Industry Will Need to Bite Bullet on Big LNG: WoodMac
Consultancy Wood Mackenzie forecast in July last year that 2017 would see a significant recovery in upstream final investment decisions (FIDs), with the number taking FID more than doubling on 2016.
WoodMac now April 5 has said it expects a similar total number in 2018 too - about 30 major oil and gas project FIDs - supported by continued prudence in industry spending.
But its research director has also said that, by 2019, the industry will need to start sanctioning big LNG projects, asking if it will be able to maintain cost-discipline seen in recent years.
In 2017, lower costs, lower breakevens, higher prices and improved corporate finances all contributed to an upgrade in industry sentiment and more projects getting sanctioned, said WoodMac, whilst noting that projects that did get the greenlight were notably smaller, with investors and operators keen for faster cycle times and quicker returns and often favouring brownfield, expansion, or subsea tie-back projects.
Average capital expenditure to develop 'major' projects (commercial reserves over 50mn barrels of oil equivalent, or boe) sanctioned in 2017 fell to only $2.7bn, the lowest in a decade, so to roughly half that of the $5.5bn average project capex sanctioned over the last decade. Of the projects sanctioned in 2017, WoodMac says that the five largest accounted for 50% of reserves, of which two were gas: Coral FLNG offshore Mozambique, and Leviathan phase 1 offshore Israel. It added that 2016 had far fewer FIDs, but larger reserves.
Outlook for 2018 FIDs
"We should continue to see operators favouring a 'leaner and meaner' path in 2018," Jessica Brewer, a principal analyst at WoodMac: "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 $2.2bn while capex/boe is now only $4.9/boe, versus $11.3/boe back in 2011."
Gas will take centre-stage, added WoodMac, aided by big expansion projects in Norway, Iran and Oman.
Already in 1Q2018, six projects have been sanctioned – all from WoodMac's original list of 30, including fields in the UK, Norway, Israel, Netherlands, Malaysia, plus China’s Lingshui development, operated by state-owned CNOOC, and China's first wholly-owned and -operated deepwater gas project.
WoodMac research director Angus Rodger however cautions: "We cannot rely on smaller projects forever, and when we look at LNG in particular, we see a lot of big projects on the horizon," as the FID story could shift again in 2019, with multi-billion boe developments such as Mozambique LNG, Canada LNG, and expansions in Qatar and Papua New Guinea eyeing FIDs.
"Can the industry apply the leaner lessons it has learnt through the downturn to these giant projects, or will we return to the boom and bust cost cycles of the past?" asks Rodger, adding it might be interesting if any push for a late-2018 sanction, thereby locking-in lower costs and pipping the competition.
Europe outlook
In a separate announcement Apr.5, GlobalData said it expects 81 new oil gas projects to start up between 2018 and 2025 in Europe – including 37 in the UK, 28 in Norway and six in Italy – which will be contribute just under 1.5mn b/d to global oil production and close to 4.7bn ft3/d of gas production. Most (45) are ‘early stage’, so less certain of proceeding. It also forecast that over five-sixths of Europe’s gas production in 2025 will be offshore.