Investments in new oil and gas projects last year fell to their lowest level in 15 years at $ 350 billion. As the world continues to tackle Covid-19 and the energy industry seeks more diversification outside of its core business, it is questionable how soon – if ever – investments in new exploration and production projects will return to pre-pandemic levels.
This does not mean that there are no signs of a recovery in investment. Wood Mackenzie reports that a total of 26 new conventional oil and gas projects are expected to be finalized this year. According to Wood Mac analysts, these projects will require an investment of about $ 110 billion to get about 27 billion barrels of oil equivalent in reserves.
One interesting feature of these projects, which shows the changes that the energy industry is undergoing, is that more than 50 percent of the reserves that will be used in these projects are natural gas reserves. Many of the largest green-light projects this year relate to liquefied natural gas, such as the expansion of Qatar Petroleum’s North Field operations. One tenth of the projects awaiting FID this year are deepwater mining, and the rest are a mixture of offshore and onshore projects.
However, according to Wood Mac, there is no guarantee that all of these projects will actually receive the final investment decision. This is for a variety of reasons, the main one being the expected rate of return, carbon intensity and political context.
Profitability – and the period over which it will emerge – has become of paramount importance for investors in the oil and gas industry, and has also become a top priority for the companies themselves. Whereas it used to be the custom to invest millions in projects that might not have recouped the investment for decades, the focus is now on shorter payback periods, which means projects with a short cycle have a better chance of getting approved. On the subject: Russia increased oil production in April
LNG projects are not short cycle projects. LNG facilities require a huge upfront investment and take years to generate the first profit. There are six large-scale projects due this year, Wood Mack said. Payback periods for these six projects range from 10 to 15 years, which casts a shadow on their FID.
First, as carbon intensity starts to make more headlines, investors are looking more at emissions, as are buyers. While this is not yet standard practice, there are indications that carbon neutral LNG may well become the standard LNG of the future, which means additional investment in carbon capture systems or other ways to reduce emissions from LNG mining and production. It remains to be seen if all planned LNG projects will receive the green light in this context.
Carbon has become an important issue for oil investments as well. Demand prospects have improved significantly since the end of the quarantine, and people are starting to travel again, not to mention the clear preference for personal transport in the post-lockdown period, which leads to an increase in fuel demand. But no less attention is paid to emissions from oil production.
A recent article by Argus on the future of oil investment in the US Gulf of Mexico noted that any plans must take into account not only costs but also carbon intensity. Virtually every major energy company now has some sort of low-carbon transition plan to reassure investors, and while they will need money from the sale of oil to implement these plans, they also need to be careful about the emissions associated with the production of this oil. On the subject: three things that will affect oil prices in May
This is clearly a challenging situation for an industry that has come under increasing criticism and increasing scrutiny from both regulators and shareholders. Under this double pressure, many projects – not just this year – may lose their viability, because reducing emissions can be and often is a costly endeavor.
Nevertheless, the world will still need oil and gas in decades, and it will need millions of barrels of them every day. This means that companies, with the support of their shareholders, will continue to invest in oil and gas exploration and production. If anything, pushing for an energy transition would lead to reduced supplies for the aforementioned reasons. This limited supply, in turn, will lead to higher prices for these energy carriers. And that will lead to more investment in oil and gas, emissions and everything else.
One interesting piece of news released this week by Bloomberg notes that the rise in oil prices has pushed up oil and gas ETFs and, ironically, ESG funds. The article explains that this has to do with how ESG funds are created, but ultimately people who invest in ESG funds put some of their money into Big Oil. And when big oil is doing well, so is ESG investors. This could provide some interesting food for thought about investing in ESG and oil and gas and, in this regard, about reducing emissions and energy supply and demand.
These are the foundations that will ultimately prevail regardless of the political context. There is a demand for oil and gas, so there must be a supply, as at least two heads of major oil companies Shell and BP recently pointed out. “Until the world needs oil and gas, we will extract oil and gas,” they said on separate occasions. And although some of the priorities in making the final investment decision in a new project may have changed, the main priority remains: will it bring money? As long as there is demand, many projects will be profitable.
Irina Slav for Oilprice.com
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