5 Mega Projects That an Energy Investor Needs to Know About

If there's one thing the commodity price crash has taught oil and gas companies, it's capital discipline. The three-year price slump, which saw crude fall to a 13-year low of around $26 per barrel and natural gas prices hitting 17-year lows of around $1.6 per million British thermal units (MMBtu), forced energy executives to consider a new approach to capital deployment.

Oil, Gas Glut Prompts Reduction in Spending

When oil was in the triple-digit territories of 2014 and natural gas trading was above $4, companies had billions of dollars in exploration budgets. The aggressive approach was essentially tied to commodity prices and severely dented balance sheets when prices hit rock-bottom in 2016. With operating profitability compromised, the worst oil crash in over half a century triggered major restructuring and a change in the companies’ long-term focus. Most producers concentrated on becoming leaner by shunning large, capital intensive projects.

According to a report by consulting firm McKinsey, worldwide capital spending in oil and gas extraction came in at around $200 billion in 2016 — down significantly from the all-time highs of approximately $520 billion in 2014. Investors wanted the companies to rein in their ever-increasing budgets amid the sector slump.

Firms Hike Capex Again as Prices Rebound

In 2017, a steady drawdown of U.S. supplies, healthy demand and the OPEC-led production cuts drove oil prices higher. With fundamentals pointing to a tighter market, oil ended 2017 at over $60 per barrel — the highest since June 2015.

The commodity’s firmer footing prompted a 4% increase in global spending, per the annual Barclays E&P Spending Survey. While it seemed that following an extended period of relative weakness, energy stocks were finally on their way to recovery, operators continued to remain cautiously optimistic with their spending. 

However, things are expected to get a whole lot better this year. Despite the escalating trade conflict between the world’s biggest oil consumers — the United States and China — market remain largely tight amid reduced supply from Iran and Venezuela. Industry watchers are confident that improving fundamentals have probably put a floor under crude prices for the time being. With both WTI and Brent crude recently hitting three-and-a-half year highs of $75 and $80, respectively, industry executives are back with their aggressive spending plans.

Even some natural gas projects are expected to witness high level of spending. The fundamentals of natural gas continue to be favorable in the long run, considering the secular shift to the cleaner burning fuel for power generation globally and in the Asia-Pacific region in particular.

Big Capex Projects Make a Comeback

Shunning the tighter capital spending and stricter cost discipline approach of the past few years, energy companies are ready to pump hoards of cash as they go forward with some mega exploration and production projects. Operators think that the lessons learnt during the bust years will help them undertake sizeable expenditures, while maintaining the target capital structure. Not surprisingly, the Barclays survey indicates an 8% increase in global spending in 2018.

Let’s take a look at some of the mega projects that will change energy's face forever and are likely to see handsome investments by producers this year:

Libra Offshore Oilfield, Brazil ($80-$90 billion)

The Libra field, one of the biggest pre-salt oil fields in Brazil, was discovered in 2010 and has recoverable oil resources in the range of 8-12 billion barrels. Located in the country’s Santos basin, the field is being developed by a consortium led by Brazil’s state-run energy giant Petrobras PBR, together with Royal Dutch Shell plc RDS.A, TOTAL S.A. TOT and two Chinese companies — China National Petroleum Corporation and CNOOC Ltd. CEO.

Libra’s massive recoverable reserves also mean enormous development costs. In November 2017, Petrobras, carrying a Zacks Rank #1 (Strong Buy), and its partners started production from the field, which is estimated to cost an astronomical $80-$90 billion to develop. With the offshore field coming online last year, 2018 should be the year one could witness large investments on the project. 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Southern Gas Corridor Project, Caspian Sea - Europe ($41 billion)

An initiative by the European Union to reduce the continent’s dependence on Russian gas, the Southern Gas Corridor involves a series of pipelines that will transport natural gas from the Caspian Sea directly into the European markets for the first time.

The Southern Gas Corridor is one of the world’s biggest and most-expensive energy developments. With a price tag of $41 billion, it includes a number of sub-projects like the $5 billion Trans-Adriatic Pipeline, the $8 billion Trans-Anatolian Natural Gas Pipeline and the $24 billion Shah Deniz field expansion Project. By 2020, Europe will receive around 10 billion cubic meters of natural gas annually from the project. Turkey is set to get another 6 billion cubic meters, which began with the recent start-up of the BP plc BP-operated Shah Deniz 2 Gas Development.

Coral South LNG, Offshore Mozambique ($7 billion)

Coral South is a floating liquefied natural gas ("FLNG") project, located in Area 4 of Rovuma Basin offshore Mozambique. Operations in the field are expected to begin by mid-2022 with plans to operate the facility for 25-long years.

Eni SpA E operates the FLNG project through its subsidiary Eni East Africa. In 2016, BP agreed to buy the project’s 100% production for the next 20 years. Estimated to hold more than 450 billion cubic meters of gas, Coral South is set to be the first ultra-deepwater FLNG facility in the world, costing some $7 billion.

Johan Castberg Project, Norway ($6 billion)

It is one of the largest offshore oil and gas developments in recent times with estimated recoverable reserves of 450–650 million barrels of oil equivalent. Located in the Barents Sea (offshore Norway) at water depths between 360-390 meters, the Johan Castberg field involves a capital expenditure of about NOK 49 billion (or $6 billion). The development plan consists of a FPSO vessel and widespread subsea development, including 30 wells, 10 subsea templates and two satellite structures. 

The project is expected to come online in 2022 with a life cycle in excess of 30 years. Equinor EQNR holds a 50% operated interest in the field, while the remaining interests are held by Eni Norge (30%) and Petoro (20%), respectively.

Clair Ridge, UK North Sea ($6 billion)

BP-operated Clair Ridge is the second development phase of the giant Clair field, which could be found roughly 75 kilometers west of the UK Shetland Islands. Requiring an investment of around £4.5 billion (approximately $6 billion), the project aims to develop the regions north of the Clair Phase 1. Discovered in 1977, the first phase of the Clair filed came online in 2005 and is likely to continue producing until 2028.

The multi-billion-pound Clair Ridge initiative is set to prolong the field’s life to 2050. The project should churn out up to 120,000 barrels of oil daily at its peak. Hook-up and commissioning services are currently taking place with start-up expected later this year.

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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
CNOOC Limited (CEO) : Free Stock Analysis Report
 
BP p.l.c. (BP) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
Eni SpA (E) : Free Stock Analysis Report
 
TOTAL S.A. (TOT) : Free Stock Analysis Report
 
Statoil ASA (EQNR) : Free Stock Analysis Report
 
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