Are exploration’s days numbered?
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Giant discoveries can transform companies and enrich countries. Guyana, Mozambique, Cyprus, Israel and Senegal are just some of the major new oil and gas provinces opened up by the drill bit this century. While exploration has bounced back from numerous downcycles in the past, this one is different. Is exploration facing an existential crisis? I asked our experts, Dr Andrew Latham and Adam Wilson.
Are exploration’s wings being clipped?
Yes, the latest cuts accelerate the withdrawal of investment that’s taken hold in the last six years. Global spend on conventional exploration hit a peak of almost US$100 billion in 2014. After the 2015 price crash, budgets fell 70% to U$$30 billion. The cuts this year will take off another third at least, reducing spend to what we think will be the new normal of US$15 billion to US$20 billion. The Majors and NOCs will account for most of that.
Is it more than just cyclical belt tightening?
Much of this year’s cuts do reflect cash conservation in response to the oil price fall. But we are also seeing signs of a significant strategic shift. Companies that have been committed to exploration are reassessing whether it will be central to the business model in future. The bigger European IOCs aim to be net carbon neutral by 2050. Diversifying and allocating capital into zero-carbon assets implies a relative downgrading of oil and gas. If upstream is going to shrink, you won’t need to explore as much.
BP aims to replace less than one-third of its reserves through exploration. Repsol, too, has hinted at a much narrower exploration focus around its core E&P positions. We suspect this is the thin end of the wedge. Intensifying ESG criteria, including reducing carbon emissions, and the threat of peak oil demand will force more companies to reassess exploration’s risks and rewards.
Can supply meet future demand without exploration?
There’s plenty of discovered oil and gas to meet demand for years. But is it the best resource? Most of the world’s undeveloped barrels have stayed in the ground for good reason – they’re high cost and need higher prices to bring to market.
Oil and gas fields that are onstream or under development won’t meet all future demand in the next 20 years, whatever steps are taken to limit global warming. The volume of new supply needed could be at least 460 billion boe in a 2o scenario; and as much as 760 billion boe in the Wood Mackenzie base case. Some of that will come from existing resource. But exploration can take its share if it can deliver advantaged barrels – low cost, low carbon intensity barrels with competitive economics.
These advantaged barrels will push higher cost and higher carbon intensity barrels out of the supply stack. We reckon more than 100 billion boe of future supply will come from exploration, split roughly 50/50 between oil and gas. That’s about one in every six future barrels.
What does the future hold for exploration teams?
The teams will get smaller, reflecting tighter budgets. Some younger generation geoscientists may choose to move into growth segments of the business – new energy, for example, where sub-surface training and skills would be valued in carbon capture and storage and geothermal.
For most petroleum geophysicists and geologists, though, exploring for oil and gas isn’t so much a job as a vocation. The challenge for those who do want to stay is to prove exploration can be a force for good. The way forward is for exploration to pivot from reserve replacement to a portfolio optimisation tool: to bolster resilience and sustainability.
Exploration in a low-carbon world will be more targeted – at gas, and at the best rocks and fluids. High recovery factors per well minimise costs and footprint. Prospective discoveries will need to integrate with carbon capture and storage.
Will smaller teams find enough oil and gas?
Exploration’s performance has improved on tighter budgets in the last five years. Capital discipline will be tighter still, and cost reductions may mean more bang for buck. But there’s risk in continuously cutting because drilling wells is essentially a numbers game – roll fewer dice, roll fewer sixes. The same could be said for people. In exploration’s heyday, one Major reckoned that only 5% of the 800 or so geoscientists in its exploration department were true innovators generating the new play ideas. Time will tell if there’s room for the innovators as the strategic direction shifts and teams shrink.