Exploration is staging a remarkable turnaround in its fortunes, with a string of big discoveries in recent months.
Many of these look to be potentially commercial, a sign that the industry can still create value. This is the only KPI that matters – the one that if proven consistently, will propel exploration back into a central position in resource capture strategy.
Oil discoveries with at least 2.5 billion bbls (recoverable) have been made in deepwater around the Atlantic margin alone. ExxonMobil’s wildcats in Guyana continue to discover oil. The recent Ranger well, which opened a new carbonate play (500 mmboe, 2018), lies further offshore from the six sandstone discoveries made since 2015 (which hold yet another 2.9 billion bbls of oil).
In the US Gulf of Mexico, the Whale (Shell, 450 mmboe, 2017), Ballymore (Chevron, 400 mmboe, 2017) and Dover (Shell, 100 mmboe+, 2018) discoveries are all high-value. On the Mexican side, Talos’ Zama discovery (430 mmboe, 2017) and Eni’s many wells (Amoca-Mizton-Tecoalli, 450 mmboe, 2017) are a promising start to IOC exploration in the previously closed PEMEX monopoly.
Away from the deepwater, the last few winter drilling seasons have seen ConocoPhillips, Repsol, Armstrong Oil and Gas and others open up a major new onshore oil play in Alaska (the Nanushuk sandstone) with multibillion-barrel potential. Gas explorers have also notched up important finds in deepwater.
Kosmos BP continues to add huge gas resources in Senegal (Yakaar, 15 tcf, 2017) and Eni has made a giant gas find in (Calypso, 7 tcf, 2018) which confirms the extension into Cyprus waters of the reef play opened up by the 2015 super-giant Zohr discovery in Egypt.
Exploration results in the decade to end 2016 were a litany of woes. Rising costs through that period meant that spend on exploration rose progressively, but fewer wells were drilled. Geological success rates held good at more than one in three wildcats, but commerciality plummeted, the economics undermined by high project development costs.
Few discoveries achieved FID, and full-cycle returns across the industry fell to low single digits, averaging just 5% in 2016. At this low ebb came the collapse in oil prices.
Paradoxically, being starved of capital was the best thing to have happened, forcing explorers to reappraise strategy, prospect evaluation and focus.
There’s now much greater discipline all round. Exploration costs have more or less halved, and difficult wells in tricky locations just aren’t getting drilled anymore.
Companies are focusing on plays where discoveries have a clear path to commercialisation. The industry is high-grading and sharpening its strategies. It is drilling fewer, better wells. The corporate landscape has narrowed, too. The seven Majors are to the fore, with a similar number of E&Ps still in the high-impact wildcatting game.
Exploration is performing better now than it was when oil prices were above US$100 per barrel.
The recent spate of sizeable discoveries also adds to our belief that returns are bouncing back up to respectability. Our preliminary analysis suggests that global exploration generated double-digit returns and created US$5 billion of value in 2017.
Dr. Andrew Latham, Head of Exploration Analysis, says this will be the first time in a decade the industry has actually created rather than destroyed value. And the more we learn about the 2017 discoveries, the more we expect volumes and value to swell.
The downside is that this revitalised, newly efficient exploration industry overall is finding less oil and gas than it used to.
Annual new field resources are likely to be around 15 billion boe, versus 20 to 30 billion boe long run average. And the improving price outlook is already pushing up the cost of new acreage. Competition for hot blocks in top licensing rounds is fierce – witness signature bonuses of more than US$1 billion in Brazil so far this year. Big cash payments at the start of a campaign are a huge burden on full-cycle economics.
After being found wanting, explorers learned from the mistakes of the past and have come back stronger. But they can’t afford to relax their newfound discipline any time soon.