LONDON – Wood Mackenzie expects a small increase in upstream oil and gas final investment decisions (FID) this year, with up to $185 billion potentially committed to developing 27 Bboe of resources.
“Achieving FID on oil and gas projects is harder than it used to be, but with fewer sanctioned in 2022 than was expected, we believe we will see a slight uptick in activity this year, with over 30 of the 40 most viable projects likely to reach this milestone,” said Fraser McKay, vice president, head of upstream analysis for Wood Mackenzie. “Most operators will remain disciplined, and carbon mitigation will remain a key part of many FID projects.”
National oil companies will likely control the larger new investments, directed at discovered resources with an average development cost of $7/boe in 2023.
“International oil companies will be focusing largely on higher cost but higher-return deepwater developments,” McKay added. “All will be acutely aware of how oil and gas project sanctions are playing out in the public domain and the scrutiny to which their associated emissions will be subject.”
Projects this year will require on average $49/bbl crude to deliver a breakeven 15% internal rate of return (IRR). A weighted average IRR of 19%, at $60/bbl, would be the lowest since 2018, the consultant suggested, with an average payback for this year’s projects at nine years.
“Short-cycle and small-scale offshore projects will out-perform in terms of both paybacks and returns,” said Greg Roddick, principal analyst of upstream research. “Long-life LNG projects are compromised when it comes to IRRs, but their attractive and stable future cash flows will be strategically important...
“Advantaged deepwater oil and shelf projects will outperform on emissions, but LNG, sour gas and some onshore projects require mitigation measures.”