Oil price slump is a good thing for explorers, says report
20 SEPTEMBER
The oil price slump will make major explorers more profitable as they are forced to focus on lower-cost, better-quality prospects, industry experts Wood Mackenzie have forecast.
Energy giants have ditched "high-cost, high-risk" exploration plays such as "elephant hunting in the Arctic" as the economics of lower oil prices make them concentrate on their best drilling prospects, Dr Andrew Latham, Wood Mackenzie's vice-president of exploration research, said.
Oil majors’ profits have been hammered by the collapse in prices since summer 2014 amid global oversupply.
But Dr Latham argued that "the economics of exploration were already broken back in 2014, when oil was at $100 per barrel", with many discoveries even then not being developed against a backdrop of rising costs and lower returns.
"One positive side effect of the downturn that we have seen is that the majors have changed the way they approach exploration, leading to improved returns, even at lower prices," he said.
In a report, Wood Mackenzie concludes that the oil majors have actually been underperforming the rest of the industry on conventional oil and gas exploration returns for most of the last decade, making on average 6pc returns compared with an industry average of 10pc.
However, last year the oil majors overtook their smaller rivals on exploration returns as they slashed their spending, from a combined total of $15bn in 2014 to $7bn last year.
The amount spent on every exploratory well plunged to $83m, the lowest level since 2008.
“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,” Dr Latham said.
Major explorers were now focusing on drilling in areas with proven geology, favourable tax regimes, low costs and low political risk, as well as new ways of operating more efficiently.
Instead of discovering large new conventional oil and gas plays for growth, they were instead looking at unconventional oil and gas, techniques to enhance recovery from existing sites, and growth through mergers and acquisitions, the report said.
“The end result will be a leaner, more fit-for-purpose sector, and will see the majors and the rest of the industry returning exploration to profitability at $60 oil price.”
