New project sanctions on the rise?
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At the start of the year, we predicted that around 20 to 25 major new upstream projects would be sanctioned in 2017, roughly double the score for 2016. So, as we approach the year’s halfway mark, how is our forecast faring?
Well, not too bad, to be honest. With 15 projects approved for development so far, we are on target. And with 8.0 billion boe sanctioned, we are also well on track to smash last year’s total of 8.8 billion boe.
These are good signs that the upstream industry is continuing on the road to recovery and that the more competitive conventional projects are moving down the cost curve sufficiently to once again attract investment.
But what does the type of project being sanctioned tell us about the state of the industry?
Two trends leap out from the data — one on oil vs gas, the other on brownfield vs greenfield.
When we look at the numbers, the bias appears clear. Of the 8.0 billion boe sanctioned across 15 projects, 5.5 billion boe is gas versus 2.5 billion boe of liquids.
So gas fields dominate? Actually not so, and the devil is in the details. One huge project — Noble Energy’s 22 tcf Leviathan development offshore Israel — overwhelms the numbers. Remove this goliath, and a totally different trend reveals itself: of the remaining 14 projects, nine are oil-focused, and oil represents the majority of the reserves sanctioned for development.
We believe there are some logical reasons for this weighting towards oil over gas. The former is easier and faster to develop, and therefore offers quicker payback on investment. This is important because it directly relates to the message of value over volume that many of the larger oil firms are conveying to their shareholders. One component of this is to achieve positive cash flow from project investments in a faster timeframe than previously. This has been influenced by the rise of the flexible short-cycle tight oil plays in the US.
But this trend is not just about more capital being allocated to tight oil. Eleven of the 15 project sanctions year-to-date are either brownfield expansions on existing fields or subsea tiebacks. Not only are brownfield/tieback developments less risky than greenfield developments, but they also tend to be less capital-intensive and quicker to bring onstream, again offering a quicker payback and better returns on the development dollars.
So what’s next?
Well, it’s also important to note that on 16 June ExxonMobil sanctioned the first phase of development on the 1.5 billion barrel Liza oil field. Discovered in 2015, offshore Guyana, initial production is expected to be over 110,000 b/d. This goes to show that it’s not just about short-cycle investments; the best greenfield opportunities are also moving forward to commercialisation.