Exploration is not dead, quite the opposite, now is the time to invest, E&P players say

Despite what you may have heard, conventional oil and gas exploration is not dead, and on the contrary, this might even be the perfect time for the exploration players to invest.

This was a main takeaway from a session titled „The future of exploration,“ held during the CERAWeek by IHS Markit on Wednesday in Houston.

The organizer itself, IHS Markit, has forecast a very modest growth in global exploration spending through 2020, and the industry has been underinvesting for more than two years now since the collapse of oil prices in mid-2014.

Announcing the start of the session on Wednesday morning , the host Gerald Kepes, Head of The Strategy & Competition of Upstream in IHS Markit, pointed out that there were some companies who’ve left the offshore and conventional exploration focusing only on unconventionals such as the U.S. shale plays.

Speaking about the lot that has decided to stay in the conventionals, the host said that those companies believe that the next 5-6 years may prove to be one of the best times for the last 15 years to do exploration.

“The cost is substantially lower, less competition out there, meaning lower prices for bidding for new acreage,” Kepes said, adding that despite the deep exploration budget cuts the companies can today drill almost as many wells.

Drilling more for less

One of the speakers, Total’s SVP Exploration, said that since taking over his position a few years back, he’s been focusing, ”like all of the industry,” on cost cutting, reducing spending, lowering breakevens in the portfolio and returning profitability to E&P.

“With falling prices, falling profit and budget cuts, it’s not been an easy time for any of us. We know that exploration takes a long-term view. We’ve reduced our exploration budget very dramatically to 40 pct compared to 2014 highs.”

However, Kevin McLachlan agreed with the host that today, in time when competition and costs are low, the downturn is an opportunity to be exploited and not to be missed.

He’s repeated what has been said a lot during this year’s CERAWeek, and that is that fossil fuels will still make up the most of the global energy mix for decades to come, therefore, continued focus and need for exploration is needed to replace the production and “grow our reserve base in that time frame.”

To achieve this goal, Total is basing its exploration strategy on conventionals in the long-term, with around 27 well expected to be drilled this year.

He said that half of the wells will be drilled in core and emerging basins, 25 percent near-field exploration to boost the value of producing assets, and the remaining 25 pct on frontier prospects, many of those deepwater and ultra-deepwater, to open-up new plays.

The company added 500 mboe in 2016 through exploration programs by drilling 19 wells and spending $1.4 billion.

In 2017, the company’s budget is lower at $1.25 billion, however, as said before, Total plans to increase the number of wells to 27.

Sweet spot for exploration

Another speaker, Murphy Oil’s Gregory Hebertson, said that despite having a solid portfolio in U.S. unconventional, the company is also committed to conventional exploration.

He’s highlighted the company’s Kikeh field in Malaysia as a proof of the value of conventionals, the field which has, over its life, delivered $10 billion of revenue to Murphy.

“Our goals in the exploration going forward is to recreate that for our stakeholders,” Hebertson said.

He said that due the new cost recalibrations in the industry, have created a new opportunity for exploration to take off.

“We believe now is the best time to be investing in exploration,” he said.

In support of his view that the conventionals are there to stay, he’s also shared a view by which the tier 1 onshore unconventional plays will largely be in decline by 2023, leading to an even greater need for conventional exploration.
He’s also provided a graph showing Brent prices rising and well costs being low, a mix he deemed an Exploration Sweet Spot.

Hebertson said: “We believe that right now, we’ve entered the best time in the last decade to be in the exploration business, and that’s environment in which prices have stabilized and are slowly rising and the cost curve is lagging for a certain period of time.”

He said that there was a two-three year window “where we can really capture the cost efficiencies that currently exist in our market.”

Speaking about favorable conditions for exploration, Hebertson has cited the overall lowering costs, availability of better rigs, decreased competition, access to acreage, opportunities to farm-in with quality partners, and the access to data.

“This is the environment that we want to capitalize on, while managing our internal business. Overall, we see a very attractive and improving investment environment for exploration.”

Eni: No need to follow the pack

Eni’s Federico Arisi Rota is certainly one of those who feel that not only conventional exploration has a future, but that it actually is the future of oil and gas.

His company has in the recent years had massive success in the offshore exploration sector, discovering major oil and gas deposits in the Mediterranean Sea and offshore Africa.

“We stayed conventional. We did not follow the pack, but relied on what we know we can do better, conventional exploration, believing that supergiant opportunities can be found,” said Eni’s EVP Americas.

However, he also said the company’s strategy is a bit unconventionally conventional.

The company’s model is to own acreage across multiple plays, all conventional, with a high stake and operatorship, and simple joint ventures, allowing it to make quick decisions, increasing operational efficiency, speed up appraisal process of its discoveries in order to compress the time to first production.

This was the case with the giant Zohr discovery Eni made offshore Egypt in August 2015. The Zohr is expected to start producing in December 2017.

Federico Arisi Rota also said the conventional exploration can compete by increasing exploration efficiency, through drilling fewer but more quality wells, also using the Zohr as an example where the field was discovered by one of four offshore deepwater exploration wells drilled in 2015.

“Roughly, every three years we discover a giant or super-giant field.” The company will try to maintain its success rate in the future with no less than 115 wells planned between 2017 and 2020, targeting roughly 45% oil and 55% gas for a total of 2-3 billion barrels of oil equivalent.

He also highlighted the importance of technology, boasting the company’s 3 petaflop super-computer which enables the company to reprocess subsurface imaging faster, speeding up the decision making processes.

While the company has made a substantial success offshore, Federico Arisi Rota said that during these “difficult” times, Eni has scaled down on deepwater and ultra-deepwater drilling, still leaving room for some high risk, high reward initiatives, and focusing mainly on near-field near-infrastructure exploration.

Nooros: The poster child

This near-field, near-infrastructure strategy has enabled the Italian company to bring online Nooros offshore discovery in just a few months – from discovery in July 2015 – to production in September 2015.

“Nooros is a poster child of our exploration strategy….And today, it is the largest gas field producing in Egypt,” Federico Arisi Rota proudly shared.

Despite the successes, exploration now faces one of the most troubled times in the history of the oil industry. We all know that exploration spending is not always appreciated by investors, so, Arisi Rota said, the industry must realign the cost structure for lower for longer scenario, cut exploration costs, boost efficiency, and smartly select opportunities.

“We also need to fight the geological shortage mantra, by thinking outside of the box… All in all, exploration is not only our past or our present, but also our future, that will continue to provide tremendous long-term value creation opportunities.”

So there you have it. Players such as Eni, Total, and Murphy feel there is place for conventional offshore exploration to be competitive and value creating, if certain “rules” are met such as: improved drilling efficiency, technology adoption, doing more with less, disciplined investment, and the right level of commitment with the medium to long term view.

However, despite the optimism, one always needs to be cautious, and this was shared at the event earlier in the week by the Saudi Oil minister Khalid Al-Falih who said he was optimistic about the global oil market outlook in the weeks and months ahead.

However, he immediately warned that his optimism “should not tip investors into “irrational exuberance.”

By Bartolomej Tomić, Senior Editor, Offshore Energy Today