FID represents one of the most integral stages to the delivery of energy projects, with its importance having become more prevalent in the energy industry over the past few years. This critical phase of any project relies on corporate finance decision makers giving the go ahead – or not – for projects to proceed and be executed successfully. It also represents an integral moment for investors to determine the likelihood of success of any projects they choose to back.
With industry analysts expecting the volume of FIDs throughout 2019 to be triple those of 2018, and collective oil and gas volumes – excluding shale and tight oil and gas prospects – equivalent to 46 billion barrels of oil, it is indicative of a flourishing industry.
It raises questions of why such growth is occurring and where.
Rystad Energy, whose research forecasts the aforementioned trebling of FIDs in 2019, identifies a large proportion of FIDs are from offshore deepwater, offshore shelf, and onshore markets. Much of this can be attributed to projects in Africa, Australia, the Middle East, and Russia – regions where a threat of reduced liquified natural gas (LNG) supplies can be expected in the mid-2020s.
Another contributing factor to the growth comes in the form of project delays. Five years ago saw the collapse of oil prices, leading to many operators halting their plans to reassess costs and planning. These delays are now beginning to bear fruit, with a quarter of all FIDs in 2019 relating to delayed projects.
This growth is a positive indicator for energy projects, with contracts running into the billions of pounds likely to be awarded, but getting them approved is a challenge in itself, and leads to assessment of the considerations of energy FIDs.
At the most basic of levels, FIDs are a risks and returns assessment in the context of a capital investment decision.
– generally, FID is made after vendor permits have been signed, and financial arrangements and optimum funding requirements confirmed in line with the project profile. Factors such as development costs, construction and engineering requirements at each phase of the project timeline, as well as evidence of market acceptance and subsequent profitability of the project need to be outlined. Defining these infrastructure items and capital expenditure are vital to investment analysis and project participation. Clarity of cash flow and dividend strategy are also crucial to perceptions of commercial viability. After all, the costs of major projects have increased dramatically in the past decade – with oil and gas industry projects overrunning by 59% – while productivity has diminished.
Liquefied Natural Gas (“LNG”) Prices and Capacity
The is plenty of positivity associated with the commoditisation of LNG, but also concerns surrounding costs and complexities for such mega projects. However, successes are beginning to appear. One such region where projects in this particular market are developing is in Mozambique. The nation’s Area 1 and Area 4 projects are expected to secure a FID from ExxonMobil before the end of the year, with the Area 1 project the largest to be sanctioned in Africa to date, with the value placed at $15.6 billion. As a result, it’s anticipated that further projects will follow at the FID stage.
For those within the oil and gas industries, having a pipeline of projects is vital to continued success. So, with the challenges faced by new projects – rising costs, temperamental oil prices, etc. – the pre-FID and FID stages offer the chance to make transparent any risk exposure and expected investment returns.
The FID stage and its associated demands is a complex task. At Pangea Strategic Intelligence, our network of experts span the globe and we can connect you to the those at the forefront of FIDs for energy projects to help you make a truly informed investment decision.