Can the oil and gas industry innovate its way out of a dismal period for exploration?
And just how bad is the global exploration picture right now, anyway?
Let’s ask Leta Smith, director of upstream energy research for IHS in Houston.
“Discovery volumes have been declining and declining and declining since about 2010,” she said, “and 2016 is shaping up to be the worst year ever.”
OK, that’s bad.
Smith keeps tabs on conventional exploration discoveries everywhere around the world except onshore North America. So activity in onshore U.S. and Canadian unconventional plays are outside her frame, although that activity has slowed from a gallop to a trot.
In international exploration, “as of the middle of this year there had only been 2.5 billion barrels of oil equivalent found. That compares with last year, which was a low year. And it was more than double that,” she said.
A worrisome trend is the industry’s failure to open up new exploration areas this year, through frontier work or new ideas or innovation, according to Smith.
“I’m sure there are innovations in cost reduction,” she noted.
“But I’m not seeing it in the deepwater basins where most of the discoveries have been made. The innovation seems to be in the unconventionals,” she said.
Companies are managing to lasso in some innovations from other industries, or are extending innovations from unconventional plays, like reduced drilling time, Smith observed.
Other than that, the industry is focused on corralling costs. The biggest players have largely shied away from exploration risk.
“Through May, the majors had found the least of any group. It’s actually the independents who are finding most of it, and that’s been true for the last three years,” she said.
Smith hasn’t been impressed by recent announcements of new finds, although they do offer evidence that exploration still works and remains the best way to bulk up reserves.
Apache Corp. said its Alpine High discovery in the Delaware Basin in Texas could hold 75 trillion cubic feet of rich gas and 3 billion barrels of oil in just the Barnett and Woodford formations, with 2,000 to 3,000 future drilling locations.
And Petróleos Mexicanos has announced several Gulf of Mexico light crude discoveries, off the coast of Tamaulipas and also in shallow waters of the southern Gulf.
But Smith said the Delaware Basin find is in a historically underperforming area and the main Pemex offshore discovery mirrors Perdido Fold Belt wells in the U.S. sector of the Gulf that have been less than exciting.
“I’m not seeing any discoveries in a place where there hadn’t been discoveries the year before,” she noted.
Even the significant new Alaskan oil discovery at Smith Bay, announced by Caelus Energy in October, could be seen as a Prudhoe Bay-Alpine extension.
Large cuts in capital expenditure budgets by almost all upstream petroleum companies darkened the worldwide exploration picture going into this year. A recent industry survey by Deloitte LLP offers both bad and good news.
“Capital spending decisions have been substantially curtailed during the last 18 months, especially for exploration activities. Budgets were directed toward more immediate needs, and external funding sources became less available. For 2016, most (42 percent of respondents) expect capital expenditure to continue declining,” its survey report said.
But Deloitte found that more than 60 percent of industry leaders expect a rebound in 2017 or 2018, with a positive effect on future exploration capital expenditure.
For 2017, “the outlook changes as 43 percent of respondents anticipate capital expenditure to rise in 2017 — optimism for a recovery next year is returning,” it said.
Mountains of Debt
Lysle Brinker monitors exploration investment as director of equity research for IHS Markit in Norwalk, Conn.
“Internationally, in the E&P space very few companies are doing anything in exploration,” Brinker said. “Exploration is the first target in cutting back because it’s discretionary, and companies just don’t have the money.”
Brinker keeps close track of the largest integrated oil companies, especially the Big Five, and he said all of them keep burning through cash.
“They’re really all running structural cash flow deficits,” he noted.
And, yes, that’s bad.
One problem is the amount of debt the largest publicly traded oil companies are carrying.
With lower revenues, the majors have increasingly turned to debt to fund operations. According to the Wall Street Journal, by August this year Exxon Mobil, Shell, BP and Chevron had a combined net debt of $184 billion, more than double their debt levels in 2014.
Despite a golden period of $100-per-barrel oil, the largest companies have emerged with mountains of debt piled on. That’s stomping on the chances for exploration recovery.
“It’s a very challenging environment. We keep saying this time it’s going to be different because of the massive amount of debt,” Brinker said.
The Good News
Maybe the best that can be said about international exploration today is that it hasn’t completely dried up and blown away. A few projects aim to build on successes drilled in 2015, or even to test new areas.
“You’re still seeing some exploration — the big companies are still drilling some wildcats,” Brinker said.
Those include wells in Ecuador, Guyana and Nova Scotia.
“These aren’t cheap wells, even with rig rates down,” he noted.
The big bright spot seems to be unconventional plays, but most of the innovation there involves stimulation and production — longer laterals, more pressure, faster drilling, multiple wellbores, refracturing jobs.
That kind of forward thinking has helped operators cope with tough-times economics.
“The per-unit cost to add reserves in these liquid-rich unconventional plays has really come down, by as much as $30 a barrel, according to one recent report,” Brinker said.
Corruption scandals, government investigations and political roadblocks in several countries also affect the exploration outlook, according to Brinker. Those problems have been compounded by low production prices.
An investigation into widespread corruption charges in Brazil, a major area of exploration in recent years, has handcuffed Petrobras and led to the impeachment of the country’s president in August.
“It’s still going to take time for things to play out politically and economically in these countries,” Brinker noted.
With the industry finishing off a couple of terrible years in international exploration, there’s little helpful advice except this: Settle into your saddle and wait for prices to keep rising.
“It’s a very unfavorable outlook for new exploration for the next year or two, depending on prices,” Brinker said. “If you get up to $60 or even over $55 on a sustained basis, that might be enough to move the needle.”