Companies are deciding to invest again, but can the other projects compete with US tight oil?
Despite an increase in new projects sanctioned this year, shale still poses a threat
During the comparative boom years between 2007 and 2013, oil and gas firms made about 40 final investment decisions on big projects every year. Then came the price crash. In 2015, the number of FIDs was just 10.
Now things seem to be picking up. Wood MacKenzie, a consultancy, expects companies to pull the trigger on 20-25 projects this year—evidence that they're starting to think about growth again.
"There are some positive signs in what is a challenging outlook for new project investment," says analyst Norman Valentine.
Why? Wood Mac sees a few reasons. "Costs have been coming down, there has been supply-chain deflation, meaning companies pay lower rates for drilling, equipment and installation," says analyst Malcolm Dickson.
"We have also seen optimisation. It is a bit of a euphemism—projects have been cut down in scale, and some previously manned projects are now unmanned."
Some developments are now being brought online in phases, meaning they need smaller upfront investment. Dickson cites ExxonMobil's Liza oil discovery in Guyana as an example. The Liza field is one of the largest finds of the last decade, but it has been divided into phases. The first phase is estimated to cost just over $4.4bn, and production is set to begin in 2020. "We're excited about the tremendous potential of the Liza field and accelerating first production through a phased development in this lower cost environment," said Liam Mallon, president of ExxonMobil's development company.
Companies are expanding brownfield projects that carry less risk and pushing those that yield a quicker return. Of 15 projects given the go-ahead this year, says Wood Mackenzie, only four are new developments.
And plenty are still struggling. Wood Mac counts more than 130 greenfield conventional projects that are in doubt, accounting for around 3.5m barrels a day of liquids, or 3% of future global supply. That would total about $360bn of foregone capital spending.
Gains for gas
Natural gas looks more promising. Wood Mac reckons gas will overtake coal as the second-most-consumed fuel by 2030. Its demand will rise by 41% over the next two decades, or 1.8% per year. At an oil price of $60, most gas projects will deliver at least a 7% return.
But firms are also being choosy, preferring to concentrate spending on fewer areas where the potential is greatest. "Companies still need a reason to invest in gas," Dickson says. Some giant projects, like Israel's Leviathan project, make up a big share of recent spending in the sector, but for local-demand reasons, not necessarily as part of a sector-wide shift into the fuel.
At an oil price of $40-60 a barrel—one of the scenarios Wood Mac has projected for—the consultancy says 23 greenfield projects in just 10 countries can offer solid returns. "Relatively few countries can deliver this. Brazil really dominates low-cost, high-volume resources," says Valentine.
Brazil accounts for more than half of the most economically attractive pre-FID resources. Deepwater projects in Guyana, the US Gulf of Mexico and Senegal are also attractive because of their economics. But few conventional projects offer the same kind of breakeven prices as US tight oil.
"Tight oil is a big economic challenge," Valentine says.
To compete with tight oil, projects elsewhere will need to get more efficient and the services will need to be cheaper. Two projects that pulled this off recently were BP's West Nile Delta project and Eni's development in Jangkrik, Indonesia, and the OCTP block in offshore Ghana. Some leaner operations are clearly starting to translate into faster development. Eni aims to bring its Egyptian gas field online by December this year, three years after it was discovered, which would make it the fastest a project of this size has come onstream ever. Meanwhile, BP started production at the West Nile Delta eight months ahead of schedule.
Scope for the future
Meanwhile, as majors like ExxonMobil focus on unconventional oil and gas, other firms might spy a gap in conventional development, Wood Mac says. Private equity is making some of the running now in upstream provinces like the UK and Norway, points out Dickson. "This is a clear sign there is still money to be made there."
And, as ever, demand growth chugs away in the background—meaning those developments will be necessary. For all the attention on tight oil, Wood Mac predicts its supply will rise from 4m b/d to 10m-strong growth, but still not enough to keep up for forecast consumption. "Many companies who aren't in tight oil need new projects if they are to continue to grow," Valentine says.
While some producers, such as Statoil and Total, see a growth path in renewables, gas also represents an opportunity as a low carbon option, particularly in power markets.