It seems the downturn has meant that companies are being pickier than ever and becoming more focused with their strategies. In the past, many explorers would spread their budgets across a wide variety of strategic approaches, but we think things will become more polarised in the future, with explorers focusing on one main area for exploration investment.
At the EAGE conference in Copenhagen we shared four possible exploration themes that could be adopted by the oil and gas industry.
The first was high-impact deepwater exploration.
With the potential for large discoveries (the average find is over 200 mmboe) and attractive success rates (38% is the ten-year average) it's certainly an appealing approach at face value. Unfortunately the main issues of deepwater exploration faced by most companies are the long lead times from discovery to first production and the high costs per well. The average exploration spend per well is US$133 million (including non-drilling costs), and at nearly five times the non-deepwater costs, there are only a few companies with the financial strength to consider these developments.
In fact the intensive competition and aggressive bidding for the best new licences could be seen as a sign of the industry's recovery, but operators need to watch as this has the potential to erode returns. This exploration theme seems a likely approach for only a handful of larger, or specialist E&P players.
The second theme we shared was high-impact onshore and shelf exploration.
With low exploration costs as well as low development costs, those with modest budgets could find this an appealing approach. Of course there's a down side, in fact there are several, but the main issue is that there are very few quality prospects. But still, for those willing to take the risk, at least they'll know relatively quickly whether their approach has paid off, given the short lead times.
Thirdly, we suggested near-field conventional exploration as a strategic exploration theme.
We, along with many others, thought this would be the obvious refuge of the exploration industry in the downturn. However, this hasn’t really happened, and we think that's to do with the great maturity of most producing basins, with the very small size of the remaining prospects making finding costs high and many struggle to be commercialised.
The final theme we shared was unconventional exploration.
The main attraction to this approach is the large resource potential combined with low subsurface risks (there are few surprises through drill out of known plays, although uncertainty will increase as companies move beyond familiar sweet spots). But the questions on full-cycle returns remain, especially once high (and rising) land access costs are factored in.
With global investment in conventional exploration and appraisal likely to be around US$37 billion in 2018, more than 60% below its 2014 peak, flexibility will be important. Many companies are likely to adjust their programmes if prices move substantially.
We believe that low service costs will spur some opportunistic spending on rigs or seismic, as contractors struggle with a reduced customer base. We expect recruitment to remain fairly static, with targeted hires for specific technical roles only. And high-cost themes, such as the Arctic and extreme HP/HT plays will continue to be shunned in favour of simpler wells. We think that at last the outlook is looking brighter for explorers.