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Our Take: Crisis Moves Dial on ‘Advantaged’ Barrels

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The Ukraine crisis has spurred a rethink of the global energy ecosystem, including the definition of “advantaged” barrels. This rethink is rooted in geopolitical risk exposure rather than breakeven thresholds, despite a multiplying of oil and natural gas prices over the past 18 months. With the energy transition challenging long-term oil and gas demand, we see the industry's appetite for geopolitical risk remaining depressed, even if Russia-Ukraine resolves soon.

  • The 2020 downturn cemented the industry’s shift toward highly selective reinvestment. Our initial definition of “advantaged” oil and gas resources included some combination of: (1) low costs (opex and/or capex), (2) high productivity, (3) short development cycles, (4) generous fiscal terms, (5) lower carbon footprints, (6) access to existing infrastructure, (7) strong market access and (8) options for integration.

  • Also on our list was “low aboveground risk,” but we see this playing a more pronounced role going forward — even if cost and carbon footprint remain the highest-weighted criteria. Notably, significantly higher prices are not altering the calculus, as evidenced by Shell in Nigeria. “We want to be out of onshore oil, no matter how the macro might perhaps change the outlook for those assets," CEO Ben van Beurden said last week, calling it "a case of risk management.”

  • Energy investment veteran Dan Pickering expects so-called “Trustworthy Barrels” to become more valued in the post-Russia-Ukraine context, favoring production in “Western/developed countries.” We agree that geopolitically risky barrels are likely to become more marginalized, but don’t see the realignment so neatly tracking these geographic or socioeconomic lines.

  • Advantaged assets included in our past assessments that still make the cut include LNG in Mauritania/Senegal and Qatar, deepwater Guyana and Brazil, tie-backs offshore Angola, and Abu Dhabi’s onshore. Moving up the list are incremental opportunities in Africa (TotalEnergies, Eni and Chevron in Angola; Eni in Algeria) and quick deployment LNG in Mozambique (Eni-led Coral; possibly Exxon Mobil at Rovuma) and Congo (Brazzaville) (Eni). Expanded Western opportunities include fast-tracked US LNG (New Fortress) and Eastern Canada's offshore (Equinor, BP, Cenovus and Suncor). East Med gas’ advantages have also improved.

  • Heightened geopolitical risk has removed Russian gas from the advantaged resource list and driven an exodus from Myanmar. More universally, we see geopolitical exposure playing an upsized role in how producers manage tail demand risk, particularly for oil post-2030, with protracted aboveground issues more likely to drive a redeployment of capital elsewhere to protect returns. Where companies cannot avoid risk, they will seek to reduce it through new development concepts rather than relying solely on old-school geopolitical maneuvering. Exxon's reported eyeing of midscale, modular LNG in Mozambique’s insurgent-riddled onshore is case in point. Tail risk considerations also inform how emerging provinces are now assessed, with fast-tracking considered for Namibia (Total, Shell) and Cote D’Ivoire (Eni).

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Topics:
Capital Spending, Upstream Projects, LNG Projects, Resource Access, Security Risk , Ukraine Crisis
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