Australian and New Zealand offshore exploration

Angus Rodger and Matt Howell

March 1, 2015

Angus Rodger and Matt Howell discuss the exploration environment as well as the potential impact from the recent fall in oil prices on Australian and New Zealand projects.

Graphs from Wood Mackenzie.

Australia has been a core area for many majors for years, but this position has evolved over time. One of the biggest shifts occurred over the last five years, as hundreds of billions of dollars has been spent on LNG development across seven different greenfield projects, and the subsequent lull this has caused in offshore exploration.

Analysis of drilling levels reveals that Australian offshore exploration activity over the 2012-2014 period was significantly lower than that of the preceding seven years. The number of exploration wells off Western Australia halved and drilling in the other sectors, such as Victoria, essentially ceased. Appraisal drilling has been even harder hit, with only minimal drilling activity in the last two years. Conversely, New Zealand had its most active year for exploration and appraisal drilling since 2010, with two rigs in-country. This has had a significant impact on the volume of discovered resource in Australia in each year. Recent annual discovered volumes have been approximately half that of the previous decade, notwithstanding the relatively dismal results in 2008. Exploration offshore New Zealand has also been poor, with only two small discoveries made. Recent drilling by Shell could change this picture, but the results have not yet been released.

Exploration drivers

The key driver for the fall in exploration and appraisal activity is a change in focus from the major oil companies. Development drilling programs for projects including Gorgon, Wheatstone, Balnaves and Coniston-Novara have utilized rigs and capital that may otherwise have been ear-marked for exploration. For example, Apache Energy, which drilled 66 exploration wells in the 2005-2009 period, but only 18 in the 2010-2014 period.

Over the last 10 years, the time taken to drill wells has increased year-on-year. 2013 saw a number of wells take longer than 100 days to drill. While in this dataset (see top chart) it looks to be an outlier, it illustrates the broader trend towards deepwater and more difficult drilling targets and conditions, particularly in the Browse Basin. Longer drilling periods have reduced the opportunity for rigs to drill other wells, contributing to the fall in overall activity.

Drilling costs have also risen dramatically over the last 10 years. Daily rig rates have increased significantly, along with rises in both service company and logistics costs. This has seen companies be more circumspect with their drilling decisions, even in the higher price environment that has until very recently been evident.

New oil price environment

The environment in which oil companies operate changed significantly in late 2014. The low oil price quickly impacted company capital plans, with both development and exploration budgets cut globally. The level of development drilling off Australia is relatively robust and unlikely to see a significant drop off in 2015, as many of the programs are underway already, are needed for contract delivery or are essential for the continued performance of fields that operate with low break-evens and high netbacks.

This could change heading into 2016, if a low oil price persists. The development spend more than 12 months out from early-2015 is likely to be more discretionary and, after a year of low prices, nothing will be sacrosanct. This is where we would expect more of an impact on development drilling and related expenditure.

In comparison, the deferral of short-term exploration activity is a relatively simple way to reduce expenditure and one we are already seeing occur in Australia. Many companies with commitment wells due in 2015 and 2016 are applying to the National Offshore Petroleum Titles Administrator (NOPTA, the government licensing regulator) to defer commitments. If successful, these deferrals could result in minimal exploration and appraisal activity.

In New Zealand, short-term activity is unlikely to be affected by the drop in oil price. One of the two rigs active there is being transported back to Singapore and the other is committed to the continuation of development drilling. The rig is scheduled to remain in New Zealand once that development drilling is complete for an exploration well. That said, this well could be considered in jeopardy, depending on the funding position of the companies involved.

Longer term

We are yet to see if the appetite for new exploration in the longer-term will be affected. An early litmus test could be upcoming license rounds offshore Australia, traditionally a core area of deepwater exploration for the majors. While the plunge in prices may test appetite for blocks that are either in deep water or on the fringes of existing plays, on the other hand acreage can potentially now be acquired through competitive bidding with a far lower work commitment than in previous years.

The low price will have a significant impact on the block bidding level. Analysis reveals there is a very strong correlation between oil price at the timing of bidding and the popularity of rounds and hence the number of permits awarded many months later. This would suggest that bids for 2014 blocks will be healthy, but demand for 2015 permits will decline sharply.

Overall, it is important for companies to maintain a dynamic and evolving exploration portfolio as a driver for future growth. However, in the current oil price environment, companies will be looking for cost savings and exploration budgets are unlikely to be spared the axe. This is despite the bidding process involving companies committing to potential exploration spend in the future, when oil prices have returned to higher levels.

Wells to watch

Nonetheless, there is a number of exciting exploration wells planned during 2015 that will be eagerly watched by the industry due to their play-opening potential. These include Murphy’s three-well program offshore Perth basin, and Apache and Woodside’s ongoing drilling in both the shallow and deep water areas of the Canning basin.

Like the rest of the world, what is going to happen in Australia and New Zealand over the next 12 months is very uncertain. We predict that explorers will take a more cautious approach to improve near-term returns for shareholders. This will include a reduced focus on frontier exploration, and an increased appetite for short-term and high value opportunities.

Matt Howell
is Analyst, Upstream Research, Australasia. He joined Wood Mackenzie’s research team in August 2011. Prior to that he worked for Baker Hughes as a wireline field engineer and in the company’s geoscience arm. Howell holds a Bachelor of Engineering (Hons) degree in Oil and Gas Engineering and a Bachelor of Commerce, majoring in Accounting and Corporate Finance, both from the University of Western Australia.

Angus Rodger
is Principal Analyst, Upstream Research, Australasia. Rodger joined Wood Mackenzie’s South East Asia Upstream research team in May 2008. Rodger holds a BA (Hons) degree in Politics with International Relations from the University of Warwick.