Upstream oil to make 13-year record cash flow on low investment, shale profits

London, (Quantum Commodity Intelligence) - Upstream oil companies are set to record 13-year high free cash flows this year of $348 billion, as oil prices rise, investment stagnates and shale producers turn profitable, said a report from energy consultancy Rystad Energy Wednesday.

Revenues for publically traded exploration and production companies will increase 55% on the year to $500 billion while investment will grow only 2%, said the report.

"Oil demand has gradually increased after the initial shock of the Covid-19 pandemic, and OPEC+ continues to hold back volumes from the market. The consequent high price movement has been further supported by a slow ramp-up in US tight [shale] oil activity," said Espen Erlingsen, head of upstream research at Rystad Energy.

"In conjunction with the persisting low investment environment, E&Ps are enjoying super-profits," Erlingsen added.

Free cash flow represents cash brought in by operating activities minus that spent on investment activities, ignoring the effects of hedging and financing and making it a fairer comparison for the overall health of cash flow generation from oil production.

High cash flows and reduced investment in mineral energy assets may be the pattern for years to come as the world's largest fossil companies divert profits into lower carbon and renewable assets, with less risk of falling foul of changing climate policy and a longer potential payback period.

Most of the supermajor oil producers, who are now quickly rebranding themselves as energy companies as they move focus to the energy transition, have said that investment in fossil fuels will be reduced going forward in order to free up cash for new low-carbon and renewables assets.

BP's CEO Bernard Looney, said this week that while the company will still produce hydrocarbons for decades to come, they want to run "the best hydrocarbons business possible - we don't want to run the biggest hydrocarbons business possible."

Norway's state-producer Equinor also said in its most recent strategy update this month that it will focus investment on high cash flow generating and lower carbon fossil production, with new projects coming on stream by 2030 having an average break-even below $35/b and a short payback time of less than 2.5 years.