Andy Latham, Head of Exploration Research, reckons those taking a longer term view are on the right track.
First, building a portfolio in the down turn doesn’t cost much and acreage can usually be acquired with low commitment.
Most governments recognise that for them it’s about winning investment and generating activity rather than cash up front – rare is the ‘hot block’ that attracts a big signature bonus. The Majors are able to acquire huge tranches of acreage in under-explored frontier basins, and after extensive high grading, drill only the very best prospects.
Second, exploration returns will improve.
It’s not quite happening yet – average returns in 2016 dipped to a derisory 3% even on our price deck of US$65/bbl real long term, the lowest in recent history and in spite of lower costs. It may turn out to be just a bad year; alternatively returns for 2016 may improve over time as more reserves come to light. Time will tell. But we think that the industry’s intensifying focus on prospect quality, reducing exploration and development costs and improving project execution will pay off.
Third, exploration is not really about averages.
Capital is mobilised for the big wells – the needle movers – and some of these are still coming in. ExxonMobil’s latest find, Turbot-1 in Guyana with Hess and Nexen (CNOOC), brings commercial reserves in this brand new province to 2.5 billion/bbl, with an NPV,15 project breakeven of US$52/bbl.
The series of discoveries the group has made ticks a lot of the boxes that define frontier exploration success – big oil fields, good reservoirs, scope to phase development to accelerate production. Plus – and it’s a big plus – the Guyana tax regime is one of the more attractive around. More of these please!
Not all the acreage picked up in the down turn will work out.
But getting in at low cost is half the battle in making money in any endeavour. Those explorers that have a clear strategy to get into the most promising basins at low cost are the ones that will have the best chance of turning the economics around and getting returns back up into double digits.