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Conventional Exploration: Smaller, Stronger and Back in the Black


Conventional explorers created value in 2017 - for the first time since 2010. Despite big volumes and record commodity prices during the boom years of 2012-2014, full-cycle returns fell to just 5%. Through the downturn, discipline returned to the exploration business. A number of factors have finally put exploration back in the black.

Activity and investment levels are both at around one-third of their peaks over the last decade. Exploration now has a smaller role to play in reserves replacement and growth, and only the best prospects are being drilled in advantaged locations.

What qualifies as the best prospects varies by company. Many explorers prioritised near-field exploration, drilling smaller, lower-risk targets that could be tied in quickly to infrastructure. However, the largest and most attractive discoveries since the downturn have been made largely in frontier plays and/or in deepwater.

Preferred deepwater sweet spots are those with superior reservoir qualities that can yield individual well recoverable reserves (EURs) of 20 million barrels of oil, or 100 mmboe of gas - or more. Key to commercial success is marrying those EURs with shallow burial depths (to keep costs low) or attractive fiscal terms with government take of less than 80%. Achieving both is even better.

Frontier plays have been shown to provide the best volume to explorers, and also the best value. Two-thirds of the volumes ever found in a play, are found before the first drop of oil or molecule of gas flows from the play. Full-cycle returns from unproven frontier plays were 11% over the 2008-2017 decade - seven percentage points higher than returns from late mature plays. Bold companies with large positions exploring in frontiers are those positioned to benefit most from high-impact success.

Moving forward quickly to development to take advantage of the bottom of the cost cycle is crucial to realizing value from exploration success. Smaller-scale, accelerated and phased developments are bringing down breakeven costs. Deepwater conventional developments now compete with shale plays, breaking even at US$50 or less.

The future looks bright for exploration volumes following a period of acreage reloading. New opportunities in exciting offshore provinces - such as in Mexico and Brazil - have created intense competition. However, high bidding levels (eg royalty rates, profit share) could create challenges to value creation from these hotspots.