FID stands for Final Investment Decision. It is a crucial stage in mega energy projects as it's the final stage to decide whether to go ahead with the project or not. In other terms, it's the final stage to determine if the investment in the project would be beneficial or not.

Before investing such an enormous amount in the project, the company or group of companies assesses all possible outcomes, including the capital required to execute the project successfully. Likewise, it's the phase for the investors to calculate the project's financial viability and put their money into it.

After assessing everything, project owners or investors agree to either go ahead with the funding or back out. If the budget is sanctioned and investors decide to move forward with the project, it is known as FID.

Several stages of planning and collaborations with different stakeholders are required before making the investment in projects of this scale.

Understanding FID meaning

FID is an abbreviation for Final Investment Decision. It is the most critical stage in multi-million dollar energy projects, especially in the oil and gas industry. FID is crucial because it opens the funding for the project, and the execution starts.

At this stage, the project owners or shareholders sanction the estimated budget for the energy project after fulfilling all the preceding steps, thereby giving an official nod to go ahead with the project. In short, FID is officially the start of a multi-million dollar oil and gas project.

Why does it matter?

Companies often take years to reach the FID stage for large-scale energy projects. These preceding years before the FID include the feasibility study, pre-FEED (Front End Engineering and Design), and FEED phase.

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FID is also important because once a company makes the Investment decision, it marks the beginning of the EPC (Engineering Procurement and Construction) stage, wherein the project contractors proceed with procuring material and beginning the construction.

What happens before FID?

Companies can not just start drilling if they find a place with crude oil reserves. Several years of planning and preparation are required before actual oil production starts.

The roadmap to FID passes through several stages involving multiple checkpoints, assessments, and consultations. To successfully execute energy megaprojects, oil or LNG companies spend tens of billions of dollars. Hence, it's evident that these companies spend years planning and proper cost estimation to stay within budget limits without impacting the quality or output of the project.

Here are some crucial phases the companies go through before arriving at the FID.

Feasibility study

The feasibility study is the first step to converting an idea into a concept. This study checks whether an idea is feasible enough to proceed further or not. Even demand and oil prices play a significant role in deciding the feasibility and worth of a project. This includes testing the initial concepts, identifying the necessary resources, estimating the budget, and where to arrange the capital required for the investment.

Economic viability is a crucial aspect to consider while testing the feasibility of a project. This includes finding the best possible solution to accomplish the project at the lowest cost and shortest duration without compromising the quality. 

Besides the project's technical and economic aspects, the feasibility study team also outlines the anticipated local issues that might affect the project's development. Regulatory clearances, local opposition on the project site, or governmental scrutiny during the project's planning, execution, and construction phase are some of the local issues that the project team considers in the feasibility study.

Before going ahead with the investment, companies involved in massive energy projects can not overlook these factors. Considering these factors will allow the owners to tackle the issues better with appropriate resources and countermeasures.

Memorandum of Understanding

More often, a consortium of companies develops large-scale oil and natural gas projects by forming a Joint Venture or JV. Therefore, the participating entities must draw the outlines of the joint venture and specify the resource and expertise allocations to accomplish the task without hurdles. Accordingly, they sign a Memorandum of Understanding or MoU to stay aware of the Terms and Conditions of their Joint Venture.

Generally, every entity participating in the JV settles for a percentage. This percentage is either based on its role or contribution to the venture. And the company, having the license to explore energy in the target site, leads the JV.

Need for JV in oil & natural gas projects

JV is, by far, the most practical way of planning, developing, and executing the majority of global oil and natural gas projects. But why is it so important? 

Here is why companies prefer to form a JV before the final investment decision.

Energy projects, be it oil & natural gas or LNG, are highly capital-intensive. Hence, a single company forms a JV, divides the capital expenditures, and bears the whole capital. Even companies like Mitsubishi Corporation, Royal Dutch Shell PLC, and Tullow Oil form JVs to mitigate the risks associated with high-value investment.

• JV allows the participating entities to access and utilize the technology and resources of the other joint venture partner.
• The lead company coming up with the initial idea or license may not have the market position in the operating region. Forming a JV grants them easy accessibility to the target market. 
• Mitigating geopolitical and regulatory risks is another benefit that JV offers to the consortium.
• JV has seen substantial success with several high-scale energy projects around the globe. Southeast Asia, the Gulf Coast of the Middle East, East Africa, South Africa, Western Australia, South America, and North Sea regions have seen several such projects in recent years.
• In some cases, forming a JV in the oil & gas sector becomes necessary due to regulatory compliance to partner with a local or state-owned firm in the operating jurisdiction.

Permits

The company or the JV must obtain the necessary permits before the final investment decision. These permits include route permits(for laying out pipelines) and EIA or environmental impact assessments to ascertain the level of emissions does not harm the environment. These clearances and permits by the respective authorities of the operating region are mandatory before starting the actual construction or installations.

FEED

FEED or Front End Engineering and Design is the final phase before the final investment decision. In this phase, the project team prepares the engineering design to visualize how the project would like after construction. FEED allows the project owners to review the technical specifications and financial options outlined in the feasibility study and prepare a final estimate of the overall costs required for each project phase.

Since FEED is the final stage before the investment decision is made, project partners ensure that all potential risks have been addressed and their countermeasures also considered in this phase.

Another objective of the FEED study is to determine the appropriate technology and engineering solutions needed to accomplish the project within the budget and timeline. This is why the FEED contracts take months, if not years, to complete.

What comes after FID?

Once the project partners are convinced about proceeding with the project in the feasibility and FEED stages, they sanction the budget and award the project contract to the EPC contractor. Generally, the participating entities announce their official project sanctioning statements via a press release.

Difference between FID & FEED

FID stands for Final Investment Decision, a crucial phase to moving ahead with a mega energy project, whereas FEED stands for Front End Engineering and Design, a stage before the FID. FEED helps the project owners to estimate the budget and make a better decision about the final investment.

Relation between FID & EPC

In FID, an oil and gas company decides to invest in a new project. After the final decision, it moves on to the next phase called EPC, wherein the actual execution of the project starts. 

Recent FID in oil & gas around the world

Lake Albert Project FID(worth USD 10 Billion)

TotalEnergies and partners(TotalEnergies, China National Offshore Oil Corporation, and Uganda National Oil Company) have announced an FID worth $10 Billion for the Lake Albert project to develop oil fields and an export facility including pipelines.

With an oil production capacity of 230,000 barrels per day, this ambitious project will enable Uganda to export oils from the Tilenga and Kingfisher oil fields via the East African Crude Oil Pipeline on the African East Coast.

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ExxonMobil advances with FID in the Yellowtail development

The global energy giant corporation from the United States is all set to proceed with its largest FID in North America. After completion in 2025, this oil facility will produce approximately 250,000 barrels of oil per day starting in 2025. Reportedly, all the regulatory approvals have been completed for this project.

Find out more megaprojects worldwide and track their current status with Global Project Tracker for the scope of investment and returns.

Conclusion

FID is undoubtedly the most crucial phase of a capital-intensive energy project. It's the ultimate stage to decide on investment, corporate finance, and the whole course of the new venture. 

FID is a critical moment for investors to assess the all-round aspects, including the risk factors, in their high-stake investment. However, correct assessment and robust planning can turn the venture into a highly profitable undertaking.