As the upstream companies grapple with oil price downturn, a new research from Wood Mackenzie has revealed that the majors invested $169 billion in exploration during the 2015-2016 period.
With the exploration spend shrinking by half in 2015 versus 2014, Wood Mackenzie’s report indicates that the majors are also adjusting to the new economics of exploration, with industry facing a leaner but potentially more profitable future
Wood Mackenzie predicted that the oil and gas industry is poised to emerge from the slump leaner, more efficient and more profitable.
According to Wood Mackenzie’s new report “Exploration Benchmarking – Majors 2006-2015,” the majors invested $169 billion in exploration during the period analysed, adding a total of 72 billion barrels of oil equivalent (boe) to their resource base.
Of this, 25 billion boe comes from unconventional plays, while resource discovery costs for the period averaged $1.78/boe.
The report also showed that returns over the period were not optimal, with returns of just six per cent, versus an industry average of 10 per cent.
Wood Mackenzie, however, noted that the majors moved quickly in 2015 to improve weak exploration returns.
“Steep cuts in exploration spending for the year have forced high-grading, which has led to enhanced prospect quality. Unconventionals are becoming increasingly important, attracting 15 per cent of the majors’ exploration spend and outperforming returns from conventional exploration since 2013,” said the report.
“Good conventional exploration volumes, together with large adds from unconventionals saw the majors add resources well ahead of the volumes they produced every year from 2011. Resource discovery costs also fell, with the lowest costs recorded in 2015,” the report added.
Commenting on the report, the Vice President of exploration research at Wood Mackenzie, Dr. Andrew Latham said “our research shows that a number of things needed to, and are, changing.”
Latham explained that one positive side effect of the downturn is that the majors have changed the way they approach exploration, leading to improved returns, even at lower prices.
He added that the new economics of exploration mean that rather than pursuing high-cost, high-risk exploration strategies – elephant hunting in the Arctic, for example – the majors have become more conscious of costs.
“Smaller budgets have required them to choose only their best prospects for drilling, including more wells close to existing fields. The industry now has in prospect a different – and potentially more profitable – future,” Latham said.
While insisting that “exploration has a new role – less is more,” Latham explained that the early indications are that the majors are now getting the exploration economics right.
“Their exploration spend halved in 2015 versus 2014, with spend per well drilled falling to levels not seen since 2008. However, there has been a shift in ambition. Companies are no longer trying to fully replace production via conventional exploration, as they used to. Now their reserves replacement will also require inorganic, brownfield or shale investments. Exploration has become incremental,” he said.
“Another big factor is gas – companies are not replacing volumes in the same ratios as their production, or in the same way. Discoveries break down to about one-quarter oil and three-quarters gas, while global production is currently nearer two-thirds oil and one-third gas. The future will become steadily more gassy,” Latham added.