Oil & Gas Exploration, Reserve Replacement Down Worldwide
Wood Mackenzie: Energy: Highlights: Oil & Gas Exploration, Reserve Replacement Down Worldwide
Oil companies are no longer replacing reserves through new field discoveries, according to a new study of 28 leading oil companies active in international exploration*. The industry has reduced its exploration investment in recent years as a response to growing technical risks and uncertain oil prices. The result has been attractive returns for the companies but with diminished reserve replacement performance. High oil and gas prices now create an opportunity for companies to step up exploration activity as part of an overall effort to secure future supply.
“The study group cumulatively created over $100 billion in value through their exploration activities over the last 10 years, says study author Andrew Latham, Ph.D., vice president of upstream consulting for Wood Mackenzie. Oil companies, encouraged by this positive return on exploration expenditures, should increase their investment and improve their chances for reserve replacement. Otherwise, these companies which represent over 30 percent of total world oil supply, face not replacing their production with new fields. This could, over time, lead to and increased dependence on OPEC supplies and place upward pressure on energy prices.”
While higher energy prices have seen increased exploration profit margins in recent years, inflationary pressures, increased competition for exploration areas and capacity constraints are continuing to drive up finding costs for new reserves, which rose 50 percent in the last 10 years in an upward trend expected to accelerate sharply. In this climate, leading energy consultant Wood Mackenzie’s report “Exploration Strategy and Performance” finds that only the top performers among the companies studied have been able to replace reserves and create value through exploration.
“Not only is exploration more expensive now, but it has become more difficult to achieve success, as the more accessible fields have been discovered,” says Latham. “While the industry has not discovered any world-scale new plays since 2000 – equivalent to deepwater Angola, deepwater Gulf of Mexico, the Precaspian basin in Kazakhstan and the giant gas fields in Australia – companies have been very successful in creating value.”
Attractive contract terms, well-developed infrastructure and new pro-domestic drilling government policies are making North America, and the deepwater Gulf of Mexico in particular, one of the world’s exploration hot spots, along with Angola, Brazil and Nigeria.
Although the supermajors remain the industry’s top spenders with high exploration success, their share of industry exploration investment peaked in 1998, and now sits at 2/3 of this level, leading to 50-percent decline in overall reserves replacement.
Unlike a similar study done two years ago, improved margins meant all companies created value through exploration, some, however, have achieved considerably more success than the others, including top performers BP, Petrobras, Apache and Chevron.
Supermajor BP’s performance was driven by a long established strategy, focusing exploration in key areas, especially deepwater Gulf of Mexico and deepwater Angola, to lead the pack in value creation.
Petrobras’ success owes much to its preferential access to world-class opportunities in Brazil, investing more heavily in exploration than most of its national oil company peers, and driving greater value creation, despite average returns on investment.
In the independents category, Apache’s distinctive strategy of exploration closely integrated with acquisitions and business development activity has excelled in countries such as Egypt and Australia.
Chevron has been a major turnaround success, moving from relatively mediocre performance in the late 1990s to top class value creation since the ChevronTexaco merger.
In terms of overall performance, most companies want new field exploration investment to fulfill the sometimes-conflicting objectives of delivering attractive returns and contributing substantially to reserve replacement. The study categorizes company overall performance in four categories – Hunters, Gathers, Grazers and Foragers. Just 25 percent of the study group was categorized as Hunters, having fully replaced production through new field exploration, without compromising returns. Approximately half were considered to be Foragers, achieving neither high returns nor full reserve replacement.
Although these trends help predict the outlook for exploration over the next several years, there are many factors that can change the equation including new exploration acreage or opportunities in previously closed areas, emergence of new technologies, discovery of new plays and petroleum systems, and increased divergence in company growth strategies.
*The study defines “value creation” as the achievement of over 10 percent full cycle returns and limits its analysis to the 28 largest companies conducting new field exploration (which does not include most OPEC countries).
Oil companies are no longer replacing reserves through new field discoveries, according to a new study of 28 leading oil companies active in international exploration*. The industry has reduced its exploration investment in recent years as a response to growing technical risks and uncertain oil prices. The result has been attractive returns for the companies but with diminished reserve replacement performance. High oil and gas prices now create an opportunity for companies to step up exploration activity as part of an overall effort to secure future supply.
“The study group cumulatively created over $100 billion in value through their exploration activities over the last 10 years, says study author Andrew Latham, Ph.D., vice president of upstream consulting for Wood Mackenzie. Oil companies, encouraged by this positive return on exploration expenditures, should increase their investment and improve their chances for reserve replacement. Otherwise, these companies which represent over 30 percent of total world oil supply, face not replacing their production with new fields. This could, over time, lead to and increased dependence on OPEC supplies and place upward pressure on energy prices.”
While higher energy prices have seen increased exploration profit margins in recent years, inflationary pressures, increased competition for exploration areas and capacity constraints are continuing to drive up finding costs for new reserves, which rose 50 percent in the last 10 years in an upward trend expected to accelerate sharply. In this climate, leading energy consultant Wood Mackenzie’s report “Exploration Strategy and Performance” finds that only the top performers among the companies studied have been able to replace reserves and create value through exploration.
“Not only is exploration more expensive now, but it has become more difficult to achieve success, as the more accessible fields have been discovered,” says Latham. “While the industry has not discovered any world-scale new plays since 2000 – equivalent to deepwater Angola, deepwater Gulf of Mexico, the Precaspian basin in Kazakhstan and the giant gas fields in Australia – companies have been very successful in creating value.”
Attractive contract terms, well-developed infrastructure and new pro-domestic drilling government policies are making North America, and the deepwater Gulf of Mexico in particular, one of the world’s exploration hot spots, along with Angola, Brazil and Nigeria.
Although the supermajors remain the industry’s top spenders with high exploration success, their share of industry exploration investment peaked in 1998, and now sits at 2/3 of this level, leading to 50-percent decline in overall reserves replacement.
Unlike a similar study done two years ago, improved margins meant all companies created value through exploration, some, however, have achieved considerably more success than the others, including top performers BP, Petrobras, Apache and Chevron.
Supermajor BP’s performance was driven by a long established strategy, focusing exploration in key areas, especially deepwater Gulf of Mexico and deepwater Angola, to lead the pack in value creation.
Petrobras’ success owes much to its preferential access to world-class opportunities in Brazil, investing more heavily in exploration than most of its national oil company peers, and driving greater value creation, despite average returns on investment.
In the independents category, Apache’s distinctive strategy of exploration closely integrated with acquisitions and business development activity has excelled in countries such as Egypt and Australia.
Chevron has been a major turnaround success, moving from relatively mediocre performance in the late 1990s to top class value creation since the ChevronTexaco merger.
In terms of overall performance, most companies want new field exploration investment to fulfill the sometimes-conflicting objectives of delivering attractive returns and contributing substantially to reserve replacement. The study categorizes company overall performance in four categories – Hunters, Gathers, Grazers and Foragers. Just 25 percent of the study group was categorized as Hunters, having fully replaced production through new field exploration, without compromising returns. Approximately half were considered to be Foragers, achieving neither high returns nor full reserve replacement.
Although these trends help predict the outlook for exploration over the next several years, there are many factors that can change the equation including new exploration acreage or opportunities in previously closed areas, emergence of new technologies, discovery of new plays and petroleum systems, and increased divergence in company growth strategies.
*The study defines “value creation” as the achievement of over 10 percent full cycle returns and limits its analysis to the 28 largest companies conducting new field exploration (which does not include most OPEC countries).
posted by Marcel at 12:01 AM
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