How explorers can make money – three strategies
Chairman, Chief Analyst and author of The Edge
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They are the romantics of oil and gas, geoscientists. Other disciplines – engineers, accountants, traders, marketers – might consider they add a bit of value somewhere along the chain. But it’s the geologists and geophysicists who take the risk capital, choose where to explore and, with science and a bit of luck, create the big value.
They’ve always been adept at discovering the resource. The problem over much of the last decade was finding resource that made money. Exploration destroyed value, a cumulative US$134 billion from 2010 to 2016. It’s a depressingly big, negative number that does no one credit. This reflects a period when the industry ‘lost control’ in thinking that higher prices would solve the problem of rising finding and development costs. Things had to change, and they have.
Our latest analysis shows exploration has got its mojo back. We have calculated positive value creation totalling US$15 billion for 2017 and 2018 combined. Full-cycle returns averaged 13% in 2018, the best year in a decade.
So how has exploration started to make money at US$60/bbl?
The industry finally got a grip on economic reality again – lower costs and faster project delivery have begun to transform development economics. At the sharp end, tightly restricted budgets forced explorationists to adopt a more focused approach to prospect selection. Andrew Latham, Head of Exploration Research, identifies three strategic themes that have generated an improved flow of commercial discoveries.
1. New plays in new basins
These frontiers are at the higher risk end of the exploration spectrum. There is likely no infrastructure and not much of a supporting service sector. Prospects need to be chosen with extreme care – big enough to realise economies of scale and able to be developed and brought on stream speedily, whether a discovery is oil or gas. Fiscal terms and domestic political support can also be very important.
The first big success in a new basin can trigger a burst of follow-on drilling that quickly reveals greater potential. Some of the best basins proved since 2014 have already raced past 5 billion boe – Guyana (ExxonMobil), Egypt (Eni), Cyprus (Eni/Total) and Senegal/Mauritania (Cairn and Kosmos/BP) are great examples. Each are deepwater plays and share that golden characteristic of high value barrels – very high-quality reservoirs.
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2. New plays in old basins
A fresh approach can breathe new life into a flattening creaming curve. It may be fresh interpretation of the data, the application of new technology, such as better seismic, or an operator with a higher risk appetite. Success can rejuvenate a mature basin, and retain explorers tempted to move to pastures new.
Such plays rarely match the scale of the big new basins, though they can add a few billion boe. The emerging Norphlet sandstone in the US Gulf of Mexico is a good example. The Appomattox (2009), Vicksburg (2013) and Ballymore (Chevron/Total in 2017) discoveries, plus five smaller finds, together hold close to 2 billion boe (mostly oil) in an exceptional Jurassic reservoir. The combined NPV10 is over US$15 billion. Another is the Nanushuk play in Alaska where, since 2013, ConocoPhillips, Armstrong and Repsol have reinvigorated onshore exploration on the North Slope, finding close to 2 billion boe in five discoveries, with an NPV10 of at least US$5 billion. Total’s Brulpadda discovery in South Africa’s Outeniqua Basin, announced today, could be the next great example.
3. Old plays in old basins
CNOOC Ltd’s Glengorm discovery in the Central North Sea last month sits in the very heart of a long-standing trend of HP/HT fields like Elgin/Franklin (found in 1985) and Culzean (2008). At 250 million boe, it’s the UK’s biggest find since Culzean, and 25 times the size of the average UK find in recent years. We estimate Glengorm’s NPV10 could be US$0.8 billion. Smaller discoveries in mature plays can be high-value barrels easily plumbed into nearby field facilities.
How has Glengorm, mapped decades ago, lain undrilled for so long? Again, the answer is likely better prospect evaluation stemming from advances in technology, including seismic definition. Previous licence holders relinquished the prospect in 2014 because potential volumes were just too uncertain.
The value destruction of the past has scared many IOCs and NOCs off exploration. It’s a dwindling band of committed explorers who have driven returns back up. Their success might make those who are presently shunning conventional exploration put some risk capital to work.