Exploration’s future in a low-cost, low-carbon world

By Andrew Latham and Adam Wilson

Whatever the pace of the energy transition, the world will still rely on oil and gas for much of its energy needs until well beyond 2040. Exploration will be critical in meeting this future demand. Yet exploration is widely perceived as discretionary, even unwarranted. Doubters see a world of risk, declining demand, enormous existing resources and a supply pecking order that ranks exploration squarely in last place. There’s even a public image problem in the false narrative that each new discovery somehow extends the fossil fuels era.

Our analysis leads us to a different view. We think companies that are showing signs of fatigue with exploration are questioning their long-term commitment to upstream petroleum. Only about half the supply needed to 2040 is guaranteed from fields already onstream. The rest requires new capital investment and is up for grabs.

Cumulative global demand for oil and gas over the next two decades will be at least 1,100 billion boe even in a 2°C scenario. It could be as much as 1,400 billion boe on our base case forecasts. Around 640 billion boe can be met by proven developed supply from onstream fields. This leaves a ‘supply gap’ of some 460 billion to 760 billion boe.

All of this supply gap – indeed much more – could be met from existing discoveries. But these need investment. Only resources with the lowest cost and best economics are advantaged and should attract capital. Much of the known resource, however, does not fit the bill.

Exploration can hold its own in this competition. We think over 100 billion boe – split roughly 50:50 between oil and gas – will come from exploration. This means the industry needs to maintain its success rate of the past five years until at least 2030. Full-cycle costs including discovery are surprisingly similar to point-forward costs of incremental brownfield and greenfield alternatives. Whatever gains the incremental volumes enjoy from existing infrastructure are offset by the law of diminishing returns. The easy barrels have been developed already, the remaining resources harder to recover. 

Reporting of environmental, social and governance (ESG) performance will become obligatory and universal. Carbon emissions mitigation could be a wildcard favouring exploration. Companies struggling to decarbonise disadvantaged older assets might even find it cheaper to start afresh with new discoveries.