When Will Oil Exploration Recover?

Call it an exploration recovery. Call it a rebound. But it feels like the oil and gas industry is returning to health in fits and starts.

That could be because the patient was sicker than we realize.

Any measure of how far exploration has come back should take into consideration how far back it started, said Andrew Slaughter of consulting firm Deloitte Services LP. Slaughter is executive director of the Deloitte Center for Energy Solutions in Houston.

“It’s coming back. Clearly, it was one of the most seriously affected pieces of oil and gas activity during the downturn. Exploration spending was cut back drastically in 2015, 2016,” he said.

When crude oil prices plummeted, at least $60 billion in exploration spending disappeared in a hurry. Since then, the industry has followed the rule, “Proceed with Caution.”

Last year showed just how fragile the recovery can be. Overall exploration spending rose with higher oil prices, then unexpectedly ticked down in the fourth quarter as prices stumbled. Industry-watchers took note of the reaction from Apache Corp.

Apache drills a lot of wells. Going into 2019, the company expected to build on its previous exploration commitment and devote at least $3 billion to upstream capital expenditures for the year.

But in February, Apache announced its board had approved an upstream capital budget of just $2.4 billion, calling that “a significant reduction from its previous 2019 investment plan, as well as from its actual upstream investment level in 2018.”

While exploration spending has increased since the industry downturn, “it’s still nowhere near the exploration spend we had in the $100/barrel world,” Slaughter observed.

Unconventional resources blur the upstream picture. The Baker Hughes Rig Count found fewer than 410 rotary rigs working across the United States by the end of May 2016.

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Call it an exploration recovery. Call it a rebound. But it feels like the oil and gas industry is returning to health in fits and starts.

That could be because the patient was sicker than we realize.

Any measure of how far exploration has come back should take into consideration how far back it started, said Andrew Slaughter of consulting firm Deloitte Services LP. Slaughter is executive director of the Deloitte Center for Energy Solutions in Houston.

“It’s coming back. Clearly, it was one of the most seriously affected pieces of oil and gas activity during the downturn. Exploration spending was cut back drastically in 2015, 2016,” he said.

When crude oil prices plummeted, at least $60 billion in exploration spending disappeared in a hurry. Since then, the industry has followed the rule, “Proceed with Caution.”

Last year showed just how fragile the recovery can be. Overall exploration spending rose with higher oil prices, then unexpectedly ticked down in the fourth quarter as prices stumbled. Industry-watchers took note of the reaction from Apache Corp.

Apache drills a lot of wells. Going into 2019, the company expected to build on its previous exploration commitment and devote at least $3 billion to upstream capital expenditures for the year.

But in February, Apache announced its board had approved an upstream capital budget of just $2.4 billion, calling that “a significant reduction from its previous 2019 investment plan, as well as from its actual upstream investment level in 2018.”

While exploration spending has increased since the industry downturn, “it’s still nowhere near the exploration spend we had in the $100/barrel world,” Slaughter observed.

Unconventional resources blur the upstream picture. The Baker Hughes Rig Count found fewer than 410 rotary rigs working across the United States by the end of May 2016.

That number had climbed to more than 1,020 by April 2019, seemingly a positive resurgence for exploration.

But during the same period, the number of rigs drilling in Texas Railroad Commission districts 8 and 8A in West Texas plus rigs running in New Mexico soared from 117 to 430.

Think, Permian Basin development.

“Onshore, I don’t really think of tight oil or unconventionals as exploration, in the traditional sense. It’s really a question of appraisal to delineate sweet spots,” Slaughter said.

Offshore Optimism

Offshore exploration has survived, though hardly thrived, in the years after the industry cutbacks. The current outlook is especially bright offshore the Americas, Slaughter noted – off Suriname, Guyana, Mexico and Brazil.

Brazil has “such a rich set of basins, although with Brazil, I think it’s going to be more of the Gulf of Mexico model of step-out and near-production” wells, he said.

One sign of exploration’s continued rebound came in the offshore Argentina licensing round in mid-April. In this frontier area, companies licensed 18 of the 38 offered blocks with winning bids reportedly totaling about $718 million.

Seismic work will precede drilling in the three basins involved, ranging from shallow offshore to ultradeep targets, so first wells aren’t expected for several years.

Bidding companies included a mix of large independents, national oil companies and majors, including a unit of ExxonMobil, which announced it had acquired three blocks in the Malvinas Basin and added about 2.6 million net acres to its upstream holdings in Argentina.

“The companies that can sustain exploration through these (price) cycles tend to be the larger ones, so the majors and the NOCs” lead the exploration charge, Slaughter noted.

Price Stability

Onshore, Slaughter sees the United States adding another 1-1.5 million barrels/day through expanded unconventional oil production, a healthy upswing but far short of the amount needed to meet projected global demand growth and field-replacement needs.

“That’s less than a quarter of what the world will need to add in terms of demand growth and depletion,” Slaughter observed.

“In the grand scheme of things, that’s part of the story. We do need exploration drilling for conventional plays,” he said.

Slaughter described himself as “moderately optimistic” about the future of upstream oil and gas. For one thing, “price stability will allow more sustainable budgets,” he predicted.

“I don’t think there is a big risk for a collapse of price again, if you look at the worldwide production picture and at the success of the OPEC agreement,” he said.

Price stability is key to the industry’s rebound, Slaughter said, because it allows companies to rebuild their financial positions. Stability also enables companies to plan with some confidence and to create longer-term business strategies.

It could be that the oil industry would rather have moderately high and stable prices than higher but volatile and unpredictable prices.

“Confidence rebuilds over time – there’s still a lot of rebuilding to be done, for the balance sheets, for budgets,” Slaughter noted.

Also, the current moderate-but-stable oil price range and upstream investment outlook encourages countries to offer tender opportunities, bid rounds and lease sales, especially as other countries make their own blocks available to the industry, according to Slaughter.

The result is a competition for available exploration spending, as countries vie to develop their natural resources.

“Generally, this sort of more moderate price environment means more countries will want to compete in offering prospects, which is good for the E&P companies,” Slaughter said.

A three-year shakeout during the downturn left the oil and gas industry with fewer companies and an impaired willingness to take on exploration risk. There’s “a smaller set of companies doing exploration now,” Slaughter noted.

“What that period has done, it’s basically taught the explorers to be more effective, to high-grade their portfolios,” he said.

Nonetheless, Slaughter sees positive signs for an exploration revival as companies return to the business of building reserves.

“I think we’re already in a healthy drilling environment,” he said.

When will exploration rebound all the way?

When the industry gets its swagger back.

As Slaughter noted, that’s a matter of strengthening balance sheets and rebuilding budgets, of regaining confidence, of fully stabilizing an oil industry that was thrown badly off-balance for a few years.

It’s a matter of time and sustained product prices. But at the same time, Slaughter said, the exploration comeback will continue.

“People always forget that you can’t shut down exploration,” he said. “It’s part of the long-term future of the industry.”

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