Goldman Sachs: Oil & Gas Capital Expenditure Restart, AI and Deepwater Exploration Lead Long-Term Growth

Overview

Goldman Sachs' 23rd annual 'Top Projects 2026' report provides an in-depth analysis of core assets and investment trends in the global oil and gas industry. The report's core conclusion is that after a decade of underinvestment, the oil and gas industry is facing a structural turning point driven by technological innovation, particularly AI and digitalization. Although project reserve life has shrunk significantly over the past decade, market sentiment has shifted; investors are beginning to reward companies willing to make long-term capital reinvestments to extend asset life again. The report predicts that with breakthroughs in deepwater exploration technology and a slowdown in US shale oil growth, global oil and gas capital expenditure will regain double-digit growth in 2027, while Liquefied Natural Gas (LNG) faces risks of short-term oversupply. Based on this logic, the report identifies 15 'winner' companies demonstrating excellence in growth and profitability, focusing on their low-cost, high-quality assets in deepwater, shale gas, and LNG sectors.

Core views

Reversal in Industry Fundamentals: From 'Capital Discipline' to 'Capital Expenditure Returns'. Over the past decade, due to an excessive emphasis on capital discipline and free cash flow, the average reserve life in the oil and gas industry plummeted from approximately 55 years in 2012 to about 20 years in 2026, a decline of 60%. However, Goldman Sachs' empirical data shows that market logic is changing significantly. Since 2024, the correlation between capital expenditure intensity (Capex/CFO ratio) and stock return rates has rebounded strongly from negative to +0.80, the strongest positive correlation since the commodity boom of the early 2000s. This means the current market no longer purely penalizes high capital expenditure but instead awards a premium to projects capable of delivering long-term production growth.Exploration Recovery Driven by Technology: The application of AI and digitalization has become the key to breaking the industry stalemate. As traditional, easily accessible onshore resources become increasingly depleted, the industry is forced to turn to high-risk areas such as deepwater and polar regions. AI technology has significantly improved the precision of deepwater seismic imaging, reducing exploration uncertainty. Data confirms this trend: new oil discoveries over the past three years have grown by 20% compared to the previous three years, and the exploration success rate in 2025 hit a five-year high. Exploration activities are returning to the center of strategic agendas for major oil companies to fill supply gaps caused by shortened reserve lives.Globalization and Maturation of Shale Oil: After supplying 60% of the incremental volume for non-OPEC countries over the past 15 years, US shale oil has entered a mature phase. Goldman Sachs predicts that while supported by oil prices, US shale oil will maintain moderate growth in 2027-28, but its growth rate will slow significantly by the end of the century, with incremental volumes concentrated mainly in Natural Gas Liquids (NGLs) rather than pure crude oil. Meanwhile, major US shale operators are accelerating internationalization, exporting technology and capital to locations such as the Vaca Muerta shale formation in Argentina and the Jafurah gas field in Saudi Arabia. This 'shale globalization' not only extends the resource base of these companies but also marks a shift in the global center of gravity for shale development.Divergence in Capital Expenditure Cycles and LNG: Global upstream capital expenditure is expected to grow by 11% in 2027 after a brief adjustment. This wave of spending is primarily driven by deepwater projects, particularly in Brazil, Guyana, Namibia, and West Africa, where the number of FIDs for deepwater projects has surged 75% compared to the five-year average. In contrast, the LNG market presents a completely different picture. Although 2025-26 saw a record wave of LNG project approvals, due to a large concentration of capacity coming online in the short term, Goldman Sachs predicts the LNG market will rapidly shift from a tight balance to oversupply, causing LNG capital expenditure growth to fall sharply after 2027 and price support to weaken.Structural Concerns in Non-OPEC Growth: Headline data suggests robust production growth in non-OPEC countries, but this is largely due to changes in statistical methodology resulting from the UAE's exit from OPEC in 2026 (moving its approximately 4.5 million barrels per day of capacity into the non-OPEC category). Excluding the impact of the UAE, underlying production in non-OPEC countries (excluding US shale oil) is actually set to enter a structural decline starting in 2028. Future supply increments will highly depend on a few giant deepwater projects and associated condensate growth, further confirming the necessity of strengthening deepwater exploration and capital reinvestment.Stock Selection Strategy: Focusing on the 'Winners' Portfolio. By analyzing financial models for 516 top-tier projects, Goldman Sachs identified 15 'winners' performing best in this field. These companies (including TotalEnergies, ExxonMobil, ConocoPhillips, Repsol, Galp, etc.) share the characteristic of owning at least two above-average growth projects, excelling in project scale, cash flow uplift, and production increases. Most control the world's lowest-cost development resources (such as deepwater pre-salt layers, low-cost LNG projects, or high-quality shale assets), enabling them to achieve superior risk-adjusted returns in the current macroeconomic environment.Oligopoly Dividends in the Services Sector: Beyond upstream extraction, the upstream services sector has also undergone profound structural changes. The deepwater drilling, offshore engineering (EPCI), and seismic exploration service industries have experienced intense consolidation over the past decade, forming an oligopolistic landscape dominated by a few giants (such as Transocean, TechnipFMC, TGS, etc.). This concentration on the supply side has eliminated past vicious competition and overcapacity, granting remaining service providers stronger pricing power and margin protection, allowing increases in capital expenditure to be more effectively converted into profits for service companies.

Analysis framework

Goldman Sachs employs a deep quantitative analysis framework combining top-down and bottom-up approaches. First, at the macro level, the firm constructs supply-demand balance sheets by tracking industry-wide capital expenditure cycles, reserve life evolution, and geopolitical shifts (such as the UAE's exit from OPEC) to determine the industry's overall cyclical position. Second, at the micro-project level, Goldman Sachs has established a 'Top Projects Database' containing 516 independent models, making independent cash flow, capital expenditure, and production forecasts for each major oil and gas project. This method allows analysts to strip away accounting noise and directly assess the true economic value (NPV) and return on investment (IRR) of assets. Finally, the firm introduces a unique 'Capex-Stock Price Correlation' monitoring indicator, using historical data to validate the shift in market attitudes toward capital reinvestment, thereby providing a behavioral finance explanation for the current valuation restructuring.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Dynamic Balance Analysis of Reserve Life and Supply Gaps

  The research report derives the reserve life indicator by calculating 'Proven Reserves divided by Annual Production'. When reserve life is too short (e.g., dropping to 20 years), it implies existing assets are being depleted too quickly and must be replenished through new capital expenditure (exploration or development); otherwise, a cliff-like supply shortage will occur in the future. This is the core logic for determining whether the industry needs to increase investment.

• Valuation MethodDCF Discounted Cash Flow

  Project Net Present Value (NPV) Assessment Based on WACC

  When evaluating various oil and gas projects, the research report uses a Discounted Cash Flow (DCF) model, combined with the Weighted Average Cost of Capital (WACC), to calculate the project's Net Present Value. This enables analysts to objectively compare the true economic value of projects in different regions and with different technical routes (e.g., deepwater vs. shale) without interference from accounting depreciation methods.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Correlation Regression between Capital Expenditure Intensity and Excess Returns

  Through regression analysis, the research report found an extremely strong positive correlation (r=0.80) between the proportion of capital expenditure to cash flow (Capex/CFO) and stock return rates. This indicates that in the current cycle, enterprises 'willing to spend money to buy growth' can achieve significant Alpha returns, representing an investment strategy based on factor exposure.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Profit Transmission from Upstream Extraction to Upstream Service Industries

  The research report not only focuses on the oil fields themselves but also analyzes the market structure of the upstream service industry (drilling, engineering, seismic services). By pointing out that this industry has formed an oligopoly, it explains why increases in upstream capital expenditure can be more efficiently converted into profits for service providers, rather than being swallowed by low-price competition as in the past.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TotalEnergies (TTE)

  Listed as a 'winner' among major European oil companies, possessing highly competitive reserve life and multiple low-cost growth projects.

  Strengths

  Smooth progress on the Tilenga/Kingfisher projects in Uganda, and asset portfolios in Namibia and Congo provide extremely high safety margins and low-cost advantages.

  Comparison

  Compared to BP and Shell, TotalEnergies' layout in deepwater and African assets makes it more attractive in terms of long-term production growth potential.

  Risks

  Project delivery delay risks; geopolitical risks.

• ExxonMobil (XOM)

  A leader among major North American oil companies, maintaining strong growth driven by the dual engines of Guyana and Permian.

  Strengths

  High production growth in the Guyana Stabroek block combined with the low-cost advantage of the Permian Basin makes its reserve life and cash flow generation capabilities extremely strong.

  Comparison

  Superior to Chevron and ConocoPhillips in capital allocation efficiency and project execution speed.

  Risks

  Changes in US regulatory policies; operational risks in Guyana projects.

• Repsol (REP)

  Demonstrates the strongest cash flow uplift potential among major European oil companies.

  Strengths

  Owns high-return projects such as Pikka and Leon-Castile, and has low-cost incremental volumes in Venezuela and Brazil.

  Weaknesses

  Relatively large exposure to political risks in Venezuela.

  Comparison

  Leads European peers in cash flow growth expectations.

  Risks

  Risk of nationalization of Venezuelan assets; inflationary pressures in the Latin American region.

• Galp (GALP)

  Possesses the longest reserve life in the industry, benefiting from major discoveries in Namibia.

  Strengths

  The massive discovery in Namibia PEL 85 has significantly extended its asset life, and the startup of the Bacalhau project brings determined medium-term production growth.

  Weaknesses

  Some new projects are still in early stages, with uncertainties regarding delivery.

  Comparison

  Far exceeds ENI and BP in terms of the reserve life dimension.

  Risks

  Technical complexity of deepwater drilling; approval progress of Namibia projects.

• YPF & Vista Energy

  Representatives of South American shale oil development, benefiting from high-quality resources in Argentina's Vaca Muerta.

  Strengths

  The low cost and high richness of the Vaca Muerta shale layer give it huge production growth potential (YPF expects 46% growth by 2030).

  Weaknesses

  Exchange rate and policy risks brought by macroeconomic instability in Argentina.

  Comparison

  Among non-EU regions, its project quality and growth multiples are highly competitive.

  Risks

  Argentine foreign exchange controls; infrastructure bottlenecks.

Key data

• Decline in Reserve Life60%Dropped from approximately 55 years in 2012 to about 20 years in 2026
• Increase in Exploration Discoveries+20%Growth rate of newly discovered oil reserves in the past 3 years compared to the previous 3 years
• 2027 Capital Expenditure Expectation+11%Projected growth rate for global upstream capital expenditure
• Increase in Deepwater Project FIDs+75%Growth in the number of Final Investment Decisions for deepwater projects in 2027 relative to the 5-year average
• Inflection Point for Underlying Non-OPEC Production2028Excluding the impact of the UAE, non-OPEC production is expected to begin a structural decline from this year
• Delayed Time for LNG Oversupply2028Despite recent high approval volumes, the oversupply situation has been postponed to this year due to factors such as interruptions in Qatar
• Exploration-Stock Price Correlation Coefficientr = +0.80Latest correlation coefficient between capital expenditure intensity and 6-month stock return rates, the strongest since 2000

Impact & implications

This series of changes signifies that the oil and gas industry is officially bidding farewell to the low-growth era of 'deleveraging and heavy dividends' and entering a new cycle characterized by 'technology enablement, capital reinvestment, and supply restructuring'. For investors, a pure dividend yield strategy may become ineffective; instead, attention should shift to leading enterprises possessing low-cost deepwater assets, advancing AI-assisted exploration, and actively布局 overseas shale markets. Simultaneously, the oligopolization of the upstream service sector also provides long-term structural benefits for related equipment and service providers.

Risks

• A global macroeconomic recession leads to crude oil demand falling short of expectations, thereby suppressing oil prices and project returns.
• Deepwater and ultra-deepwater projects face higher technical complexity and risks of delivery delays.
• Geopolitical conflicts (e.g., in the Middle East, Russia-Ukraine) may disrupt supply in key production areas or hinder the development of new projects.
• Intensified oversupply in the LNG market may cause prices to fall below break-even points, affecting the economics of new projects.
• Tightening of ESG regulatory policies may increase carbon capture costs or restrict financing for certain types of projects.
• A stronger US dollar may increase the burden of capital expenditure denominated in USD.

What to watch

• Track the practical application effects of AI in seismic data processing and reservoir modeling to see if it can continuously reduce the failure rate of deepwater exploration.
• Closely monitor the execution of capital discipline by US shale oil producers, especially the integration efficiency of Big Oils after acquiring shale assets.
• Observe the pace of Final Investment Decisions (FID) for LNG, particularly the implementation of projects outside the US (e.g., Mozambique, Tanzania).
• Track whether quarterly capital expenditure guidance from major oil companies (such as Exxon, Total, BP) continues to be raised to verify the sustainability of the capital cycle.
• Pay attention to actual production changes in core non-OPEC oil-producing countries like the UAE to judge the true trend of underlying non-OPEC supply.