LONDON/HOUSTON/SINGAPORE, 12 June 2018: The exploration sector has emerged from the downturn, leaner and keener than before. Dr Andrew Latham, vice president, global exploration,Wood Mackenzie, today told delegates to the annual European Association of Geoscientists and Engineers (EAGE) Conference: “The economic outlook is at last looking brighter for explorers.”
In his keynote address to the conference, held this year in Copenhagen, Dr Latham said that the last decade has seen the exploration sector reach new highs - and lows - as fluctuations in oil price affected investment. Well numbers and exploration spend fell to a 10-year low in 2017, but since 2008, close to 250 billion barrels of oil equivalent has been found.
He said: “Deepwater attracted almost half of global exploration investment over the past decade and has delivered a similar share of new volumes. It also contributed the largest number of giant discoveries following the unlocking of the prolific Brazilian pre-salt oil and East African gas plays. The higher cost of these wells was offset by larger discovery sizes, helping to keep discovery costs low.”
Dr Latham told delegates that while shelf plays attracted over 50% more exploration and appraisal wells than deepwater, the relative maturity of the sector was reflected in a smaller average discovery size. Onshore exploration, meanwhile, accounted for 60% of new field discoveries and just over 30% of discovered volumes, from less than a quarter of total exploration investment.
However, Wood Mackenzie sees only gradual change through 2018.
“Most companies will hold their highly cautious approach to exploration for a while yet. Industry investment and well counts will remain stubbornly low,” Dr Latham said.
“Across this smaller industry, two themes will stand out. Firstly, the number of committed explorers has dwindled and corporate diversity will remain unusually low.
“Secondly, much of the industry is chasing rather similar opportunities. Play and basin diversity will also be unusually narrow. This raises the spectre of sharper competition eroding margins – a threat not seen since 2014,” he added.
Dr Latham told delegates that industry consolidation, the price downturn and the attractions of unconventional alternatives have all reduced the field of wildcatters. With few newcomers, today’s narrow corporate landscape looks set to persist.
“Operatorship will be more concentrated than ever, with only the majors, a handful of NOCs and the top few independents leading high-impact drilling programmes. Reduced partnership options will also see the majors joining forces to manage risk,” he said.
According to Wood Mackenzie’s analysis, the most-favoured plays will be deepwater sweet spots promising high resource density, rapid commercialisation and breakeven prices below US$50 per barrel.
Dr Latham said: “Most of the best of these are around the Atlantic margins. Basins are a mix of the proven – such as Guyana, Mauritania, and the US Gulf of Mexico - and unproven frontiers. Examples of the latter with firm 2018 wells are in Nova Scotia, South Africa, and Namibia.
“Subsurface risk will not be off the agenda. Big explorers will be willing to drill new deepwater play tests where they see potential for material volumes, particularly economically-advantaged oil. Whether the plays are proven or not, the critical factor will be scope for straightforward development in a success case.”
Dr Latham warned that exploration’s share of upstream investment has slipped to below 10% since 2016 and is not about to recover.
“Global investment in conventional exploration and appraisal will be around US$37 billion in 2018,” he said. “This will be 7% less than 2017 spend of US$40 billion, and over 60% below its 2014 peak. The majors’ investment will be cut back relatively less, trimmed by around 4% versus 2017. As some of the last outstanding pre-crash high-rate rig contracts roll over, average well costs should trend lower.”
Much of the industry’s focus will be on acreage capture and re-loading for the longer-term, he said. For some, the priority will be to reposition their portfolio for a lower breakeven future. For others, the focus will be on renewal after a period of inventory depletion. This will see intense competition for quality acreage, especially in Brazil and Mexico.
Dr Latham told EAGE delegates that the industry should achieve double-digit returns this year, on the back of portfolio optimisation and lower costs.
“The industry will drill fewer, better wells focused on plays that are commercially attractive,” he said.
“After a few difficult years, the economic outlook is at last looking brighter for explorers.”