The global exploration scene has undergone a profound and painful change over the past two years. It is indisputably becoming a smaller industry but one that is striving toward being leaner, more efficient and eventually more profitable.

It is also an industry whose players have more alternatives at their disposal than in previous eras. According to analyst Andrew Latham, vice president of global exploration research at Wood Mackenzie, this slimmed-down sector will not rely, for example, upon conventional exploration as much as before. “There are now plenty of alternatives out there in tight and unconventional plays as well as greater recovery from existing assets negotiating for discovered resource opportunities and even in the mergers and acquisitions market. So for some companies those alternatives will play a greater role,” he said.

Conventional Exploration

But conventional exploration remains a perfectly viable growth and renewal option, “particularly for companies that are good at it,” Latham told delegates late last year at the Petroleum Exploration Society of Great Britain’s Petex 2016 event in London. The sector’s exploration performance will be a “massive contributor” going forward, he added.

Latham described Egypt as the “single most significant country of recent times,” thanks to its outstanding success with finds in completely new plays offshore such as Zohr, and he labeled Eni “by far the leader” when looked at through a corporate exploration lens over the last few years.

Diverse Portfolios

This is thanks largely to Eni’s diverse but still almost entirely conventional exploration portfolio.

"If one play fails, we have the flexibility to go to others."

Luca Bertelli, Eni’s chief exploration officer, also spoke at Petex and outlined the company’s strategy of spreading the exploration risk over many geological plays worldwide. “We do not like or want to be exposed to just one play,” he said. “If one play fails, we have the flexibility to go to others. We explore in 43 countries around the world, and we keep a constant focus on our exploration portfolio. It has been renewed continually, always following a balanced approach.” Between 2006 and 2015 Eni discovered about 14 Bboe of resources from new exploration activity, Bertelli added.

Latham described the global upstream industry as being “in a period of relative diversity in terms of where exploration is enjoying its greatest successes. As well as the deepwater theme being pretty important, the other characteristic of many of those is that they are new plays.”

New Plays

Although the industry is now more risk-averse, he added, the reality is that a lot of the biggest, best and most valuable exploration successes seen during the downturn are coming from new or emerging plays.

The conventional volumes being found are admittedly smaller than at almost any time over the last 50 years, particularly for liquids. But Latham pointed out that by normalizing the trends over that period, the volumes found over the past couple of years in particular “do not really stand out as being the worst. In reality, a lot of exploration’s recent decline is nothing more than the fact that it’s drilling fewer wells during this downturn.”

Each company that drills wells can expect to find 25 MMboe per exploration bore on average, with appraisals to grow those volumes, Latham said.

Global exploration spending in 2017 is forecast by WoodMac to be about the same as in 2016 at about $40 billion, which is less than half the figure from two or three years ago. “That decline is steeper than we have seen across the industry in general. Through much of recent history exploration spending was about 18% of the industry’s capital investment, but now it’s down to about 13%,” Latham said.

This decline in spending, he said, did not mean a subsequently similar drop in activity levels; rather, it reflected the sector’s increased focus on value. There was a period, Latham admitted, during the times of higher oil prices “where almost anything went, and a lot of companies were tolerating high levels of risk and cost in the hope that high prices would rescue them.” That is certainly no longer the case today, with operators targeting exploration prospects—whether onshore, offshore, conventional or unconventional—with more care but paradoxically at greater speed.

Shorter Time Frames

This focus on shortening time frames includes factoring in less risk, which can be above or below ground, and less activity in very high-cost exploration themes such as the offshore Arctic.

“Don’t take this as being a retreat from new plays and new frontiers,” Latham said. “Because absolutely what we’re seeing is that new plays and frontiers have a critical role behind a lot of those volumes that are being discovered. But it’s choosing more carefully among those opportunities.”

Bertelli illustrated how operators are shortening the time to first oil or gas for new discoveries by pointing out that the huge Zohr Field was found in August 2015, sanctioned just five months later and is expected to flow first gas by year-end 2017. “Today we have already drilled six wells [that were] all successful and confirmed the volume of gas in place at 30 Tcf [849 Bcm]. Zohr has fantastic petrophysics. We were in the right place at the right time to discover a giant gas field in Egypt,” he said.

Role Of Governments

Such golden opportunities need to emerge with governments “having a role to play,” Latham said. There is much fiscal change taking place around the world related to oil and gas after much of the previous decade saw countries toughen up their terms.

“Now it’s more about industry-specific reductions in taxation. These have become the majority in recent months, becoming more attractive. There are dozens of places around the world where there are ongoing discussions about future fiscal terms, and one of the most common motivations for this is where the host government is looking to encourage more exploration. That’s the driver,” he said.

Bertelli backed him on this, urging governments to continue making their acreage more attractive. “Investments will be clearly redirected into countries that will incentivize exploration,” he said. The company has almost 300,000 sq km (115,831 sq miles) of net exploration acreage globally, so it has plenty of choice over where to spend its money.

Acreage Renewals

Related to this is the theme of renewing acreage portfolios at lower cost, particularly for the stronger global exploration players.

It was pretty obvious, Latham said, that if companies “are having to make huge signature bonus payments to capture high-quality prospective acreage, when you stick those payments into any full-cycle economics you are almost hurt from the start. Now such payments are rare and largely avoided by most players. We, as an industry, have an opportunity to renew portfolios without taking that hit from the agency capture costs.”

He flagged up Statoil as the “company to watch” in terms of the greatest net acreage captured in highimpact plays since the start of 2015. “The strongest companies in our industry are backing themselves with good options in terms of exploration that lies in the years ahead,” Latham said.

He concluded by saying there would be a “less diverse” corporate landscape going forward. “There will be the Eni [companies] of this world—those that can make a success of conventional exploration. But there will be others that will retreat to the onshore resource plays, and we will watch with interest for what the national oil companies will do also, as there’s a strong case for many of them to assist with conventional exploration as well. They’ve got great acreage portfolios,” he said.

The upshot is that the upstream industry “is drilling in a greater diversity of plays around the world. Mature plays, new plays, deepwater plays, onshore plays, carbonates, whatever. It would be rather surprising if all that diversity ran into a buffer at the same time,” he said.