Success Strategies Explored

Myths Put to Rest

What makes companies successful in exploration?

That's one of the most important questions in the world today, as the petroleum industry struggles to meet increasing global oil demand.

This September, the Wood Mackenzie consulting group in Edinburgh, Scotland, plans to complete a new Exploration Strategy and Performance (ESP) Study.

Its goal is to identify the best strategies for creating value through exploration, according to Andrew Latham, Wood Mackenzie vice president-energy consulting and project director for the study.

"The whole exploration industry is being challenged right now," Latham noted.

In particular, financial markets have asked tough questions about the payoff from oil and gas exploration, he said.

Some observers doubt that the industry can be efficient enough in exploration to win a viable return on invested capital.

"The first question is, really, 'Is that true?' Our clients are interested in knowing if the industry is in decline," Latham said.

Final conclusions won't be issued until the ESP study is complete -- but there's already enough evidence to destroy some popular myths about exploration, and to point a way toward future success.

Here's to Peers

Latham discussed preliminary study results at the AAPG Annual Convention in June, during an exhibit-hall presentation titled "Identifying the Top Exploration Performers and How They Achieve Success," and as part of an AAPG forum on "New Discoveries."

Wood Mackenzie divided the industry's major exploration players into peer groups and analyzed their performance for the period 1995-2004, he said.

The first group includes the world's seven Supermajors: BP, Shell, ExxonMobil, Chevron, ConocoPhillips, Total and ENI.

Near-majors and large players make up a second peer group: Statoil, Petrobras, Repsol-YPF, BG plc, Petronas, Norsk Hydro, BHP-Billiton and Woodside Petroleum.

The largest U.S. independents comprise the third group: Unocal, Amerada Hess, Apache, Anadarko, Kerr McGee, Marathon, Occidental, Burlington Resources, Devon Energy and Murphy Oil.

Large Canadian independents EnCana, Talisman and Nexen make up the fourth peer group, and the fifth brings together Asian-area explorers, including PetroChina, CNOOC and Oil and Natural Gas Corp. of India.

The Wood Mackenzie study draws upon its existing economic analysis of almost every significant field and exploration program around the world, Latham said.

To assess exploration spending, the study utilizes U.S. Securities and Exchange Commission (SEC) filings, he noted.

"On the cost side, we could use the SEC-reported costs because those are pretty much reported in the year the investment is made," Latham observed.

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What makes companies successful in exploration?

That's one of the most important questions in the world today, as the petroleum industry struggles to meet increasing global oil demand.

This September, the Wood Mackenzie consulting group in Edinburgh, Scotland, plans to complete a new Exploration Strategy and Performance (ESP) Study.

Its goal is to identify the best strategies for creating value through exploration, according to Andrew Latham, Wood Mackenzie vice president-energy consulting and project director for the study.

"The whole exploration industry is being challenged right now," Latham noted.

In particular, financial markets have asked tough questions about the payoff from oil and gas exploration, he said.

Some observers doubt that the industry can be efficient enough in exploration to win a viable return on invested capital.

"The first question is, really, 'Is that true?' Our clients are interested in knowing if the industry is in decline," Latham said.

Final conclusions won't be issued until the ESP study is complete -- but there's already enough evidence to destroy some popular myths about exploration, and to point a way toward future success.

Here's to Peers

Latham discussed preliminary study results at the AAPG Annual Convention in June, during an exhibit-hall presentation titled "Identifying the Top Exploration Performers and How They Achieve Success," and as part of an AAPG forum on "New Discoveries."

Wood Mackenzie divided the industry's major exploration players into peer groups and analyzed their performance for the period 1995-2004, he said.

The first group includes the world's seven Supermajors: BP, Shell, ExxonMobil, Chevron, ConocoPhillips, Total and ENI.

Near-majors and large players make up a second peer group: Statoil, Petrobras, Repsol-YPF, BG plc, Petronas, Norsk Hydro, BHP-Billiton and Woodside Petroleum.

The largest U.S. independents comprise the third group: Unocal, Amerada Hess, Apache, Anadarko, Kerr McGee, Marathon, Occidental, Burlington Resources, Devon Energy and Murphy Oil.

Large Canadian independents EnCana, Talisman and Nexen make up the fourth peer group, and the fifth brings together Asian-area explorers, including PetroChina, CNOOC and Oil and Natural Gas Corp. of India.

The Wood Mackenzie study draws upon its existing economic analysis of almost every significant field and exploration program around the world, Latham said.

To assess exploration spending, the study utilizes U.S. Securities and Exchange Commission (SEC) filings, he noted.

"On the cost side, we could use the SEC-reported costs because those are pretty much reported in the year the investment is made," Latham observed.

Reported results aren't as helpful in judging the payoffs from exploration, because companies typically book reserves over a period of several years, he said.

For a cost-payoff evaluation, the study draws on Wood Mackenzie's proprietary industry analysis, according to Latham.

It will extend the firm's earlier "Value Creation Through Exploration" report, issued three years ago, he added.

Pardon Me, Myth

Initial results show that some widely known facts about exploration aren't facts at all.

Myth Number 1: Because of their size, the largest oil companies are inefficient behemoths when it comes to exploration.

Call that an article of faith among independents.

Smaller companies promote their lean-and-mean approach, sometimes claiming they can drill wells at a fraction of the cost of the majors.

So which group gets the best return on exploration investment?

The Supermajors, by a good margin.

"Typically, the Supermajors of the peer groups are the highest performing group, but within any one of those groups there's of course wide variation," Latham said.

Supermajors and majors not only have lower finding costs overall, but they also account for a majority of new oil and gas discovered.

Myth Number 2: Exploration investment is fleeing North America in search of better opportunities overseas.

In fact, North America has been one of the fastest growing areas for new exploration spending over the past 10 years.

Latham noted that projects like deepwater Gulf of Mexico exploration require very substantial outlays by industry.

"You can see where big dollars would get spent," he said. "And there's a lot of activity in Canada."

Also, the United States appears relatively attractive compared to countries that demand a high share of future production for exploration rights, Latham observed.

"I think the reason the industry is coming back to the U.S. is the price environment," Latham said, "because although the plays are expensive, the government take is much less."

Myth Number 3: Mergers lead to a near-term decline in exploration results, as companies try to combine corporate cultures.

It makes sense that large oil companies would have to work through the distractions of a megamerger before building a new exploration program.

Except, that notion is completely wrong.

"We've seen an uptick in performance following mergers," Latham said.

He attributed the increased success to a process of high-grading or "cherry picking" prospect portfolios following mergers.

What does decline is total spending on exploration by the merged entities.

"We can see in the aftermath of the megamergers, typically the spend is much, much less than it would have been," Latham noted.

Myth Number 4: Only a small handful of prospect areas have provided attractive payoffs for exploration in the past decade.

The performance study assesses WHERE companies have had exploration success as well as HOW.

High-value areas range from the Gulf of Mexico to Trinidad and Tobago to North Africa, from the Norwegian Sea to Kazakhstan to Indonesia and offshore Australia.

For the oil industry, there's been -- literally -- a world of opportunity and payoff in exploration.

Gems or Stratagems?

To define the exploration strategy of individual companies, the Wood Mackenzie study draws on a set of several strategic axes.

Those represent the choices a company makes when setting up and following a strategy, or a list of questions to be answered:

  • Frontier acreage or proved basins?
  • Operator or non-operator?
  • Early entrant or late entrant?
  • Volume targets or value targets?
  • Core regions or core competencies?
  • Elephant hunting or string of pearls?

With more than a dozen axes to consider, companies can choose from hundreds of exploration approaches.

The performance study will evaluate those strategies to identify which ones have been most successful during the past decade, Latham said.

One obvious and basic attribute of successful exploration could just as well apply to personal investing, or improving your golf game:

Having a consistent exploration strategy brings more success than having no strategy at all.

Some companies take a scattergun approach to exploring, Latham observed.

"It's often very difficult to tell just what the strategy is," he said.

And, hand in glove, companies have more success when they stay in geographical and geological areas they know and understand, or develop a thorough expertise before entering a new area.

Latham cited the example of a European energy company that enjoyed good success on its home turf but stumbled as soon as it ventured into unfamiliar prospect areas.

"Stick to what you know" could be seen as common sense.

"What we're doing new is bringing some quantitative evidence to back that up," Latham said.

He singled out BP as a positive example of exploration strategy, with ongoing good results.

"BP's strategy from the early 1970s to now has been pretty consistent," he said -- targeting the best prospects in basins where it can be the number one or number two producer.

When Plays Work

At this point, all numerical data for the exploration study has been gathered, according to Latham.

"We've completed the quantitative analysis and that's being circulated through the companies for feedback," with no major corrections or revisions so far, he said.

In its findings, the new study will try to answer the question, "Is there a real, identifiable link between exploration strategy and performance?"

Given the wide variation in results among companies, and with strategic shifts producing better or worse performance, the answer seems to be, "Yes."

But just as important, the data could put to rest another myth about the oil industry and exploration results.

An industry in decline?

Not at all.

"Given the investment that the industry makes in exploration, how do the results compare?" Latham asked.

"The overall level of exploration performance looks good right now," he said. "If you want to put it in school-report terms, you could say, 'It's doing okay, but could do better.'"

And results from recent years, especially 2004, are actually very good, Latham noted.

Successful strategies have helped the industry achieve results during the past 10 years of moderate exploration spending.

They'll be even more important in the critical 10 years ahead.

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