Exploration's traditional role as the primary engine of upstream growth has been slipping away; if unchecked, it could become an existential threat to traditional wildcatting. Most of the largest upstream companies are unlikely to ever return to a business model wholly reliant on conventional exploration for growth.
This decline began several years before the recent oil price falls. The trend away from exploration is stark and has been magnified by the oil price collapse. Reserve replacement from conventional new fields is just one-quarter of that seen a decade ago. The data tells the story: during 2002-2005, the industry sanctioned 30 billion boe from discoveries made since 1995; during 2012-2015, the industry sanctioned 7 billion boe from discoveries made since 2005. The upstream landscape is shifting
Exploration value creation has become a niche rather than universal activity; full-cycle industry returns fell below 5% in 2014 even under a US$85/bbl scenario. Companies are investing elsewhere to replace reserves and grow production. Part of exploration's decline reflects a wider retreat from conventional greenfield developments, representing a smaller portion of industry growth than a decade ago.
Taking their place are more economically-attractive brownfield projects, unconventional plays and incremental investments on existing assets. These resources typically lie onshore or in the shallow offshore, contrasting with the deepwater location of most new discoveries.
This exploration retreat has not yet led to growth or reserve replacement problems, but in the longer term, growth without new exploration success is unsustainable. The hopper of discovered undeveloped resource and incremental opportunities is finite. Unconventional plays and future brownfield opportunities will become increasingly marginal.
We expect that the trend away from conventional exploration will eventually reverse. The potential for the economics of exploration to be reset through lower costs is critical. The Majors and other impact explorers recognise this and high quality acreage remains in strong demand.
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