This is not to say that there is no sign of investment recovery. Wood Mackenzie reports that there are a total of 26 new conventional oil and gas projects that could get their final investment decision this year. These projects, according to analysts at Wood Mac, would require investments of around $ 110 billion to unlock around 27 billion barrels of oil equivalent in reserves.
One interesting thing about these projects, which shows the changes in the energy industry, is that over 50 percent of the reserves to be mined with these projects are natural gas reserves. Many of the biggest projects slated for green light this year are liquefied natural gas, including Qatar Petroleum’s production expansion at North Field. A tenth of the projects on hold for FID this year are deepwater production, and the rest are a mix of offshore and onshore projects.
However, according to Wood Mac, there is no guarantee that all of these projects will actually receive a final investment decision. This is due to a variety of reasons, the main one being the expected rate of return, carbon intensity and the political context.
Returns – and the time it will take to emerge – have become of the utmost importance to oil and gas investors, and they have also become a top priority for the companies themselves. Whereas previously it was customary to pour millions into projects that might not make the investment for decades, the focus is now on shorter payback periods, which means short-cycle projects have the best chance of being approved. Related: Russia Boosted Oil Production In April
LNG projects are not short cycle projects. LNG installations require massive initial investments and take years to generate initial returns. There are six large-scale ones that owe their FID this year, according to Wood Mac. Payback times for these six projects vary between 10 and 15 years, which casts a shadow over their FIDs.
On the one hand, as carbon intensity begins to grab headlines, investors are increasingly paying attention to emissions – and so are buyers. While this is not yet standard practice, there are signs that carbon neutral LNG may well be the standard LNG of the future, which means additional investments in carbon capture systems or others. ways to reduce the emissions footprint of LNG extraction and production. It remains to be seen whether all planned LNG projects will be informed in this context.
The carbon issue has also become an important issue for oil investments. The outlook for demand has brightened considerably with the end of lockdowns and people are starting to travel again, not to mention the marked preference for personal transportation after the lockdown, which drives up demand for fuel. The same goes for emissions linked to oil production.
A recent Argus article on the future of oil investments in the US Gulf of Mexico noted that any plan should consider not only costs, but carbon intensity as well. Virtually all of the major energy companies now have a low-carbon transition plan to appease investors, and while they would need money from the sale of oil to implement those plans, they should also pay attention to the emissions footprint of the production of this oil. Related: Three Things That Will Drive Oil Prices Up In May
It is certainly a complex situation for a sector that has become the target of growing criticism and increasing scrutiny, from both regulators and shareholders. Under this double pressure, many projects – not just this year – could lose their viability because reducing emissions could, and often is, an expensive endeavor.
Yet the world will still need oil – and gas – decades from now, and it will need millions of barrels a day. This means that companies, supported by their shareholders, will continue to invest in the exploration and production of oil and gas. On the contrary, the energy transition would lead to a tighter supply for the reasons mentioned above. This tight supply, in turn, will push the prices of these energy commodities up. And that will lead to more investment in oil and gas, emissions and everything.
Interesting news this week from Bloomberg notes that the rise in oil prices has boosted oil and gas ETFs but also, ironically, ESG funds. This is due to the way ESG funds are constructed, the story explains, but the end result is that people who invest in ESG funds invest some of their money in Big Oil. And when Big Oil does well, so do ESG investors. This could give rise to some interesting lines of thought on ESG investing and oil and gas, and, on a related note, on reducing emissions and energy demand and supply.
These are the basics that would eventually prevail, regardless of the political context. There is a demand for oil and gas, so there has to be a supply, as at least two CEOs from Big Oil, Shell and BP recently noted. Until the world needs oil and gas, we will produce oil and gas, they have repeatedly said. And while some of the priorities for making a final investment decision on a new project may have changed, the top priority has remained: will it make money? As long as there is demand, many projects will bring in money.
By Irina Slav for Oil Octobers
More most popular reads from Oil dollar: