Bar for FIDs Keeps Rising for Big Oil

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Uncertainty has long been the enemy of the final investment decision (FID), and never have oil companies had so much to consider before pulling the trigger on new projects thanks to the energy transition. The pandemic and concerns about future oil and gas demand have prompted most international oil companies (IOCs) into retrenchment. And while IOCs are not halting FIDs altogether, as shown by Equinor's decision last week to advance its $8 billion Bacalhau project off Brazil, the bar continues to be raised for schemes to get the green light. Companies are justifiably torn. In the past the industry has been burned by both extremes -- investing too aggressively or too cautiously. In the early 2000s companies were caught flat-footed and couldn’t produce fast enough amid twin supply and demand shocks (PIW Jan.8'21). But in the mid-2010s, companies that aggressively loaded up their project queues at $100 oil were walloped years later when the taps turned on in a sharply lower price environment. The International Energy Agency's recent road map for achieving net-zero emissions by 2050, which states that no investments in new oil and gas developments are needed after 2021, has added more doubt to an already-ambiguous picture for FIDs (PIW May28'21). Projects needed to check myriad boxes before the pandemic, but today the list is longer. Carbon credentials are emerging as a must. Operators are under pressure to make the case to increasingly vocal shareholders that new projects will not unduly add to the emissions problem as the world strives to decarbonize. They must also justify that any new volumes mesh well with the uncertain future demand picture, meaning projects must have low break-even costs that keep them profitable at low prices. For schemes like Bacalhau, that level was less than $35 per barrel. Investors already forced Exxon Mobil to scale back ambitions for a pipeline of growth projects widely seen as too expensive and ambitious for a world of abundant supply. TotalEnergies CEO Patrick Pouyanne touts both the cost and low-carbon appeal of future projects, including its Lake Albert project in Uganda (PIW Jun.4'21). “These two criteria are well below those of our current portfolios,” he told investors, adding that each new project should contribute to decreasing emissions intensity at the company. So what FIDs can pass muster under ever-sharpening standards? High-volume, low-cost greenfield deepwater projects in places like Brazil, Guyana and Suriname are broadly seen as strong candidates. The US Gulf boasts a similar attraction, particularly on carbon, although the basin faces a somewhat higher cost base (PIW May28'21). By contrast, heavier oil projects, or more mature fields with less strict emissions control may face a steeper climate road, with Iraq one example (PIW Oct.23'20). Areas with higher country risk, such as in Africa, may also become more challenging amid the uncertain backdrop, as in Mozambique where unrest has delayed LNG project progress (PIW Apr.9'21). But compelling cost profiles could still win the day if an adequate carbon case can be made. Financing may also emerge as an issue with banks and governments, especially in Europe, under societal pressure to stop such funding. While very long-term projects have been falling out of vogue for some time, medium-cycle developments can still be seen as favorable. Companies must juggle all these factors on top of traditional concerns like project execution and supply chain management -- in themselves monumental tasks. The needed pace of investments is far from settled, but there may be a closing window to push through projects with start-up times landing before demand is expected to face a structural decline somewhere around 2030 (PIW Jun.26'20). That could leave even long-matured projects on the shelf. Companies may opt to fill their need for new or infill barrels with smaller, more flexible volumes like tie-backs, nonoperated projects, or shale. Still, there are signs that increased new scrutiny on projects may only intensify, potentially driving a further rethink of project queues. IOCs have long argued that projects under their more carbon-conscious stewardship is a better option than divestment to less transparent or scrupulous actors. Oil project cash flows are also broadly understood to fund the industry's low-carbon reinvention. But society and investors may demand more. Royal Dutch Shell CEO Ben van Beurden said this week the company would aim for “acceleration” of its transition strategy after a Dutch court ruled the company had a “duty of care” to cut emissions -- a move with conceivable bearing on FIDs (PIW Jun.4'21).