FIDs Stack Up, But Industry Stays Selective

Oil and gas companies are cashed up and ready to invest — but with some clear caveats in play. Lengthy, and at times competing, demands from investors mean both returns and carbon footprints must factor into final investment decisions (FIDs) for both conventional and new energy projects. A need to fund growing shareholder returns while advancing longer-term objectives, particularly around emissions, is forcing companies to try and line up enough “goldilocks” opportunities to secure both. When found, FIDs are coming fast. But CEOs are showing patience when things don’t yet align. In oil and gas, green-lighted projects are generally expected to lower carbon intensity and improve cost competitiveness, while ideally bringing forward production quickly to avoid tail risks. Executives generally acknowledge that current oil and LNG prices are likely near top-cycle levels, requiring investments to weather potentially weaker future market conditions. In low carbon, companies must convince skeptical investors that new energy returns can compete with oil and gas or at least offer compelling strategic resiliency to secure growing future shareholder payouts.

Deepwater projects are moving forward with unprecedented speed, led by Guyana, the US Gulf of Mexico and Brazil. These are generally at the lower end of the cost curve given highly productive reservoirs, streamlined designs and ample tie-back opportunities, particularly in the US Gulf. Carbon intensities often sit far below industry averages and are on the decline. Technology breakthroughs are also moving Gulf projects up the queue, as firms find new ways to develop tricky reservoirs economically. Chevron — which sanctioned the very high-pressure, extremely high-temperature Ballymore development last year — says the US Gulf’s carbon-intensity footprint is nearly 80% lower than its global oil portfolio, which itself is about 40% below industry average. New technologies and improved reservoir understanding have BP resurrecting the Kaskida Lower Tertiary scheme, where an FID could come this year. Shell has similar plans for Sparta (formerly North Platte). In Guyana, Exxon Mobil’s recently sanctioned fifth scheme puts the Stabroek Block on pace to go from first oil in 2019 to more than 1 million barrels per day in 2026. By contrast, TotalEnergies is eager to move development off Suriname — but only after it shores up how to minimize higher gas-to-oil ratio targets. Equinor just green-lighted a rare gas-condensate development in Brazil’s pre-salt. Meanwhile, Petrobras is looking to flaring reductions, electrification and carbon capture to further reduce its pre-salt carbon footprint as oil FIDs advance.

LNG projects dominate long-cycle investments given expectations of gas’ longer staying power through the energy transition. Baker Hughes figures year-to-date sanctioned capacity could more than triple through the rest of 2023. But the enthusiasm does not come with a blank check — or uniform views on the optimal path to top returns. Baker Hughes says LNG FIDs could reach 65 million-115 million tons per year in 2023, with 20 million tons/yr sanctioned through mid-April. Sempra and Cheniere are leading next-wave US LNG developers, tapping economic expansions and strong commercial track records to line up additional FIDs. Shell tipped FID as “soon” for QatarEnergy’s coveted North Field South expansion, which also counts Total and ConocoPhillips as partners. Improved terms support Chevron and Marathon Oil’s plans to backfill existing capacity at Equatorial Guinea. But views differ on Browse offshore Australia; BP sees “mid-teens” returns from plans to backfill North West Shelf LNG, while Shell sold out, citing noncompetitive economics. Security concerns have finally eased in Mozambique, but Total will go slow to preserve returns as it fights over contractor cost hikes. Exxon went back to the drawing board onshore Mozambique to cut costs and recently tendered a modular, smaller train concept for Rovuma LNG. Exxon sounds keen to advance with Eni a second floating LNG (FLNG) development at Coral in the meantime. Total CEO Patrick Pouyanne, however, has panned FLNG for not offering economic brownfield expansion opportunities.

Low-carbon ventures arguably face more scrutiny given the lack of investor familiarity and still-conceptual nature of carbon capture and storage (CCS), hydrogen and biogas. Executives are quick to assure returns drive capital decisions. But the challenge is that crucial items that will underpin those returns — chiefly policy support and market development — lie outside companies’ control. Shell scrapped a sustainable aviation fuel and renewable diesel extensions to its Singapore energy park citing “not robust enough returns” amid a lack of supportive regulatory structures to command premium pricing in Asia. It also relinquished a stake in the Northern Endurance Partnership CCS project in the UK, while sticking with its Acorn CCS-hydrogen scheme ahead of imminent government funding. Exxon is laying the groundwork for a net-zero gas value chain that will link US Permian gas to a “blue” hydrogen plant at Baytown. The project could potentially qualify for the upper end of US Inflation Reduction Act hydrogen credits, but significant uncertainties remain.