The FID is just one point in the life of a project. Before a Final Investment Decision is made, a project goes through several steps. These include a Feasibility Study (to determine if this project is economic), commitments from partners (these projects are so expensive that multiple sources of cash are needed), and the FEED (Front End Engineering and Design). During the FEED period, the technical requirements and the overall costs of the project are determined. These things are then presented to the group making the Final Investment Decision.
Once the FID is made, the project moves to the EPCI stage (Engineering, Procurement, Construction and Installation). This is the stage where the majority of the project costs are incurred. During the EPCI phase, the final designs are approved, the materials are approved and ordered, contracts are signed and equipment is ordered.
Before the FID, the costs associated with the project are relatively small. Once FID is made, the company is committed to spending the money to complete the project. It becomes much more difficult to stop a project after the FID is approved.
In today's environment, everything is being questioned. Before March 2020, most oil price forecasts had the price of oil at $40 USD or higher. During the feasibility studies, this price of oil would have been used in economic analysis. Now, there are many forecasts that predict oil prices will be below $40 through 2021. At current prices, nearly all of the major projects are uneconomical. While forecasts show oil prices should increase, most companies will hesitate to take unnecessary financial risks.
At the start of April, Wood MacKenzie stated that out of the 50 projects they were tracking at the beginning of 2020, potentially only 10 would be approved this year. As seen in Figure 1, the number of approved projects could be less than the number of projects approved in 2015, which is the last time we saw a major drop in oil prices.
With this delay in projects, the amount of money being spent on oil and gas projects globally will be decreased as well. In a recent Rystad Energy article, their analysis showed that 2020 Greenfield (new oil and gas fields) tendered contracts are expected to decrease to $60 billion, the lowest in 20 years.
Rystad forecasts that 2021 will only see a minor uplift in activity followed by a significant increase in 2022. This will mean a delay in future supplies by at least 2 years. The full Rystad article can be found at the following link:
Rystad Energy - Greenfield E&P Tenders shrink
The reason that a FID delay is important is that it will have a significant impact on oil (or gas) supply in the future. The rule of thumb is that it takes 5 years from the start of a project until it is producing oil. If a project is significantly delayed, it will be difficult to restart from the same spot. Many projects will likely go through the Feasibility and FEED stages again, though likely at a faster rate. There will be significant labor challenges when the project discussions resume as many talented people have been forced out of the industry.
The forecasts for reduced future oil supply are already beginning. Rystad Energy released a forecast at the beginning of May forecasting a supply deficiency of 5 million barrels of oil per day (BOPD) by 2025.
Before the oil price collapse, Rystad was predicting that supply would exceed demand in 2025. With reductions in exploration, they forecast that supplies will be below demand. The full Rystad article at the following link:
Rystad Energy: Oil Supply under supply by 2025
The future under supply will cause oil prices to increase significantly. The OPEC countries will likely be able to meet most of the demand increase but additional supplies will be required. In a pre-COVID-19 oilpatch, the US was able to add supplies rather quickly (6 to 12 months). In a post COVID-19 world, where investment money is tight (maybe non-existent), and equipment and personnel are limited, it may be difficult for US oil companies to add to global supplies.
If any of us are left working in the oil and gas industry by 2025, there is a light at the end of the tunnel. It won't be another train but a boom that will require us to rebuild the industry. We just need to get there.
Once the FID is made, the project moves to the EPCI stage (Engineering, Procurement, Construction and Installation). This is the stage where the majority of the project costs are incurred. During the EPCI phase, the final designs are approved, the materials are approved and ordered, contracts are signed and equipment is ordered.
Before the FID, the costs associated with the project are relatively small. Once FID is made, the company is committed to spending the money to complete the project. It becomes much more difficult to stop a project after the FID is approved.
In today's environment, everything is being questioned. Before March 2020, most oil price forecasts had the price of oil at $40 USD or higher. During the feasibility studies, this price of oil would have been used in economic analysis. Now, there are many forecasts that predict oil prices will be below $40 through 2021. At current prices, nearly all of the major projects are uneconomical. While forecasts show oil prices should increase, most companies will hesitate to take unnecessary financial risks.
At the start of April, Wood MacKenzie stated that out of the 50 projects they were tracking at the beginning of 2020, potentially only 10 would be approved this year. As seen in Figure 1, the number of approved projects could be less than the number of projects approved in 2015, which is the last time we saw a major drop in oil prices.
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| Figure 1: Wood MacKenzie Upstream Project Tracker, Q1 2020 |
With this delay in projects, the amount of money being spent on oil and gas projects globally will be decreased as well. In a recent Rystad Energy article, their analysis showed that 2020 Greenfield (new oil and gas fields) tendered contracts are expected to decrease to $60 billion, the lowest in 20 years.
 |
| Figure 2: Rystad Energy Tendered Contract Analysis, Service Cube, May 2020 |
Rystad Energy - Greenfield E&P Tenders shrink
The reason that a FID delay is important is that it will have a significant impact on oil (or gas) supply in the future. The rule of thumb is that it takes 5 years from the start of a project until it is producing oil. If a project is significantly delayed, it will be difficult to restart from the same spot. Many projects will likely go through the Feasibility and FEED stages again, though likely at a faster rate. There will be significant labor challenges when the project discussions resume as many talented people have been forced out of the industry.
The forecasts for reduced future oil supply are already beginning. Rystad Energy released a forecast at the beginning of May forecasting a supply deficiency of 5 million barrels of oil per day (BOPD) by 2025.
 |
| Figure 3: Rystad Energy Supply Forecast, May 2020 |
Before the oil price collapse, Rystad was predicting that supply would exceed demand in 2025. With reductions in exploration, they forecast that supplies will be below demand. The full Rystad article at the following link:
Rystad Energy: Oil Supply under supply by 2025
The future under supply will cause oil prices to increase significantly. The OPEC countries will likely be able to meet most of the demand increase but additional supplies will be required. In a pre-COVID-19 oilpatch, the US was able to add supplies rather quickly (6 to 12 months). In a post COVID-19 world, where investment money is tight (maybe non-existent), and equipment and personnel are limited, it may be difficult for US oil companies to add to global supplies.
If any of us are left working in the oil and gas industry by 2025, there is a light at the end of the tunnel. It won't be another train but a boom that will require us to rebuild the industry. We just need to get there.
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