After a few years of extreme caution, exploration looks primed for delivery again. But has enough confidence returned to the sector to drive significant change? We believe most companies will stay cautious and well counts will remain stubbornly low. Competition for the best opportunities will be fierce. However the industry's focus on reducing costs in the last few years is paying off and we should see better returns in 2018.
Here are five key themes we've determined for the global exploration industry this year:
1. Increased competition despite fewer players
Shrinking numbers of explorers does not mean less competition as key players are on the hunt for similar exploration opportunities. We are concerned that sharper competition might erode margins as the Majors, a handful of NOCs and a few independents compete to bag high quality opportunities. We believe the most favoured plays will be deepwater sweet spots promising high resource density, rapid commercialisation and breakeven prices below US$50/bbl.
2. Is limited investment in exploration the new normal?
Does exploration create value? Years of lacklustre returns mean that not all management teams are convinced. Exploration’s share of upstream investment has slipped to below 10% since 2016 and is not about to recover. This could be the new normal, with the days of one dollar in six or seven going to exploration forever in the past.
We expect global 2018 investment in conventional exploration and appraisal to be around US $37 billion – 7 % less than 2017 spend and over 60% below its 2014 peak.
3. Big wells mainly in deepwater and frontiers
2018's mantra will be to keep the focus on simpler wells. More than half of all oil and gas volumes will again be found in deepwater, while explorers will steer clear of high-cost areas, difficult logistics and slow-to-drill wells. Although risk tolerance will strengthen, prospects with less than a one-in-ten chance of success are unlikely to be drilled.
The best discoveries should come from newly proven plays and frontiers, as we have seen throughout the downturn.
4. A race for quality
As the industry plans for the future , a core focus will be capturing new acreage for the longer term. Some will want to position themselves for a lower breakeven future, while others will renew portfolios after a long period of inventory depletion. There will be approximately 40 licensing rounds during the year, and we expect strong competition for quality acreage as key players compete for a smaller pool of opportunities. Licencing rounds in Brazil and Mexico will be the ones to watch.
5. Long overdue move back to profitability
We expect the industry to achieve double-digit returns in 2018, with lower costs and redesigned portfolios already paying off. Many exploration costs have halved since a 2014 peak, thanks to a focus on achieving efficiencies while avoiding complexity.
However, the demand for quality acreage could push up prices. Can explorers hold their discipline to avoid value erosion as competition intensifies in hot plays?
In 2018, the industry will drill fewer, better wells focused on plays that are commercially attractive. After a difficult few years, the economic outlook is at last looking brighter for explorers.