Global oil and gas exploration should return to profitability in 2017 after 5 years of only single-digit returns, research and consulting firm Wood Mackenzie Ltd. says in a report.
“The industry has a good chance of achieving double-digit returns in 2017,” commented Andrew Latham, WoodMac vice-president of exploration. “Smarter portfolio choices and lower costs are already paying off."
WoodMac’s analysis of the 2017 global exploration outlook shows exploration will continue its transformation to a smaller, more-efficient industry, with overall investment, at best, matching $40 billion spent in 2016. Lower costs mean that well counts may hold up close to 2016 numbers, and flat budgets could mean exploration’s headcount cuts are now mainly in the past.
The firm believes the majors and “a handful of bolder independents will drill most of the wells to watch” just like in 2015-16. The firm expects the best discoveries to come from new plays and frontiers, despite greater emphasis on infrastructure-led drilling from many explorers.
“More than half of the volumes are expected to be found in deep water,” Latham said. “Here some well costs will fall to $30 million or less, with full-cycle economics that are positive at less than [$50/bbl].”
According to the report, exploration’s share of upstream investment will dip to a new low of just 8% in 2017. An eventual return to historic norms depends on a recovery in crude oil prices. WoodMac expects the Brent oil price to rise sharply from 2019, averaging $77/bbl in real terms for the year. Under that scenario, a recovery in exploration spend will follow 1-2 years later.
“The industry is focusing on acreage capture and reloading for the longer term,” Latham explained. “Companies willing to sign acreage with firm 2017 wells may be spoilt for choice. A spate of new licensing in outer slope plays will continue as explorers digest news of better-than-expected reservoir quality and source rock potential in these ultradeepwater settings.”
He added, "After a decade in the doldrums, the majors’ returns from conventional exploration improved to nearly 10% in 2015. The rest of the industry is heading in the same direction. Fewer, better wells promise a brighter future for explorers.”