Year of Discovery Sees 'Dim Bright Spots'

Leave it to the experts to sum up what the international exploration picture looked like in 2016:

“Not much,” said Pete Stark, senior research director and adviser for IHS Markit Ltd.

By one measure, 2016 shaped up to be the worst time for international oil and gas discoveries in years.

By another, last year looks like the worst for international oil additions in decades.

“The decline in global discoveries are ongoing from 2015,” Stark said. “By the end of November, we were looking at just 7 billion barrels of oil equivalent, slightly biased toward gas.”

Consider this: the world’s two biggest discoveries last year were both in the United States – the Caelus Energy LLC oil discovery at Smith Bay on Alaska’s North Slope, and the Apache Corp. Alpine High oil and gas find in the southern portion of the Delaware Basin in Texas.

IHS includes frontier U.S. discoveries like Smith Bay in its year’s best wells list, but not onshore Lower 48 plays like Alpine High, which Stark said “is really back in the shale game again in West Texas.”

That makes the 2016 exploration highlights list even less exciting.

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Leave it to the experts to sum up what the international exploration picture looked like in 2016:

“Not much,” said Pete Stark, senior research director and adviser for IHS Markit Ltd.

By one measure, 2016 shaped up to be the worst time for international oil and gas discoveries in years.

By another, last year looks like the worst for international oil additions in decades.

“The decline in global discoveries are ongoing from 2015,” Stark said. “By the end of November, we were looking at just 7 billion barrels of oil equivalent, slightly biased toward gas.”

Consider this: the world’s two biggest discoveries last year were both in the United States – the Caelus Energy LLC oil discovery at Smith Bay on Alaska’s North Slope, and the Apache Corp. Alpine High oil and gas find in the southern portion of the Delaware Basin in Texas.

IHS includes frontier U.S. discoveries like Smith Bay in its year’s best wells list, but not onshore Lower 48 plays like Alpine High, which Stark said “is really back in the shale game again in West Texas.”

That makes the 2016 exploration highlights list even less exciting.

The Caelus Energy Alaska find turned out to be the year’s big, exciting oil discovery. Without that well, natural gas would have been “super-dominant” in the resource total, Stark noted.

“It’s that one U.S. North Slope discovery that makes oil look a little better, that breathes life into it,” he said.

Discovery in Decline

And once again, offshore wells dominate the year’s best discoveries, many of them in deepwater, Stark said. That’s also been an ongoing trend in international exploration.

A nasty downturn in the oil and gas industry over the past two years slashed the number of rigs drilling wildcats worldwide, contributing to the decline in exploration successes. “It’s the post-recession lower oil and gas prices,” Stark said.

But while the industry slump and lower prices in recent years have hurt international exploration efforts, they can’t be blamed for the overall trend. The decline has persisted year after year.

“It’s a continuation of the slide in international discoveries that has been going on since 2010,” Stark observed.

International exploration results have disappointed in size for some time. But the decline in number of successful exploration wells is truly startling, and the discovery rate also “has tended to be on a downward slope,” he noted.

“If you look back a decade ago we were averaging in the neighborhood of 450-500 international discoveries a year,” Stark said.

When the final results for 2016 are totaled up, he expects – maybe – a little over 200 successes.

Overall, international natural gas discoveries weren’t bad in 2016, but “it looks like oil could be at the lowest level since 1952,” Stark said.

International Ennui

Back to last year’s dearth of big discoveries outside the United States – some of that comes from the industry downturn, some from geopolitics. And some can be blamed on a corruption scandal and political upheaval in Brazil, usually a contributor to the big-success list.

“Internationally, outside the U.S. you’ve had one giant discovery, in Senegal,” Stark said.

“West Africa is still producing a few good discoveries. The rest is scattered. There’s nothing in Latin America, mainly because of Brazil,” he added.

It might be a dim bright spot that international exploration success was spread around the globe in 2016. Turkmenistan claimed added resources, and Myranmar upped reserves with a good discovery well.

“There was one in Romania, but it was mostly gas. PetroChina had a similar one in the Tarim Basin, and that’s only one of two in the Far East,” Stark said.

In the IHS preliminary list of best international discoveries last year, only seven seemed to have a chance to reach or exceed the 200 million barrels of oil equivalent threshold:

  • Alaska North Slope
    Caelus Energy Alaska LLC, Smith Bay, Tulimaniq No. 1 and 2 wells, 1.8 billion barrels of oil and 1.8 trillion cubic feet (Tcf) of gas
  • Senegal
    Kosmos Energy Ltd, Cayar Offshore Profond Block, Teranga-1 well, 5 Tcf of gas plus some condensate
  • Angola
    Cobalt International Energy LLC, Offshore Block 20, Kwanza Basin, Zalophus No. 1 well, 2 Tcf gas plus condensate
  • Myanmar
    Posco-Daewoo/Woodside, Offshore AD-7 Block Rakhine Basin, Thalin-1A well, 1.5 Tcf gas
  • Angola
    Cobalt International Energy LLC, Offshore Block 20, Golfinho No. 1 well, 200 million barrels oil, 290 billion cubic feet of gas
  • Russia
    Gazprom, Northeast Sakhalin Sub-basin, Lunskoye Yuzhnoye discovery well, 1.2 Tcf gas plus condensate
  • Gulf of Mexico
    Chevron Corp., Keathley Canyon, Gibson prospect exploration well, 195 billion barrels of oil equivalent plus condensate

Lately, conventional wisdom has held that the future of exploration belongs to the national oil companies, or NOCs. That’s especially true when they are tapping into resource abundance in their own countries.

But look at this year’s top international discoveries list, as well as the best North American wells total, and you’ll find a significant number of U.S. independents among the operators.

Cobalt International has headquarters in Houston, Kosmos Energy in Dallas. Caelus Energy is based in Dallas and Anchorage.

“The U.S. independents are still out there taking risks,” Stark said. “There are high risks out there in places that have the best prospects for discoveries.”

Stark doesn’t see the international exploration picture getting better until more money comes into risk drilling and that likely depends on the willingness of OPEC and Russia to heed production quotas.

“We’ll just have to see if the recent OPEC announcement reestablishes their role in the market,” he said.

Uncertain geopolitics, the threat of terrorism, constrained economics and industry malaise have all made exploration a tough game to play, on a very wild and challenging international frontier.

“Until you get back to a healthier oil price,” Stark said, “a lot of companies are reluctant to push money out into the frontier areas of the world.”