The Edge

The case for investing more in exploration

How to keep the spectre of peak oil supply at bay

1 minute read

The warning signs are there – the industry isn’t finding enough oil. Guyana is one of the very few giant oil discoveries made during the downturn. Fact is, we need more Guyanas, a lot more, and we need them soon. Without them, the oil market is in danger of tightening in the not too distant future.

We need more Guyanas, a lot more, and we need them soon.

The risk is laid bare by our oil supply analysts, Dougie Thyne and Matt Deane. They've refreshed our forecasts for the sources of oil supply to meet global oil demand through to 2040. The starting point is our database of projects onstream and under development. We layer on risked assumptions for the following: 

  • Future reserves growth for conventional field and unconventional oil plays
  • Production forecasts for pre-FID projects and pre-drill tight oil
  • Volumes from other existing discoveries.

High cost discoveries we deem sub-commercial are excluded.

Invariably, the opportunity to develop known sources diminishes. A supply gap opens up in the mid-2020s, reaching 3 million b/d by 2030, 9 million b/d by 2035 and a formidable 15 million b/d by 2040. Barring technology breakthrough beyond what we already assume, we’ll need new oil discoveries. 

Barring technology breakthrough, we’ll need new oil discoveries.


Exploration is back making money with a long-overdue recovery to double-digit returns. Our latest view of exploration results confirms all the hard work to cut costs and commercialise discoveries is bearing fruit. We already see exploration returns of 13% in 2018, the highest calculated in well over a decade. As these discoveries are appraised and projects move through the development cycle, we can expect these economics to improve further. Get our complete analysis of the global exploration industry.

Global exploration review of 2018: Back in the black

Buy now

The problem is that the recent rate of commercial volumes found gives little confidence that there will be enough new discoveries to fill the gap. Spend on oil exploration globally has collapsed from US$60 bn p.a. in 2014 to just US$25 bn p.a. in 2018. The drop has fed directly through to significantly lower volumes of reserves discovered. Exploration found 8 bn bbls p.a. of commercial liquids on average in the early part of this decade; it’s only delivered around 2 bn bbls p.a. in the three years since 2014.

The oil market could be running short of oil capacity by the late-2020s at the current, low discovery rate. That’s worryingly near at hand given it takes the best part of 10 years for the average new discovery to build to peak production even with a marked improvement in project execution post-downturn. Even if new volumes discovered double, a gap opens up in the 2030s and climbs to 6 million b/d by 2040. This will have to be filled by presently sub-commercial discoveries with implications for price.

The one bit of good news is that volumes discovered correlate with spend. Reserves per exploration well has held at a reassuringly consistent rate of 25 mn boe since 2014, around half liquids.

The oil is out there – what three things have to happen for the industry to crank up investment and do the job?

First, capital availability. 

Major or minnow, explorers have found it difficult to persuade boards and investors to fund high impact exploration since the downturn. But in 2018, there is money – around US$160 bn p.a. of free cash flow for the 48 IOCs and NOCs covered in our Corporate Service. The mind set for most E&Ps is still to be conservative, and default is to return capital to shareholders. Yet the duty to shareholders' interests cannot be myopically short term. More of the ‘windfall’ cash needs to find its way into exploration to sustain the business in the long term.

Second, the reward has to justify the risk. 

Exploration is performing better now than it was when oil prices were above US$100 per barrel. Tight discipline has led to double-digit returns in 2017, the highest for more than a decade. So better economics justify more investment; the industry just needs to demonstrate it can continue to create value as it ramps up spend.

Third, a portfolio that can deliver. 

Big oil discoveries are more likely to be made in frontier areas. As well as Guyana, among the most eagerly watched potential play opening wells will be in Suriname, and the Brazilian Equatorial Margin; Mexico; Senegal, Gambia, Namibia and South Africa; Australia (where Quadrant’s Dorado discovery is the biggest oil discovery this century); and Alaska. The Majors, a few internationalising NOCs and a handful of global E&Ps have built exposure in some of these frontier provinces.

More explorers need to get in on the action if the spectre of ‘peak supply’ is to be kept at bay.