Global Oil and Gas Industry Faces Turbulent Future As Spending and Investment Fall

Leading international energy research firm Wood Mackenzie and the International Energy Agency (IEA) are predicting difficult times ahead for the global oil and gas industry.

Wood Mackenzie said companies will need to maintain disciplined investment criteria whilst navigating significant headwinds as capital budgets fall and spending cuts deepen.

Meanwhile, new data from the IEA shows that opportunities to relieve market pressures by identifying new resources are becoming ever more difficult.

Competing Pressures

Tom Ellacott, senior vice president of corporate research at Wood Mackenzie, believes that oil and gas companies are caught between competing pressures as they plan for 2026.

“Near-term price downside risks clash with the need to extend hydrocarbon portfolios into the next decade,” Mr Ellacott said.

“Meanwhile, shareholder return of capital and balance sheet discipline will constrain reinvestment rates, [and] investors will continue to reward near-term priorities such as distributions, stable cash flow, and balance sheet strength over long-horizon investments.”

Reinvestment Rate Constraints

Wood Mackenzie is forecasting reinvestment rates will average 50%, enabling firms to return an average of 45% of operating cash flow to shareholders, while it expects companies with gearing above 35% will reduce their leverage to provide protection from rising price shock risks.

“Those with high reinvestment rates exceeding 80% will emphasise net investment after asset sales, deploying disposals to offset higher spending whilst high-grading portfolio quality,” Mr Ellacott said.

Wood Mackenzie says companies will need to support structural cost reductions by streamlining their operations, reducing headcount, and accelerating deployment of AI-enabled efficiency measures.

“Some companies will need a more nimble and creative approach to business development to free up capital and build out next-decade portfolios,” the firm’s head corporate analyst Neivan Boroujerdi said.

Accelerating Field Decline

The IEA says a higher global reliance on shale and deep offshore resources has led to a significant acceleration of the average rate at which oil and gas fields’ output declines over time, meaning companies must work much harder than before just to maintain production at today’s levels.

“The international conversation over the future of oil and gas often focuses on demand trends, while the factors affecting supply receive considerably less attention,” the IEA reported.

The agency’s new analysis – which used production data from around 15,000 oil and gas fields – noted that nearly 90% of annual upstream investment currently offsets supply losses at existing fields.

“In the case of oil, an absence of upstream investment would remove the equivalent of Brazil and Norway’s combined production each year from the global market balance,” IEA executive director Fatih Birol said.

“The situation means that the industry has to run much faster just to stand still, and still pay careful attention to the potential consequences for market balances, energy security, and emissions.”