How Successful Will the New Phase of Exploration Be If The Earth is Already a Pin-Cushion?

McMahon, Neil¹ (1) Sanford C. Bernstein, London, United Kingdom

With the current growing level of expenditure on exploration, the industry may have found a floor to the deteriorating trend in global discovered volumes. It is likely that the oil industry will find more in 2006 than it did in 2004, the year marking the lowest point. Projections that the industry will start a major exploration discovery cycle are likely to be wrong. Analysing a time series of global maps showing all exploration wells drilled from 1965-2005 one can see that every significant sedimentary basin has been tested. From successes and failures, the industry has a good handle on where the remaining reserves are located. Unfortunately no significant basin remains unexplored and there is little hope of repeating the supply response recorded after the last high oil price crisis in the 1973-1982 period. There will be losers in the current cycle of exploration activity, resulting in higher than historical exploration expenses, small field sizes, high finding and development costs, and low reserve replacement rates. For companies just starting to revamp their exploration programs, the chances of replacing reserves without increasing the exploitation of unconventional hydrocarbons or investing in ex-National oil companies is remote. In particular, companies that hope for major finds in basins that previously have been extensively explored, with the assumption that new technology will improve their success, will be disappointed. We expect results of exploration activity to be relatively poor, the outlook for 2007 could be less then impressive if low success leads to reductions in exploration budgets.