Vice President, Energy Research
Future exploration will feature more gas
Global gas demand, in most realistic scenarios for the energy transition, keeps rising long after oil demand has peaked.
As a transition fuel, gas holds many attractions: carbon footprints are smaller and upstream costs are less than half of oil. Many companies want gas to help them reduce their carbon footprints, often in tandem with moves into renewables.
But the problem is value. Gas returns, whether exploration or development, are weaker than oil. And gas prices are far lower than oil in many markets, especially North America, limiting its value.
So, what will shape the shift to gas? And what does more gas mean for overall exploration returns?
Oil exploration returns beat gas almost everywhere.
Energy transition will drive demand for gas
As the energy transition takes long-term oil growth off the agenda, much of the exploration industry will turn to gas for growth. Gas already comprises over half the new field resources being discovered. And the long-term market outlook is encouraging.
Our base energy transition scenario sees global gas demand grow by 30% to 2040, driven by the switch away from coal. Even under our accelerated transition scenario, we still model gas growth of 15% over the next 20 years.
Gas is cheaper to find and develop
Gas is much easier to find and develop than oil: discovery and development costs are 17% and 50% respectively.
Most of today’s largest exploration prospects are gas. One successful wildcat can set up decades of stable material cash flow. Even the old problem of stranded gas has waned: new gas discoveries are now just as likely to be commercial as oil.
But gas has lower value
Despite favourable finding and development costs, gas rarely matches oil for value.
Gas discoveries over the past decade represent 48% of the commercial volumes but only 26% of the value in pre-development NPV10 terms. That equates to an average gas field NPV10 of US$1.93/boe versus US$5.05/boe for oil fields.
Gas value is also eroded by its timescales. Big utility customers need stable long-term supply, which stretches gas production plateaus far longer than oil fields of equivalent size. And lead times for new LNG schemes can last more than a decade.
How can explorers drive higher gas returns?
Not all gas is equal. Explorers that focus on domestic gas in growing markets with an ability to pay should outperform.
Domestic gas wins over export, whether by pipeline or LNG, by a value factor of three. Explorers might also accelerate returns by selling some gas pre-FID or look to leverage equity gas via a high-returns trading business.
What other strategies can explorers use to drive higher gas returns? Learn more in the insight below:
Exploration strategies will adapt for gas – sooner or later
Exploration’s trajectory towards more gas looks inevitable, despite the weaker returns.
But the timing is uncertain.
Any new embrace of gas will come slowly while oil returns outperform. Companies have strong economic motives to keep oil at the heart of their portfolios for as long as they can.
Investors, policymakers, consumers and companies will eventually all drive the dash for gas. But for now, the pace of change seems muted.
When will Big Oil become Big Gas? That may depend on when companies see more value in steering a course towards a low carbon future.
What's the role for the exploration industry as the energy transition takes long-term oil growth off the agenda? Fill in the form on this page for a full analysis of how leading explorers are changing their core strategies in response to the energy transition.