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Focusing on Advantaged Oil and Gas

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The Covid-19 pandemic has given Europe’s majors a daunting view of how an energy system aligned with the Paris Agreement’s climate goals might look. A much-decarbonized world will require a smaller set of competitive, low-cost oil projects as companies move to manage decline in their production and shift toward renewables. “Advantaged” hydrocarbons will likely take priority in the next generation of oil and gas developments. The Key Characteristics Low development and production costs are critical. Russia and the Mideast Gulf, for example, offer exposure to vast, low-cost resources such as Novatek’s Arctic LNG or Qatar’s massive LNG expansion. The East Mediterranean’s emerging low-cost gas play is also currently grabbing the majors’ attention (related). In addition, while the concept of “advantaged” hydrocarbons has in the past focused on production costs, project lifetimes are so long now that all operators must also consider associated greenhouse gas (GHG) emissions. This is because a price could be placed on an oil or gas project’s emissions in the future, Deborah Gordon, a global oil and climate change analyst at Brown University, told Energy Intelligence. Gordon is the architect of the Oil-Climate+ Index, which measures lifetime emissions of different crudes and natural gas resources. She noted that higher GHGs are likely to be associated with assets in Russia and Brazil under their current political regimes. There is also a great deal of emissions uncertainty in the US (especially Texas), Africa, and the rest of South America -- particularly in new finds in Guyana and Suriname. But more transparency in the Middle Eastern countries such as Saudi Arabia, the United Arab Emirates and Qatar, as a result of market-based events such as initial public offerings, could deliver an "air-tight case" for lower emissions in those countries, Gordon said. Time to first oil or gas, along with payback periods, are also key criteria for advantaged resources given the great uncertainty over future demand. After the last oil price downturn in 2014, offshore operators shifted focus to shorter-cycle and less-costly phased, modular developments that were tied back to existing infrastructure (PIW Mar.15'19). This makes otherwise less-advantaged resources more economic and increases the viability of larger projects in regions such as the Gulf of Mexico, the North Sea and offshore Angola. A competitive fiscal and regulatory environment is critical given intense competition for global capital at current oil prices. Former upstream hotspots like Nigeria and Angola struggle to attract investors amid stiff competition from Brazilian and Guyanese deepwater provinces. Luanda introduced a new fiscal regime in 2018 to stir investment and stem the production decline, with some companies biting (PIW Jun.14'19). A manageable aboveground and political risk profile is also essential. Such risks are prevalent in newer producing provinces that are still establishing effective governance structures. Mozambique, Papua New Guinea and Guyana, for example, all face potential project delays due to armed violence, and fiscal and regulatory uncertainty. Another requirement is proximity to markets with strong demand prospects or with diversification opportunities in other segments with growing demand, such as petrochemicals. Where Are Majors Seeking Advantage? South America is a key region despite the tough operating climate. The attractive economics of Brazil’s giant pre-salt play have enticed Royal Dutch Shell and French major Total. In terms of exploration, Shell cites the promise of Mexico and its frontier positions in Colombia and Argentina. “We see these areas as having the technical potential, combined with the current fiscal terms, to underpin our current investment,” Shell has stated. Italy’s Eni has also homed in on Mexico. Meanwhile, Shell’s exploration activity will focus on near-field discoveries in existing heartlands. But it is making selective investments in promising emerging and frontier offshore basins, such as Suriname -- a country that also features in Total’s long-term plans (EIF Sep.16'20). Shell’s deepwater positions in the Gulf of Mexico, Nigeria and Malaysia are among its lowest net carbon footprint developments globally. And it reckons it can use its deepwater and technology expertise to bring low-carbon barrels into the energy mix from these basins. Since many of these reservoirs start with natural depletion and then use water injection, they don’t require as much horsepower to extract the oil. These crudes are lighter too, which also means less emissions. Meanwhile, deepwater reservoirs require fewer wells, less steel and less gathering than other types of field. For BP, the US Gulf will play a key role as it shifts to what its oil and gas boss Gordon Birrell describes as “more efficient tie-backs, infill drilling and other near-hub options," while the UK major’s exploration activity will revolve around existing hubs. BP has flagged a string of assets it sees as a good fit with plans to develop a “resilient and focused” hydrocarbon portfolio. Short-cycle US shale “exemplifies some of the key attributes we're looking for: flexibility on pace and timing of investment, fast paybacks on individual wells, material contributions ... with ability to flex between them," Birrell said (EIF Aug.19'20). With less cash to spend, BP has set strict investment hurdles. Upstream oil projects and refineries will have to pay back in under 10 years, while gas projects must pay back in under 15. BP’s 20% stake in Russia’s Rosneft will also provide very low-cost production that is resilient through the energy transition (EIF Sep.2'20). Total also has exposure to low-cost resources in Russia via its 19.4% stake in Novatek. Meanwhile, the French major has expanded its footprint in the Middle East. It has made acquisitions in Abu Dhabi, where the Adco concession’s lifting costs are under $3 per barrel, and in Qatar. But, as CEO Patrick Pouyanne recently noted, Africa remains at “the heart” of Total’s long-term strategy. BP, Shell and Eni have all targeted Egyptian gas as a core part of their portfolios, offering access to a growing market and further exploration opportunities near existing infrastructure. And, like its peers, Eni is looking to focus on countries with existing infrastructure. The Italian major has exposure to Norway’s lower-carbon offshore resources through its Var Energi subsidiary, as does BP through its stake in Aker BP. Advantaged Oil and Gas: Which Resources Make the Grade for IOCs? Low Cost

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