WoodMac: Exploration is Getting Leaner, Gassier

The upstream sector is still grappling with the oil price downturn but a study by UK-based consultancy Wood Mackenzie indicates that it will emerge leaner, more profitable, and gassier.

 "The new economics of exploration mean that rather than pursuing high-cost, high-risk exploration strategies, elephant-hunting in the Arctic for example, the majors have become more conscious of costs,” said Andrew Latham, vice president of exploration research at WoodMac, owned by US firm Verisk. “Smaller budgets have required them to choose only their best prospects for drilling, including more wells close to existing fields,” he added.

WoodMac’s new report, Exploration Benchmarking – Majors 2006-2015, notes that the majors invested $169bn in exploration during that period, adding 72bn barrels oil equivalent to their resource base. Of this, 25bn boe came from unconventional plays. Resource discovery costs for the period averaged US$1.78/boe. Returns over the period were not optimal, with returns of just 6%, versus an industry average of 10%. But the majors achieved their lowest costs in 2015. Moreover, they achieved large additions from unconventionals, well ahead of the volumes they produced every year from 2011.

Conventional exploration's role in reserves replacement is set to diminish, the report added. Other renewal options - from unconventionals, discovered resource opportunities, enhanced recovery techniques, and mergers & acquisitions (M&A) - are likely to prove key to future reserves replacement.

Majors’ exploration spending halved in 2015 versus 2014, with spend per well drilled falling to levels not seen since 2008, said Latham. Companies are no longer trying to fully replace production via conventional exploration. Instead their reserves replacement will also require inorganic, brownfield or shale investments, he added, and exploration has become incremental.

"Another big factor is gas - companies are not replacing volumes in the same ratios as their production, or in the same way. Discoveries break down to about one-quarter oil and three-quarters gas, while global production is currently nearer two-thirds oil and one-third gas. The future will become steadily more gassy."

Mark Smedley