When joint ventures, company consortia, or public-private partnerships plan massive energy projects, they must go through several stages of planning and execution. One of the most important steps of this process is the FID.
But what exactly does FID stand for and what does it mean for the projects and the companies involved?
This comprehensive guide to FID will provide an overview of the steps companies and project partners must go through before they give the final go-ahead for a project and have contractors launch the actual construction of large-scale oil and gas projects. The guide will also offer a glimpse into what comes next after FID and what the important questions are for companies and investors to consider in each of the stages before and after the FID.
In this guide, investors will learn:
- What does FID stand for
- Which are the stages before positive FID is taken
- What comes after FID
- How joint venture partners decide to take FID
- How companies and project owners look at projects after the 2014 oil price crash
- Which are the most recent trends in FIDs in the oil and gas industry
- What is FID?
FID stands for final investment decision (FID). This is the point in an energy project in which the company or companies owning and/or operating the project approve—or sanction—the project’s future development. With the FID, the company or companies basically say to investors and the media ‘we are moving ahead with this project because we have (or have raised) the money necessary to pay for its execution and start of operations, and we believe that this project will make money for us in the future.’
Typically, it is the board of directors of a company involved in an oil and/or gas project who makes the Final Investment Decision for a project. When companies say that they have taken or made an FID, they mean that they approved the project to go ahead.
For example, Chevron said in one of its most recent project decisions: “Chevron Corporation (NYSE: CVX) announced today it has sanctioned the Anchor project in the U.S. Gulf of Mexico. This marks the industry’s first deepwater high-pressure development to achieve a final investment decision.”
- Why Does FID Matter?
In major energy projects, companies usually take years to make the FID. The stage with the FID follows the feasibility study stage, the pre-FEED (Front End Engineering and Design) stage, and the FEED stage.
The FID typically launches the execution of the project and is the beginning of the engineering, procurement, and construction (EPC) stage or sometimes the engineering, procurement, construction, and commissioning (EPCC) phase. At this point, contractors can proceed with procurement and construction and complete the engineering of the project
FID is the stage during which the project owners begin to spend the most money on the project, because this is usually the stage at which contractors begin actual work on construction and execution.
Most major oil, gas, or liquefied natural gas (LNG) projects require billions of U.S. dollars of investments for all the stages of development, so the companies-project owners carefully plan, usually years in advance, how to best design and execute a project in order to keep costs contained and at the same time, offer meaningful returns on investment in the project for the company and its shareholders.
- What Are the Stages Before FID?
FID is just one of the stages in a massive energy project. Before a company or joint venture partners move on to FID, they will need to have completed several other important phases in the project development.
- First comes the feasibility study.This is the phase in which a project begins its life as an idea, and this idea and its initial concept are tested for feasibility. The project idea begins with identification of resources, how much (roughly) the project would cost, and where the money to finance it would come from.
The feasibility study aims to evaluate how economically sound (for the company) the idea of the project is and whether the project can bring additional value by creating a new value chain on its own. For example, if a nearby newly built oil/LNG/fuel export terminal will maximize the value of the resources to be developed.
At this feasibility stage, the company or companies will be asking themselves how they can have the lowest possible cost, without compromising quality, in the shortest period possible.
This is also the step in which the project owner(s) should already draft a rough outline of any local issues they might encounter in the project’s development and execution. For example, how many permits and environmental assessments from how many agencies—local, federal, or other—the project needs to obtain before proceeding to actual construction and operation. Or how much local opposition they could face in the planning, public discussion, and construction phases. The project owners must also take into account the timing for government approvals to their project.
Companies cannot overlook these initial steps in project planning and project management, because with better understanding of the issues, project owners can better plan how much resources they should allocate to the planning phase.
- After the feasibility study, the project partners, if more than one company is developing an oil or gas resource, sign a memorandum of understanding (MoU)to set out the basic structure of a joint venture that will develop a given resource and sell it on the market. Each company takes a percentage of the venture and typically one—usually the firm that has come up with the idea and the one with license to explore the oil/gas resource—becomes the project’s operator or leads the consortium of companies.
- Many major oil and gas projects around the world are now planned, developed, and executed by several companies which form a joint venture.
Through the joint venture structure, companies:
- divide the capital expenditures on big multibillion-dollar projects, which would be otherwise too cost-intensive for a single company.
- access technology and/or resources of their joint venture partners
- scale up or de-risk geographical or market position
- share and mitigate risks amid volatile oil and gas prices and regulatory uncertainty in some geographies
In recent years, more large-scale projects, especially offshore projects worth tens of billions of U.S. dollars in regions with changing investment climate and frequently changing regulations and tax systems—such as Africa, Southeast Asia, or South America—are being planned, developed, and executed via joint ventures. Sometimes this is inevitable, because many oil and gas producing countries require a local company or the state-owned oil & gas firm to be a joint venture participant, even if it holds just 5 percent working interest in the project. The project partners, or the sole company developing a project, need to consider the exact location of their project and which markets they will target with resources from the project. Partners must examine how the national and local regulations and environmental requirements will impact the project timeline and costs.
Before making a Final Investment Decision, project partners and companies obtain all the necessary permits and file all required paperwork related to the project, including environmental impact assessments (EIAs) and route permits (for pipelines for example) from authorities. The respective regulators have to approve the project before companies proceed with any actual construction and installation work. At this point, project owners and operators have to consider the required permits in the jurisdiction where the project will be located. They will also have to assess the likelihood of potential challenges to the project from both regulators and the public.
- Then the project moves on to the Front End Engineering and Design (FEED)This is the phase after the feasibility study and gives the basic design of the project, outlining in details the technical and financial options reviewed in the feasibility study. The FEED examines the technical requirements and provides a rough estimate of the overall project costs and the costs of each phase. In the FEED stage, project partners need to ensure that they have addressed any potential risks to the project and that the work on FEED will have extensive analysis and detailed data and information that would inform the Final Investment Decision.
In the FEED phase, project owners and operators communicate with the engineering contractor to decide which technical and engineering options are the best to use in the project.
For massive oil and gas projects, FEED contracts typically take around a year to complete.
FEED is one of the crucial stages in project implementation before the FID. The activities during the FEED phase are very important for ensuring a positive FID and the subsequent successful execution and start-up of a project.
- The company or project partners will need to make sure that they have, or will have, the money necessary to finance the construction, installation, and commissioning of the planned oil and/or gas project. Project owners and operators need to make sure that they meet the criteria of lenders for financing, or that they can fund their respective share of the project’s costs with available resources.
Once a company or project partners have successfully completed all these steps described above, their respective boards of directors and executive committees take the Final Investment Decision. Before the decision, the partners will have addressed all potential concerns about the project’s environmental impact, financing, permitting requirements, and government and regulatory approvals.
- What Comes Next After FID?
Taking the final investment decision, companies move on to the post-FID process in the project—Engineering, procurement, and construction (EPC), or Engineering, procurement, construction, and commissioning (EPCC), or the Engineering, procurement, construction, and installation (EPCI) phase.
The project is sanctioned when the final investment decision is taken. Often ‘project sanctioning’ is used as a synonym for FID.
With the FID, partners progress to the execution phase of the project.
In EPC, engineering includes basic and detailed engineering, planning, construction engineering. Procurement includes procurement, purchasing, invoicing, logistics and transport. Construction includes civil engineering, electrical installation, and mechanical installation.
- Recent Final Investment Decisions on Massive Projects
In the oil and gas industry, many of the massive projects are in the offshore sector. Following several years of depressed offshore market after the oil price crash of 2014-2015, the project sanctioning has picked up pace in recent months, and the industry seems to have entered a new offshore investment cycle, judging from the increase in greenfield investments in 2019, according to Rystad Energy.
The expansion phase of Saudi Aramco’s Marjan field in Saudi Arabia was the largest offshore project approved in 2019, with nearly US$12 billion in investment. The second largest project was the first phase of Total’s Area 1 development in Mozambique. Chevron’s Anchor field development in the US was the largest project sanctioned in the Atlantic region, just ahead of the second phase of Equinor’s Johan Sverdrup field offshore Norway.
In 2019, the total approved greenfield investments in offshore oil and gas projects reached US$92.3 billion, according to Rystad Energy’s estimates. The total investment pledged last year was the highest sum approved since 2013, just before oil prices crashed and delayed many final investment decisions.
Companies are now much more careful when planning and designing massive projects, because with oil prices averaging around $60 a barrel over the past year, they simply cannot afford huge cost overruns, which were typical for major projects whose development had started at the beginning of the 2010s.
Project owners and operators have many steps to take and a lot of planning to do before making the Final Investment Decision on a project. The FID is just one phase of a project’s planning and execution—basically the phase between successful careful planning and the start of actual project execution.
The Final Investment Decision is the crucial step in a project that tells investors and shareholders that companies are ready to spend money on a new project, and that they expect the project, once fully operational, to make enough money to make the initial investment worth it.