The Edge

Exploration - where less can be more

How capital discipline led a return to value creation

1 minute read

Can oil and gas companies justify continuing to invest in exploration? The industry is in the early throes of pivoting to a zero-carbon future, and a small but rising number of integrated companies have started to view the customer, rather than resource extraction, as the source of future value creation. Investment has fallen by two-thirds since the inglorious peak of 2013, while financial constraints and the gathering pace of the energy transition have marginalised exploration on company agendas.

Yet the world will still rely on oil and gas for decades to come. New discoveries can still be commercialised well into the future, so long as they are advantaged – low-cost and low-carbon intensive resources.

Exploration analysts Dr Andrew Latham, Huong Tra Ho and Will Austin have just completed our Exploration Company Benchmarking report 2010-19, assessing the performance of 39 leading IOCs and NOCs drilling both conventional and unconventional plays. Their analysis shows how exploration learned brutal lessons early in the decade and has come back stronger as it bids to find a role in energy’s future. Here are some snippets.   

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  1. Exploration is making money again. The decade was a game of two halves. The 39 explorers contrived to destroy US$162 billion of value 2010-14; then created US$29 billion 2015-19 (assuming US$50/bbl Brent, real). What happened to turn things around? Austerity after 2014 led to capital discipline.
  2. More high-impact discoveries. Fewer wells, but these delivered a higher proportion of big finds. The 39 companies drilled over 400 wells a year (net) on average during 2010-14  making, on average, 21 ‘large and giant’ discoveries a year (100-500 mmboe and > 500 mmboe, respectively). The well count halved to 200 a year for 2015-19, yet the number of ‘large and giant’ discoveries still averaged 16. In fact, 2019 was the best wells-to-big-discoveries ratio of the decade.
  3. More conventional discoveries are commercial. Discovering resource is one thing, converting that resource to reserves another. Prioritising value over volume led to the share of commercial plus economically viable resources increasing from 44% in 2010-14 to 58% over 2015-19. Most of the 39 companies showed a marked improvement. Prospect selection and size of discovery play a big part; so, too, prospect location (fewer wells are drilled without a clear path to commercialisation), lower costs and faster development timetable.
  4. Corporate highlights: ExxonMobil created the most value (US$11 billion) among the 39 companies through 2015-19, from Guyana and US unconventionals. EOG wasn’t far behind (US$11 billion, all from unconventionals). Eni (US$8 billion) led in conventional exploration with its East Mediterranean gas giants; Occidental (US$9 billion, Permian tight oil) and Hess (US$7 billion, Guyana) came out top among Independents. Among NOCs, some of which focus on volume targets, CNOOC (US$7 billion, Guyana, China offshore) was a stand-out performer. Qatar Petroleum was a new entrant to international exploration drilling in 2019, its partnership strategy delivering a top-decile discovery success rate of 73%.

So much for last decade, what about the future? Significant challenges lie ahead for exploration’s continued renaissance. Financial pressure wrought by 2020 is forcing companies to cut budgets still further. Exploration is also increasingly competing for scarce capital with a burgeoning suite of zero-carbon opportunities.

Volumes from conventional exploration are holding up nicely on a per-well basis but there are question marks around new unconventional resource. US shale accounted for a big chunk of resource additions and value creation in the 2010s, but the L48 is now in the appraisal stage. Will new, large, commercial international shale plays emerge in the Middle East, Colombia, Argentina, North Africa and Australia?

There has been healthy interest in acquiring new exploration acreage, conventional or unconventional. High-impact plays have been a big focus, and improved terms have helped. The Majors have led the way on reloading, notably Total and Equinor, which have transformed their portfolios from 2015 to 2019. Occidental and QP have done much the same. Asian NOCs – including CNOOC, Petronas and PTTEP – have revitalised their international portfolios.

The future is about a smaller universe of explorers, a handful of Independents staying committed and more of the NOCs joining the Majors. Happily, the last five years have already shown that explorers are creating value again – and that less can deliver more.

High impact discoveries have held up well despite well numbers halving since 2010