Oil and Gas

Oil explorers have a new philosophy: Less is more

Oil volumes are at 70 year lows: Expert
Oil volumes are at 70 year lows: Expert

Major oil explorers have changed the way they approach searching for new reserves, leading to improved returns, even at lower prices, according to a research from Wood Mackenzie.

Andrew Latham, Vice President of exploration research at the company told CNBC Monday that exploration has a new philosophy: Less is more. He added that most of the oil discoveries that the major companies are making tend to be in deep water and the break even points are much higher. As a result, explorers are pulling away from the very high cost and high risk frontiers.

"The new economics of exploration mean that rather than pursuing high-cost, high-risk exploration strategies - elephant hunting in the Arctic, for example - the majors have become more conscious of costs," Latham said. "Smaller budgets have required them to choose only their best prospects for drilling, including more wells close to existing fields. The industry now has in prospect a different – and potentially more profitable – future."

The Wood Mackenzie report, entitled Exploration Benchmarking – Majors 2006-2015, noted that a total of $169 billion was invested in exploration by majors between 2006 and 2015, adding 72 billion barrels of oil equivalent (boe) to their resource base. Of this, 25 billion boe comes from unconventional plays. While resource discovery costs for the period averaged US$1.78/boe, returns over the period were not optimal, with returns of just 6 percent, versus an industry average of 10 percent.

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However, the report from also noted that the majors moved quickly in 2015 to improve weak exploration returns. Steep cuts in exploration spending for the year have forced high-grading, which has led to enhanced prospect quality. "Unconventionals are becoming increasingly important, attracting 15 percent of the majors' exploration spend and outperforming returns from conventional exploration since 2013," the report said.

"There has been a shift in ambition. Companies are no longer trying to fully replace production via conventional exploration, as they used to. Now their reserves replacement will also require inorganic, brownfield or shale investments. Exploration has become incremental," Dr. Latham said.

He further explained that the shortages in exploration is challenging. He also added that last year the majors saw 3 billion barrels discovered around the world in conventionally new discoveries. "That was the lowest volume for 70 years.

"One year doesn't change so much but if we stay at those levels for a number of years, which certainly is our view, we are going to be down sub 10 billion barrels of new oil discovered per year. And that is against 30 billion that the world is consuming."

The report highlights gas as another big influence on the sector. 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," Dr Latham said.

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