Analyst sees explorers growing more cost-conscious

Offshore staff

Edinburgh, UK/HOUSTON/LONDON/SINGAPORE – The upstream exploration sector is still grappling with the oil price downturn, but Wood Mackenzie says that its new research indicates that the industry is poised to emerge from the slump leaner, more efficient, and more profitable.

Andrew Latham, vice president of Exploration Research at Wood Mackenzie, says:  "Our research shows that a number of things needed to, and are, changing. One positive side effect of the downturn that we have seen is that the majors have changed the way they approach exploration, leading to improved returns, even at lower prices.

"The new economics of exploration mean that rather than pursuing high-cost, high-risk exploration strategies … 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."

The analyst firm’s new report, “Exploration Benchmarking – Majors 2006-2015,” notes that the majors invested $169 billion in exploration during the period analyzed, adding a total of 72 Bboe to their resource base. Resource discovery costs for the period averaged $1.78/boe. Returns over the period were not optimal, with returns of just 6%, versus an industry average of 10%.

However, the firm notes 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 attracted 15% of the majors' exploration spend and outperforming returns from conventional exploration since 2013.

Latham says: "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.

"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 1/4 oil and 3/4 gas, while global production is currently nearer 2/3 oil and 1/3 gas."

09/20/2016

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

Making DDoS Mitigation Part of Your Incident Response Plan: Critical Steps and Best Practices

Like a new virulent strain of flu, the impact of a distributed denial of service (DDoS) attack is...

The Multi-Tax Challenge of Managing Excise Tax and Sales Tax

To be able to accurately calculate multiple tax types, companies must be prepared to continually ...

Operational Analytics in the Power Industry

Cloud computing, smart grids, and other technologies are changing transmission and distribution. ...

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...