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Big FIDs on Horizon for LNG, Deepwater as Costs Decline, Says Wood Mackenzie

As oil and gas operators become “leaner and meaner,” they are reducing the size of projects and their costs, with a number of big investment decisions on the horizon, according to Wood Mackenzie.

As operators became more confident of efficiencies and prices, there was a significant recovery last year in upstream final investment decisions (FID), which more than doubled from 2016, as researchers had predicted.

Wood Mackenzie is forecasting a similar FID total this year -- circa 30 major projects -- supported by “continued prudence in industry spending.”

However, the average project size last year was 376 million boe, much smaller than in both 2016 and 2015. Operators last year also chose brownfields over greenfield projects, with average capital expenditures (capex) of $2.7 billion, the lowest in a decade.

To put 2017 capex in context, average project spend for facilities sanctioned in the last decade was $5.5 billion.

"We are seeing significantly smaller projects, alongside a greater appetite for brownfield and expansion projects, and more subsea tie-backs," said principal analyst Jessica Brewer.

"Brownfield developments are popular in the current capital-constrained environment, with less spend and execution risk than a greenfield project, and a faster route to first production.

“Both investors and operators want to see faster cycle times and quicker returns on upstream projects."

The major producers remain focused on oil projects, which is no surprise, but deepwater exploration also is a bigger target. As of yet, there’s no evidence of a “deliberate switch” to natural gas, even though many of the Big Oil operators have claimed a turn to gas to lower emissions.

On the lower spend, the average net present value over 15 years, i.e. NPV15 breakeven of $52/boe in 2017 fell 21% year/year, while the internal rate of return jumped by 18%, or 11% higher year/year.

The biggest declines in capex were seen in deepwater developments, aided by the “phasing of the next era of giant projects,” according to Wood Mackenzie.

“Cost reduction efforts by the industry have largely been successful,” researchers said. “The primary focus has been to reduce project footprints through fewer wells, smaller facilities and the greater use of subsea tie-backs and existing infrastructure.

“Lower costs, lower breakevens, higher prices and improved corporate finances all contributed to an upgrade in industry sentiment and more projects getting sanctioned in 2017.”

“We should continue to see operators favoring a 'leaner and meaner' path in 2018,” Brewer said. “At the beginning of the year we selected 30 projects we thought were most likely to make FID, and they follow many of the trends we saw emerge in 2017.

“Average capex continues to fall, averaging only $2.2 billion, while capex/boe is now only $4.9/boe, versus $11.3/boe back in 2011."

Wood Mackenzie also is forecasting a 15% decline in average breakeven cost to $44/boe, applying a 15% discount rate, with the most competitive projects in shallow-water Norway, UK and Mexico.

Natural gas projects this year are expected to take center stage, aided by big expansion projects in Norway, Iran and Oman.

The first quarter of 2018 ended with six projects already sanctioned, including fields in the UK, Norway, Israel, the Netherlands, Malaysia and China. China’s Lingshui development, is the country’s first wholly owned and operated deepwater natural gas project.

"While it is good news that operators have found ways to grow in tough business conditions, the big question is whether the industry is actually spending enough," said Wood Mackenzie research director Angus Rodger. “We cannot rely on smaller projects forever…”

Looking at liquefied natural gas (LNG) terminal sanctioning in particular, “we see a lot of big projects on the horizon,” he said.

The FID story could shift again in 2019, with multi-billion boe developments weighted to natural gas, including Mozambique LNG, Canada LNG, and expansions in Qatar and Papua New Guinea all eyeing sanctioning.

"Can the industry apply the leaner lessons it has learned through the downturn to these giant projects, or will we return to the boom and bust cost cycles of the past?" asked Rodger. "Companies know they don't want to be all rushing through that door at the same time and then see costs blowout. So it will be interesting to see if any of these LNG projects push for a late-2018 sanction, thereby locking-in lower costs and pipping the competition."

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