FID or no FID

When is a final investment decision (FID) not a FID? When it's an internal FID.

A commentary by Readul Islam, Senior Analyst, Rystad Energy

Large upstream projects are more often delivered by a group of partners rather than a single 100% owner. This spreads project risks and can also make it possible to finance megaprojects, which could be beyond the capacity of any single player. When time comes to approve a project with multiple partners, it must be “all-in”: each partner must commit to paying its share in accordance to its equity stake in the project.

After project sanctioning, major contract awards normally roll out within weeks or the first few months following the FID (large projects might need to order long lead items pre-FID). But in the interesting times we're living in, a project sanction announcement doesn't necessarily mean contract awards are imminent. Here we look closer at a trio of projects with reported sanction activity within the past three months.

The highest profile of the trio is arguably Mad Dog Phase 2, where operator BP announced its sanction of this Gulf of Mexico project on December 1, 2016. BP's press release made clear it was an internal sanction, stating “While BP has reached a final investment decision (FID) on Mad Dog Phase 2, BHP Billiton and Chevron… are expected to make a final investment decision in the future”. During Chevron's 4Q16 earnings call on January 27, 2017, CEO John Watson commented “We have not yet taken FID but I expect that we will” when queried on the project. News broke February 9, 2017 of the endorsement from BHP's board.

At the Coral FLNG project off Mozambique, Eni announced on November 18, 2016 its go ahead. Eni also clarified “… approval of this investment by Eni's Board… is another fundamental step towards the Final Investment Decision on the project, which will turn effective once all Area 4 partners have approved it”.

The Coral FLNG project lies within the Area 4 license in the offshore Rovuma Basin, with operator Eni partnered by CNPC, Mozambique's oil company ENH, Galp Energia and Kogas. Early December, comments from ENH's chief executive Omar Mitha indicated the state player had voted in. Just before Christmas news arrived that Portuguese Galp had given its nod. And early February 2017 the Mozambique Minister of Energy confirmed a thumbs-up from South Korean Kogas. Thus, at the time of writing, FID of the Coral FLNG project is pending approval from the board of the Chinese state player CNPC.

While with both these projects the operators announced their internal sanction first, the Leviathan Phase 1 project has a different script. Operator Noble Energy had been hoping to sanction the LNG project in Eastern Mediterranean waters off Israel by the end of 2016. During 2016, the consortium of Noble, Delek Group & Ratio Oil revised the plan of development, progressed several gas sales agreements and overcame legislative hurdles that had threatened its investment in the project.

It was however minority partner Delek Group that announced its board had authorized project sanction around mid-December 2016. Local Israeli reporting at this time indicated Ratio Oil had also given its approval. To date, Noble Energy hasn't announced project sanction; some analyst speculation exists currently that the operator will announce the FID prior to stating its 4Q16 results, which is scheduled February 14, 2017.

Megaproject sanction announcements tend to be a single united announcement made by the operator on behalf of its partners — this approach still is being followed: e.g. with the mid-2016 sanction of the Tengiz FGP/WPMP project. However, at least with the 3 projects we've looked into here, perhaps the price plunge since 2H14 has stressed the upstream project sanctioning process and given observers a peek into the inner workings of these FIDs. Operators and partners have either reported their internal project approvals, or media has given a running commentary as various partners signed off. Perhaps the players wish to demonstrate project advancement, signify that they've done their job and the ball is with their partners. Or perhaps… it's the industry that needs to see evidence of this forward momentum; it is us who need positive signs of progress in these challenging times.

*Rystad Energy UCube estimates the Coral FLNG, Leviathan Phase 1 & Mad Dog Phase 2 projects will sanction approximately 3,5 billion oil equivalent barrels of liquids and gas reserves for a combined spend of 19,5BUSD from FID to first hydrocarbon production, with the projects plateauing at about 370 thousand barrels of oil equivalent per day by the middle of the next decade.

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