The Upstream Sector Adjusts to the New Economics of Exploration

Abstract

The upstream exploration sector is still grappling with the oil price downturn, but the industry is poised to emerge from the slump leaner, more efficient and more profitable. A number of things needed to, and are, changing. One positive side effect of the downturn is that operators 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, operators 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 majors are at the forefront of the changes. They added a total of 72 billion boe to their resource base. Of this, 25 billion boe comes from unconventional plays. The majors add resources well ahead of the volumes they produced every year from 2011, but returns over the decade were not optimal, with returns of just 6%, versus an industry average of 10%. Conventional exploration's role in reserves replacement is set to diminish. Other renewal options - from unconventionals, discovered resource opportunities, enhanced recovery techniques and M&A - are likely to prove key to future reserves replacement. Exploration has become incremental. Unconventionals are becoming increasingly important, attracting 15% of the majors' exploration spend and outperforming returns from conventional exploration since 2013. The majors moved quickly in 2015 to improve weak returns from conventional exploration. Steep cuts in exploration spending for the year have forced high-grading, which has led to enhanced prospect quality. In addition, costs have been reduced. The majors' exploration spend halved in 2015 versus 2014, with spend per well drilled falling to levels not seen since 2008. Another big shift is the rise of gas - companies are not replacing volumes in the same ratios as their production, or in the same way. Discoveries break down to about one-quarter oil and three-quarters gas, while global production is currently nearer two-thirds oil and one-third gas. The future will become steadily more gassy, with implications for the global gas market, prices and value.

AAPG Datapages/Search and Discovery Article #90291 ©2017 AAPG Annual Convention and Exhibition, Houston, Texas, April 2-5, 2017