A small group of deep-pocketed companies increasingly dominates exploration and, as yet, they are avoiding the boom-and-bust mentality of previous oil cycles.
In the past, plucky minnows might have gambled their futures on a single frontier well. For now, this model has passed, with a small number of IOCs and NOCs willing to take chances, Westwood Global Energy Group’s recent State of Exploration 2022 report said.
“These companies are not reinvesting in upstream projects as they once might have,” Westwood head of global E&A Graeme Bagley told Energy Voice. “They’re returning cash to shareholders and cutting debt. They’re conservative on the long-term oil price and don’t see it as higher for ever.”
Pledges of net zero by 2050 are taking hold of planning decisions, with companies unwilling to invest in hydrocarbons that may never be developed.
“Long-cycle exploration may not be the right thing to do,” Bagley said. Instead, companies are more focused on short-cycle and infrastructure-led exploration (ILX).
These companies have learned lessons from previous busts. In the past, high oil prices tended to drive a certain amount of euphoria.
“When capital discipline is less pronounced, the success rate has gone down – essentially they were drilling dumb wells. There’s also a correlation of stranded gas discoveries being found at times of high oil prices,” Bagley said.
A more conservative outlook has focused explorers’ minds on thinking through how to develop resources. “Thinking has become a lot more sophisticated about what makes success,” he said.
Companies are thinking beyond just the size of a potential resource. They are also considering how quickly they could develop a resource and even what the emissions footprint of production might be.
One of the reasons for a more cautious approach in exploration is a lack of support from the market. “There’s less room for smaller companies, who might have been able to raise cash in 2013,” said Westwood senior analyst Jamie Collard.
Part of the reason for a lack of market support may well be the industry’s poor record.
Westwood data from 2021 show that while the number of high-impact wells remained around the same level as in 2020, the discovered resource dropped 65%, to 6.7 billion barrels of oil equivalent.
“Success rates are very low, at 2% for commercial success in frontier basins,” Bagley said. For frontier plays in proven basins this only increases to 8%.
Perhaps, Bagley said, the upside to exploration is not as positive as had been thought. Since the Tupi Basin opening in 2006, new oil plays have not been as large as had been hoped, with the exception of Guyana and Suriname.
“In the Orange Basin, the jury is still out. It needs more wells and appraisal to find out what the commercial and cost options will be. The cycle time in frontiers is less attractive,” he said.
In 2021, supermajors and national oil companies (NOCs) dominated exploration, Collard said, squeezing out the smaller companies.
There is an opportunity available to the smaller companies, but there are only a handful that remain willing and able to take on this risk.
Bagley noted Kosmos Energy, Capricorn Energy and Tullow Oil as having been able to carry out exploration in the past and move through into development. The former renounced frontier exploration and the latter two are merging, with a focus on developing production.
“There’s a question of who will operate and where the funding will come from,” Bagley said. He gave the example of Impact Oil and Gas, which introduced TotalEnergies to the Venus prospect, in Namibia.
“Impact had a great carry on the first well, but they may not have the cash for the next stage. Total is going to spend an awful lot of money on appraisal work and through into development, that will be in the billions of dollars,” he said.
The French company drilled Venus in more than 3,000 metres of water, which is among the deepest waters for exploration in the world. “The find and flip model is probably the way to go as the big money may not be there to carry Impact.”
That said, Bagley disputed the suggestion that exploration was on its last legs. “It’s not the end. Not all companies are moving away from the frontier. Total is still going to do high impact and ILX work, and it’s the most active company internationally.”
Shell has taken the decision not to enter any new plays after 2025. As a result, the Westwood executive said it is working to “get a presence in as many countries before 2025, to fill its opportunity hopper, to drill after 2025.”
ExxonMobil and BP are unlikely to make significant moves in this regard, though. Exxon is busy with its Guyana focus and BP has made the most emphatic move towards the energy transition.
“Eni would like to continue doing high impact and ILX,” Collard said, citing its work in the Tano Basin and Angola. “It’s made a long-term capex plan to drill around 10-15% of exploration wells targeting frontier plays in the next five years,” he said. Repsol appears to have only one well left in the frontier, in Indonesia, before it moves away from the business.
“Africa is on the return, even if it’s not back to where it was seven years ago,” Collard said.
Shell’s Jaca well, off Sao Tome and Principe, is a notable frontier exploration test currently under way. Other areas to watch this year include Eco’s Gazania well in South Africa’s Orange Basin, due in the second half.
Eni is also due to be drilling in Mozambique this year, continuing the hunt for an oil play off East Africa. Equinor and Total are to move into exploration in Angola this year.
Countries hoping to attract new exploration investment, for instance through licence rounds, will have to control their expectations. Competitive rounds have largely failed to perform in recent years, suggesting companies may prefer direct negotiation.
Furthermore, countries may have to show they are making an effort through improved fiscal terms, as Angola has done.
Is exploration dead? No. But it is clear that companies are taking a much more sober approach to the challenge – with a greater eye on long-term projections than ever before.