As the way the world consumes energy shifts more and more, there is a growing concern from investors about just how much of a demand there will be for conventional oil and gas in the future.
That is one of the realities that may be causing conventional oil and gas discoveries to sink to their lowest levels in seven decades according to a new report released earlier this month by IHS Markit. The overwhelming reason for the downturn in discoveries is declining prices, the report said, but there is at least some concern about what energy consumption may look like as renewables become a bigger part of the world’s energy mix.
The report, titled “IHS Markit Conventional Exploration Results in Early 2018 Through 2019: No Rebound in Activity or Results,” said a significant rebound in discoveries may not happen. That’s because since 2014 there has been an increased emphasis on exploring less risky maturing basins and short cycle-time unconventional projects.
Companies are placing an emphasis on smaller basins in which they can cut cycle time from 10 years to three years to even a year. The average discovery size of these early lifecycle basins is approximately 210 million barrels (MMbbl) versus 25 MMbbl from mature basins discovered during the last 10 years.
“If you see all of these projections of demand starting in the 2030s or some cases the 2020s because everyone is going to go to renewables and I won’t need oil and gas after 2025 or 2030,” said IHS senior advisor Keith King, who is also a lead author of the IHS Markit E&P trends analysis, in an interview with HartEnergy.com. “That’s more on the liquefied gas.
“So the thought process is why go out and drill an expensive wildcat in a frontier basin that it takes five years to appraise if it’s successful and four years to get it approved for development and then takes 10 years to develop. The demand for production can start to decline by the time it gets going. So it seems better to go after shorter cycle opportunities.”
The de-emphasis on new discoveries due to alternate energy sources and declining interest by investors in taking financial risks along with the declining global prices have played a role in the drop in discoveries.
“All of that kind of sticks together, no one articulates it quite that way,” King said. “But to think about it, it makes sense. Why would I invest in something that isn’t going to be producing in 20 to 40 years the demand may not be there?
“The other thing is the understanding about the demand structure versus in investment. If you are concerned about interest rates going forward you buy shorter term bonds.
“People are also starting to invest more in renewables, not a significant amount but they are starting to say I’ll build some wind farms and do some of these other things,” King continued. “This is the first time in the 40 years I’ve been in this business that we have had such an existential threat from another source of energy like wind and solar. Before, after the 2009 turn, after the downturn in 1999 and 1980 and 1986 we all knew what we were going to do when the price recovered but now it’s not as clear cut.”
King does leave open the possibility of a rebound in discoveries, it just may not come back in the same robust way as did after past downturns. He said the key is understanding why discoveries aren’t rebounding right now.
Concerns about constraining carbon and slowing climate change have become a game changer in the industry and King says those concerns will cause people to second-guess oil in the next 20 to 25 years.
“If those things go away or one day we wake up and say solar and wind can’t provide our energy we need to have oil and gas production, if that changes then I think you will start to see an increase in conventional exploration,” he said.
Whiting Petroleum, and Hess Corp. espoused optimism about the Bakken, while others talked about the reinvented San Juan. Meanwhile, Extraction Oil & Gas is ready to deal with SB-181.
Mezzanine financing usually remains a reliable standby when the broader capital markets are swinging shut.
With deal volume down, investors sidelined and volatility all about, getting deals across the finish line is getting harder and harder.