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Scenario Planning Prior To Final Investment Decision (FID)

July 13, 2019
Mike Callis

The Importance of Scenario Planning to FID?

When looking at whether to invest in natural resources projects in countries that do not exhibit similar economics to developed markets, there is little point in trying to apply models that would be used in Europe or the US, for example. It is not an exercise in precise data.

However, when considering investments of potentially billions of dollars, risks need to be mitigated. What is, therefore, instead required is detailed scenario planning based on possible outcomes.

The factors impacting these outcomes are myriad. A variety of things can impact the route to market. Political, Economic, Operational, and Logistical challenges all emerge, and different aspects of each need to be plugged into models to build out various scenarios.

Large scale projects are usually made up of a consortium of stakeholders, rather than one solitary company. Financing would usually be beyond any single business, so there tends to be a pooling of resources to get off the ground.

Within that context, each company has their own final investment decision to make. All but one of the parties involved in a mega project may come to a positive FID, but as each and every party is dependent on a collective decision that they all arrive at independently, there is no guarantee that the project will actually commence.

EY’s 2015 Spotlight on oil and gas megaprojects report showed that industry-wide performance was poor – well over 50% of projects were behind schedule and over budget. Low oil prices along with political and economic uncertainty were the primary drivers. There was a prevalent pressure to cut costs, reduce staff and drive down supplier prices. Companies were also being much more cautious about their investment decisions.

Prices have, of course, rebounded and the Oil industry is in a much stronger position than it was in 2014/15. However, a large degree of the more cautious, ROI-driven culture remains.

BP is a good example of an operator that has been impacted by this. In late 2016, BP announced that it had reached a final investment decision (FID) on ‘Mad Dog Phase 2’ (a megaproject in the Mexican Gulf), but it had to wait until early 2017 for its partners – BHP Billiton and Chevron – to announce that they had, too.

On the positive side for BP, a year later, in Q1 2018, the company announced that 2017 profits were up 139% to $6.2bn (£4.5bn). Retaining the cost-conscious approach that had been forced on them in leaner times, and pursuing it in a time of growth and higher prices produced strong results.

 

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