. The underinvestment in upstream asset development has been a concern for several years, with the COVID-19 pandemic only exacerbating the issue, and according to a recent report by Goldman Sachs, oil and gas activity declined at a compounded 7% from 2014 to 2021. The investment bank expects primary energy capital expenditure to grow 48% by 2027 to $1.9 trillion, up from $1.3 trillion in 2022. “We believe the energy industry has been underinvesting since the peak of 2014, with investments in traditional energy (upstream oil and gas) falling 50% in 2020 from the peak and driving an 18% reduction in global primary energy investments, from $1.3 trillion in 2014 to $1.0 trillion in 2020,” the bank said. “A number of oil and gas investment decisions had been delayed since 2014, translating into 10 million B/D of lost oil production by 2024–2025—equivalent to Saudi Arabia’s annual production—and 3 million BOED of lost LNG production—more than Qatar, on our estimates,” according to Goldman Sachs.

China's 5G and supercomputing industrial policies: A critical (comparative) analysis

AbstractThe Chinese central government has greatly supported two strategic high‐tech industries: 5G and supercomputing. However, when both encountered similar U.S. sanctions, the 5G industry failed to make crucial upstream components while the supercomputing industry could. This article argues that the central government‐level industrial policies contributed to these divergent outcomes. Using natural language processing and qualitative content analysis of meticulously collected official documents and secondary sources, key policy differences were identified. Before the U.S. sanctions in May 2019, China's 5G industrial policies were significantly unbalanced, with inadequate attention given to research and development of vital upstream components, contributing to a lack of upstream investment. Although recent attempts to rebalance 5G industrial development since 2021, the policy focus remains largely on the mid and downstream segments. In contrast, before the U.S. sanctions in 2015, the supercomputing industrial policies emphasised the development of the entire industrial chain, including crucial upstream components, resulting in China's possession of entirely homegrown supercomputers. Leveraging a tri‐level analysis framework rooted in political economics, this study also offers possible explanations for the policy divergence and discusses implications. It contributes to the existing literature and ongoing debate on China and industrial policy amidst great power high‐tech competition.

Capacity choice with upstream investment

AbstractWe consider a vertically related market with an upstream firm engaging in cost‐reducing investment and downstream firms competing on quantity. We analyze the capacity choice by downstream firms. We find that input price decreases with production capacity if many downstream firms exist or the investment is efficient. More importantly, in the previous research, it is shown that the duopolistic downstream firms always choose undercapacity in a vertical market with an upstream firm. However, we find that overcapacity occurs in equilibrium if the number of downstream firms is large or the upstream investment is efficient.

Managing MNE Geographic Overstretching: Regional Integration of FDI Locations Along the Value Chain

Research suggests that many MNEs face the challenge of geographical overstretching – defined as international expansion beyond what a company’s dynamic capabilities allow. This issue is especially challenging for companies pursuing global economies of scale while being locally responsive. This paper argues that the regional integration of FDI locations can alleviate the negative performance effect of certain international expansion. The analysis of global automotive industry from 2003 to 2019 shows that regional integration of FDI locations across the value chain helps MNEs to reduce the negative performance effect of inter-regional diversification. By contrast, regional integration of upstream investments or downstream investments has no such benefit and can even hinder organizational performance. The present research enriches our understanding of MNE geographic scope and regional strategy interface, by delineating the role of regional integration of investment locations in inter- and intra-regional diversification.

E&P Notes (August 2022)

E&P Notes (August 2022)

Downstream Cross‐Holdings and Upstream R&D*

Cross‐holdings affect firms’ behavior in other vertically related markets. We consider a vertical market with two downstream firms and an upstream firm engaging in cost‐reducing R&D. Since downstream cross‐holdings weaken downstream competition, the upstream firm also decreases its investment. Hence, we find that as the degree of downstream cross‐holdings increases, input price increases and investment level decreases. Although cross‐holdings have this negative effect on downstream firms’ profits, they increase the downstream firms’ profits if the investment technology is inefficient. Finally, we show that with inefficient upstream investment, total surplus increases with cross‐holdings, while consumer surplus always decreases with cross‐holdings.

Sustainable Recovery: Regained Optimism

Upstream investment is the main driver for employment in our industry, and forecasts of company spending are eagerly expected by the service sector. I commented in my January column on the initial activity estimates made by West (Evercore). The forecasts have now been firmed up and the increases range between 15 and 17% in 2022 compared to 2021, with growth in all geographical regions. Evercore even projects that 2022 will be the beginning of a multiyear positive cycle for the industry, following 2021 which was a “renaissance of sorts” for the E&P sector. The US Energy Information Administration (EIA) Short Term Energy Outlook for February 2022 forecasts that US oil production will rise to 12.0 and 12.6 million B/D in 2022 and 2023, respectively. The latter would be the highest level ever reached, exceeding the previous record in 2019 by 0.3 million B/D. In their fourth-quarter announcements, the leaders of major service companies made the most optimistic comments for the past several years. Halliburton’s CEO Jeff Miller stated that “simultaneous” growth will occur in both the North American and international markets with a “momentum that I have not seen in a long time.” For Schlumberger’s CEO Olivier Le Peuch, “a strong multiyear upcycle” is underway as capital spending commitments are set to increase by 20% in North America and in the “low to mid-teens” across the broader international market. Such notes from the service sector are welcome news for SPE, as its financial sustainability depends on the engagement of the industry through trade shows, exhibitions, and meetings. Fiscal year 2022 (which ends on 31 March 2022) was the most challenging one in SPE’s history, as we chose not to diminish the level of service to our members and continued to provide virtual and hybrid information channels. SPE’s account balance was positively impacted by the outstanding performance of its reserve funds in financial markets and the support from the US government through instruments such as the Paycheck Protection Program (PPP). These allowed a considerable reduction in loss to an estimated $3 million. For fiscal year 2023 (ending 31 March 2023), the SPE Finance Committee has retained a cautious outlook, with significant uncertainties resulting from the pandemic situation. Early signals coming from the success of the recent hydraulic fracturing technology conferences and exhibitions in Oman and the US are positive. The financial strategy will be adapted in the coming months based on the results of key events such as IPTC, OTC Asia, and the Offshore Technology Conference in Houston.

Sustainable Recovery: Managing Risk, Uncertainty, and Complexity

I was invited to chair an executive panel related to best practices in oil megaprojects at the 2021 World Petroleum Congress in Houston in December. There were outstanding presentations by Petrobras, Equinor, and Chevron related to developing very complex projects in challenging surface and subsurface environments with the required quality and in line with initial cost estimates. Technological evolutions in our industry have allowed such an achievement, which makes me proud to belong to this industry. If I were to characterize the skills that differentiate our oil and gas professionals from most other industries, I would highlight our knowledge of subsurface sciences and the ability to manage large-scale projects that are complex and have significant risks associated with them. The latter refers to a significant deviation from the planned/expected performance of the project due to various factors. SPE has developed over the years several initiatives related to risk management. They span most of the technical disciplines, in particular the Health, Safety, Environment, and Sustainability, and the Management disciplines. Among the latest resources is the Human Factors Technical Section, which has done an outstanding job to deliver valuable information on how to mitigate risks associated with human factors, especially in the case of complex decisions with short-time response required. With the expanding use of artificial intelligence in our operations, there will be more involvement of the Data Science and Engineering Analytics discipline. Other resources include publications about decision analysis, and in particular, the books Making Good Decisions, Introduction to Petroleum Economics, and the still very useful Decision Analysis in E&P. A particular type of risk that our industry faces is the challenging economic environment that has resulted in shorter industry cycles associated with an increased impact on activity (hence employment) in the oil and gas sectors. The activity drop in 2014–2016 led to a decrease of more than 25% in upstream investments, followed by another even larger (30%) decline in 2020. In fewer than 5 years, the upstream sector has seen investments nearly halved. I highlighted in a previous column that the 2022 recovery would depend on the emergence of new variants of COVID-19. The emergence of the Omicron variant and the speed at which it is spreading around the world, with limitations imposed on international travel, has led to new daily cases reaching a (conservative) figure of 3 million daily worldwide. Thankfully, it seems that the severity of the cases is lower than with previous variants such as Delta.

The Multiple Impacts of the COVID-19 Pandemic on China’s Oil Security and the Rising Green Opportunities

The COVID-19 pandemic has seriously challenged the global oil market, and coronavirus-induced oil prices crash, oil demand decline and global economic recession affect China’s oil supply as well. China has high oil vulnerability due to its rising oil import dependency which aggravates Beijing’s concerns about oil security, despite at a time of the pandemic-induced oil oversupply. This study uses the SWOT analytical model to identify the strengths, weaknesses, opportunities and threats in China’s oil sector, and the changes in opportunities and threats caused by the COVID-19 pandemic. The pandemic has brought multiple impacts to China’s oil security. Results from the analysis show that the existing opportunities such as oil investments in the Belt and Road Initiative (BRI) and domestic upstream opening-up have been weakened; new threats that the uncertainty over global oil demand-supply and decrease in global upstream investments have emerged; opportunities that an increase in domestic strategic petroleum reserve (SPR) and low-carbon development are rising amid the pandemic. Notably, the COVID-19 pandemic has demonstrated the vulnerability of the global oil market to systemic risks and accelerated the transition to renewable energy.

The Multiple Impacts of the COVID-19 Pandemic on China’s Oil Security and the Rising Green Opportunities

The COVID-19 pandemic has seriously challenged the global oil market, and coronavirus-induced oil prices crash, oil demand decline and global economic recession affect China’s oil supply as well. China has high oil vulnerability due to its rising oil import dependency which aggravates Beijing’s concerns about oil security, despite at a time of the pandemic-induced oil oversupply. This study uses the SWOT analytical model to identify the strengths, weaknesses, opportunities and threats in China’s oil sector, and the changes in opportunities and threats caused by the COVID-19 pandemic. The pandemic has brought multiple impacts to China’s oil security. Results from the analysis show that the existing opportunities such as oil investments in the Belt and Road Initiative (BRI) and domestic upstream opening-up have been weakened; new threats that the uncertainty over global oil demand-supply and decrease in global upstream investments have emerged; opportunities that an increase in domestic strategic petroleum reserve (SPR) and low-carbon development are rising amid the pandemic. Notably, the COVID-19 pandemic has demonstrated the vulnerability of the global oil market to systemic risks and accelerated the transition to renewable energy.

Caspian Oil and Gas Leverages Strengths To Survive in a Low-Carbon World

Nearly 30 years ago as the Soviet Union lay in tatters, Azerbaijan and Kazakhstan signed off on the Caspian’s first oil and gas megaprojects, hoping to guarantee their independence by transforming the region’s energy landscape and their role in it. Nursultan Nazarbayev, then president of Kazakhstan, took the first step in April 1993 by creating Tengizchevroil (TCO), a joint venture between Chevron and Kazakh state oil company KazMunaiGaz, to develop the super-giant Tengiz oil field and nearby Korolev field. Today, Chevron still holds 50% of the venture, ExxonMobil controls 25%, KazMunaiGaz, 20%, and LukArco, a subsidiary of Russia’s Lukoil, 5%. A year and a half later, in September 1994, Azerbaijan’s president, the late Heydar Aliyev, signed a production-sharing agreement (PSA) to develop the deepwater reserves of the Azeri, Chirag, and Gunashli (ACG) fields, attracting the participation of a “who’s who” of the world’s oil and gas elite—13 global companies representing eight countries. These and other signings had a knock-on effect as more upstream megaprojects popped up across the region in the late 1990s and throughout the early 2000s, attracting more international participation and the need to develop midstream infrastructure such as Azerbaijan’s Baku-Tbilisi-Ceyhan pipeline (BTC) export line to Turkey and Kazakhstan’s Caspian Pipeline Consortium (CPC) to Russia’s oil export terminal at Novorossiysk, as landlocked Central Asia devised ways to get its crude oil to market. For a generation, the Caspian’s top-heavy “bigger is better” way of doing things, led by global majors, did a good job of attracting upstream investment. But what about the next generation as those same supermajors rebrand and shift their portfolios to produce more energy with less carbon? Ashley Sherman, research director at Wood Mackenzie for upstream oil and gas, predicted in June that Caspian oil and gas production will continue to grow in this decade as already-committed oil and gas investments percolate through the system (Fig. 1). These investments, however, target expansion and optimization of existing operations. Thus, by 2030, upstream capital expenditures are likely to be at only half of their 2019 levels, Sherman wrote. BP and Socar’s (the state oil company of the Azerbaijan Republic) deepwater Shafag Asiman discovery in Azerbaijan may be an exception, but while a first exploration well drilled and completed in March detected gas condensate, the well was suspended pending further evaluation and possible drilling of a sidetrack appraisal well, BP said in a news release. The block lies 125 km (78 miles) southeast of Baku in an unexplored area in 650-to-800 m water depths. It is likely that tomorrow’s Caspian upstream will look a lot like today’s Caspian upstream, which is dominated by five projects: the onshore Tengizchevroil and Karachaganak projects in Kazakhstan; shallow-water offshore Kashagan, also in Kazakhstan; and Azerbaijan’s offshore deepwater ACG and the Shah Deniz gas field. While each of these projects elicits a definite “wow” factor in terms of sheer size, it is worth noting that the PSAs on which most of the projects are based will expire in the 2030s, though some remain in effect into the 2040s.

The Competitiveness of Beef Exports From Burkina Faso to Ghana.

Despite large volumes of cattle stocks in the Sahel, most exports of cattle products remain as live animal sales rather than meat. However, there is increased interest amongst donors and governments to increase value-added exports of beef. In this paper, we provide results from a simulation analysis that explores the prospective competitiveness and benefits of exporting beef from Burkina Faso to Ghana rather than live animals. The paper reviews trading patterns in live animals along the corridor and meat imports from overseas destinations to Ghana. Model results highlight limited competitiveness of the main products demanded in destination markets (offals). Market segmentation strategies, infrastructure development, and animal productivity all generate marginal improvements in competitiveness, but not enough to compete with third-country supplies. Only specific, largely external macroeconomic conditions provide for significant improvements in competitiveness. The paper further reveals the relatively modest employment gains associated with increased exports of meat in lieu of live animals. The analysis suggests a re-think on large-scale investments in downstream functions in the value chain, instead illustrating the fundamental role of upstream investments in productivity, animal health, and collective action to promote greater market integration between pastoralists and formal sector buyers.

E&P Notes (August 2021)

E&P Notes (August 2021)

Investment in drinking water and sanitation infrastructure and its impact on waterborne diseases dissemination: The Brazilian case

Investment in sanitation and drinking water infrastructure is essential for universal access to these services in developing countries. Universal coverage of water and sanitation services (WSS) can prevent the dissemination of waterborne diseases and mitigate their adverse effects. These diseases are responsible for many deaths worldwide, especially among the disadvantaged population and children. A causal effect can be established between WSS investment and hospital admissions due to waterborne diseases. Therefore, we considered an innovative network-DEA approach that models the link between serially connected subsystems (upstream investment and downstream hospitalizations). This approach allowed us: to measure the efficiency of both subsystems; estimate the amount of (efficient) investment necessary to universalize the access to proper WSS infrastructure; and mitigate hospital admissions due to waterborne diseases. We used the Brazil case study to test our model. On average, Brazilian states could increase the number of people not requiring hospitalizations due to waterborne diseases by 157 thousand per R$100 million invested in sanitation and 26 thousand per R$100 million invested in drinking water. Our results suggest that relatively small (efficient) investment in those two infrastructure types has a massive impact on hospitalizations. This impact would be more significant than the investment in WSS coverage. Therefore, if safely managed, WSS would cover all citizens, and Brazil would come closer to developed countries.

Bearish long‐term outlook for upstream gas investment as zero‐carbon commitments mount

Bearish long‐term outlook for upstream gas investment as zero‐carbon commitments mount

An Empirical Study on Optimal the Allocations in Advertising and Operation Innovation on Supply Chain Alliance for Complex Data Analysis

Effective and efficient closed‐loop supply chain processes can provide a significant competitive edge for companies. This study considered three investment strategies in the process of initiating closed‐loop supply chain alliances. The results showed that a promised proportion has a significant effect on investment decisions under a pure investment strategy. Furthermore, a reasonable promised proportion can coordinate the supply chain under a pure innovation strategy but cannot in a pure advertising strategy. Upstream (i.e., innovation) investments decrease wholesale and retail prices, while downstream ones increase retail and wholesale prices. Increasing innovation investment can transform benefits to the downstream, while increasing advertising investment may cause opportunism. A hybrid investment strategy balances upstream and downstream investment simultaneously and provides insights into optimizing the supply chain system in investments.

Open acreage concession process: new Brazilian mecanism to attract oil and gas upstream investments

Open acreage concession process: new Brazilian mecanism to attract oil and gas upstream investments