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Reasons for Falling Commerciality of New Discoveries and Possible Solutions

Abstract

Volumes in new discoveries from exploration activity have suffered a drop-off following standout performance in the years 2008-2012. Despite the initial optics of the decline, Wood Mackenzie's analysis shows that volumes found by international oil companies (IOCs) are still holding up, and that average discovery sizes have not diminished. However, the industry is finding it harder to monetize these resources. The proportion of oil and gas volumes we deem commercial has fallen steadily since 2006, from a high of 70% reaching a low of just 10% in 2014. This trend has led to an erosion of returns and value creation from exploration and contributed to the decision by some companies to retrench from exploration. The reasons for the drop in commerciality – in addition to the low oil price environment – include: cost escalation; drilling to deeper reservoir targets in ever deeper waters; greater proportion of gas; lack of scale in frontier discoveries; move to less-understood geology (stratigraphic traps, basin floors, fan systems, rifts, etc). Greater complexity has exacerbated cost escalation. Production coming onstream over the next few years is from more complex projects, for example HP/HT, hostile offshore environments, low permeability and/or porosity reservoirs. Wood Mackenzie's current yet-to-find estimates show that almost 100 billion boe of resource break even above US$60/bbl. Most of these are found in deepwater prospects. Clearly these future resources are sub-commercial in a continued low oil price environment. Cost deflation will help to reverse some of the escalation trends. But industry will need to do more to return to positive value creation. Operators and service companies must work in innovative ways to overcome the obstacles to monetization. Strategies will range from technology breakthroughs, to equipment standardization, to new ways of collaborating between disciplines and companies.