First cut is the deepest

Audrey Leon and Elaine Maslin

January 1, 2016

OE reached out to analysts Wood Mackenzie and IHS Energy to find out the view on the next 12-18 months. And the outlook is not so great for exploration spend. Audrey Leon and Elaine Maslin report.

Wood Mackenzie

Image from iStock.

Andrew Latham, VP upstream consulting, at analysts Wood Mackenzie, says we can expect to see less exploration in 2016, across the board, although the jury is still out on how the national oil companies will respond in the current oil price environment.

“Everybody is doing less exploration than they were and
the small companies have cut back sharper relative to the majors,” he says. “The overarching theme is one of a retreat from frontiers, the most obvious being the Arctic. But, we are still seeing deepwater exploration. The jury is out on is the national oil companies, especially those that invest internationally. They have not yet cut that deeply, but there is a thought that they might.”

So where are explorers aiming their drillbits? Unsurprisingly, heartlands or established basins, where there is existing infrastructure so that smaller discoveries can have higher value, Latham says. “Shell, for example, is having a good run in Malaysia, and Eni has been drilling in the Congo in shallow water plays. Areas of the North Sea are coming into that as well, for example Apache, in the Central Graben recently.”

While new discoveries in North Sea heartland areas are significant for Apache, they will not be transformative for the basin. But, there is drilling likely in more high impact areas, such as offshore Brazil, he says.

“More activity is also likely along the coast from Brazil,” he says, such as offshore Guyana, where ExxonMobil made the 2015 Liza discovery – one of the 10 biggest finds in 2015. 2016 might also see the first well spud offshore Uruguay, Latham says.

Other high impact areas include Mauritania, following large discoveries there by Kosmos Energy and Cairn Energy – both of which were also listed list in the top 10 discoveries of 2015 – particularly as there’s a belief there could be oil, as well as the discovered gas, there.

The Eastern Mediterranean will also remain a hot spot, says Latham, as well as deepwater offshore Egypt, as Eni looks
to appraise its massive Zohr discovery – another 2015 top 10 discovery. “A gas play is also emerging in the Black Sea, and we will see more drilling there,” Latham says. “All of these, excluding Uruguay, have discoveries or proven hydrocarbons,” says Latham, “and they are not super high cost exploration provinces.”

The areas that will lose out are the likes of Greenland or the Kara Sea and even ultra-deep gas plays in the US Gulf of Mexico, as well as rank unknown frontiers. But those areas deemed difficult to work in are also slipped back, such as the Australian Bight, and the sub-basalt plays West of Shetland, which are difficult and high cost, as well as the Barents Sea, where exploration results have been mixed.
Meanwhile, areas where there have been high levels of exploration, will also fall off the exploration radar, as the focus moves towards commercialization, such as East Africa, where giant gas discoveries were made offshore Tanzania and Mozambique in recent years.

As we move into 2017-2018, the results from the recent, strong offshore Newfoundland round, including drilling commitments, might start to bear from, says Latham, as well as offshore Mexico.

A wild card could be future prospects for floating LNG, as a development solution for small-scale resources in basins where the potential for onshore LNG trains isn’t attractive. “This is getting some attention in parts of the world that don’t have challenging maritime conditions, specifically West Africa, Cameroon, Equatorial New Guinea with the likes of Ophir and Perenco,” says Latham. Golar LNG, a partner on both, is confident there is plenty more to come.

-Elaine Maslin

IHS Energy

Workers on the West Gemini rig, supporting the CLOV project.

Photo from Total/Gonzalez Thierry.

For explorationists, the next 12-18 months will be a difficult road. For most companies, exploration is the easiest to cut if you are looking to reign in capex, says Rebecca Fitz, a senior director for IHS Energy. She explains: “There are very few near-term consequences (to cutting exploration spend). Cuts to development spend, in contrast, result in near term cuts in production growth expectations. IHS expects these deep cuts to continue into 2016. “We (IHS) did a study, a couple months ago, where we looked at the top 18 most successful deepwater exploration companies over the last five years. Their exploration spending is expected to fall about 50% (from 2013-2015). That’s significant, even for the most successful companies, at exploration,” Fitz says.

Fitz explains that one implication of exploration cuts are certain companies will continue their transition toward asset development, such as UK-based Tullow and Brazilian national oil company Petrobras. “This places the onus on a new set of explorationist to drive new play de-risking,” she says.

So for the companies who are still drilling, where are
they headed? Fitz says they are staying on familiar ground. “There will be less focus on frontier exploration, and new play incubation,” she says. “We would instead expect the bulk of exploration efforts to focus on pre-existing core areas and pro- grams, such as the Gulf of Mexico, Sub-Saharan Africa, and other established petroleum provinces. Chance of failure is high in a frontier programs, while established infrastructure positions in core areas tends to facilitate more rapid development—and potentially better economics—of new discoveries in these areas.”
-Audrey Leon