Where is the money in energy?

Neil Golding, EIC’s Director of Market Intelligence, calls final investment decisions (FIDs) “the reaching and closing of the final, critical decision gate for an energy infrastructure project to proceed to the point where ground can be broken and construction commences”. He oversees EICDataStream – the organisation’s database resource, tracking more than 14,000 projects across the global energy industry.

Boom time in oil and gas

In oil and gas, the collective CAPEX values of projects reaching FID outshine any other sector. In 2022, 89 projects reached FID, representing a collective CAPEX value of US$154bn. Fewer projects have reached this stage in 2023, numbering 54, but their collective CAPEX is higher, in the region of US$176bn.

“This could be down to a number of these projects in 2023 comprising large-scale liquefied natural gas liquefaction schemes, as well as buoyancy in the upstream and midstream oil and gas sector, including projects in Mexico, Guyana and Angola, not to mention Rosebank in the UK, reaching FID,” Golding says.

Vysus Group CEO David Clark adds that a significant increase in oil and gas market activity across the Middle East during the last few years, along with increased project FIDs in Norway, has been driven largely by tax incentives put in place over the last three to four years. “Looking ahead, increased deepwater exploration, and additional development in South America, South Africa/Namibia and the Gulf of Mexico suggests continued FID approvals for these larger scale projects in the next two to four years,” he says.

Andrew Aldrich, Global Business Development Director at BMT, thinks the high levels of hydrocarbon FID rates are suggestive of the “tumultuous” geopolitical landscape of the past 24 months, and show nations “taking out insurance policies for energy security”.

Martin Layfield, Engineering Consultancy & Global Growth Director at Petrofac, adds: “Some regions like

Africa have huge energy demand that economically viable oil and gas projects can meet in the immediate term, ranging from major greenfield developments to ones that are quite focused and niche. 

“On the other hand, we are seeing activity focused on smaller, marginal field developments, which may have previously been seen as unattractive but are now subject to accelerated development to move from design into construction and operation in the shortest possible timescale.”

Nuclear – big ticket power assets

The energy security case for nuclear power continues to build, and countries are also recognising the key role of nuclear energy in reaching net zero. At COP28, more than 20 countries from four continents launched the Declaration to Triple Nuclear Energy Capacity by 2050.

Indeed, new nuclear power stations represent high CAPEX, although a fair amount of risk is associated with developing these long-lead projects. Consequently, explains Golding, there are fewer of them when compared with other sectors.

“Of the announced projects that are moving forward, we have seen 40% reach FID to date. The key markets are China and India, and 50% of the projects to reach FID are located in those countries.” Next is Europe, including the UK and eastern Europe.

Golding says the length of time for a project to reach completion from FID should be noted. In 2022, just three projects reached FID, representing a total CAPEX of US$16.6bn. In 2023 that number was four, representing a total CAPEX of US$28.9bn.

High levels of hydrocarbon FID rates are representative of nations taking out insurance policies for energy security Andrew Aldrich, BMT

Offshore wind

Despite ongoing inflationary pressures and supply chain issues, 12 offshore wind projects reached FID in 2023, totalling US$21bn in CAPEX. This compares to just four in 2022. The UK remains a key market, with the government’s recent decision to increase bidding caps in the Contracts for Difference Allocation Round 6.

“For the foreseeable future, offshore wind growth will concentrate in three regions: Europe (EU & UK), Asia Pacific and North America (US),” says Golding. “Aside from China, Taiwan, South Korea and Japan will contribute to new capacity in the Asia Pacific.”

Clark says: “From a UK perspective, many in the wind market supply chain are also legacy oil and gas players and have been able to fund the move to renewables partly from the revenue and margins generated by their oil and gas businesses. Slowing activity levels in the UK, including the slower pace of the Scotwind projects, combined with forward market uncertainty, mean that many businesses are challenged to continue to bridge the gap between the two markets, given the delays, or to green light the capital investment commitments needed to increase renewables capability. Consequently, they are looking to invest in overseas markets where activity is picking up.”

According to Aldrich, offshore wind will be a key element of reaching net zero for the UK and Europe. “The green electrons from wind will play a critical role in powering our infrastructure and producing the new fuels that will decarbonise our transport and logistics sectors,” he says. “FID rates will accelerate in nations where the policy environment is right.”

Energy transition

Layfied says: “We are seeing growth in demand for energy transition projects across the board, including wind and hydrogen. Heightened carbon capture and storage [CCS] activity has been a real positive in 2023, which we expect to continue.”

In both hydrogen and CCS, the volumes reaching FID are much lower than in more established sectors. However, this year may have marked a turning point, with two major flagship projects reaching FID in each sector. In October, the US$1.37bn Pothos CCS scheme off the Netherlands secured this milestone, while Saudia Arabia’s multi-gigawatt-scale Neom green hydrogen/ammonia project, which has a total investment of US$8.4bn, reached financial close earlier in 2023. It is important to note that these very large green hydrogen projects will require additional wind or solar capacity to supply them, signalling work for those segments of the renewables industry, too. 

“In addition to the Middle East and Asia-Pacific, more transition projects are moving from planning to FID in Northern Europe/Norway, while the commercial approval in the UK seems to still be sluggish, despite the broad number of projects and technologies in development,” says Clark.

KBR works with both integrated and national oil companies. Its Director of Project Solutions in Energy Transition, David Cole, says that in the case of hydrogen projects, the work is currently focused on front-end feasibility and engineering study, whereas oil and gas projects are able to progress with greater ease into the engineering, procurement and construction stage.

The challenge faced by the energy industry is the accurate cost estimation of hydrogen projects. “Oil and gas is a known entity and the risks are generally well understood,” says Cole. “Hydrogen projects are faced with a mountain of new challenges and risks that are yet to be fully explored through the long-term operation of the electrolysis, storage and transportation lifecycle. The industry sees that hydrogen has massive potential, but it carries risk, and this creates uncertainty when it comes to making the final investment decision.”

What does this mean for the supply chain?

“It’s clear that oil and gas will remain a major part of the energy mix and provide a significant proportion of future supply chain opportunities,” says Golding.

One reason oil and gas is so buoyant is that this period has followed nearly a decade of suppressed investment, and the new capacity that will come onstream as a result of these FIDs will maintain production rather than increase it. “It is the consequence of a protracted era of under-investment,” he adds.

Despite the current modest FID rates, project pipelines in nascent energy transition sectors are expanding – a proportion of which will progress to FID. That’s why it’s important for the supply chain to start divesting into energy transition markets, says Golding: “Bid early, get in early.”

Aldrich adds: “Focus on where to play. Understand the customer and contracting routes and what value you can add. Build from your strengths.”

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