The exploration sector heads into 2020 facing increasing pressure from the energy transition. While capital discipline and portfolio high-grading remain key, the shift to a low-carbon world poses a fundamental challenge, and this year is likely to show the sector’s direction of travel in the years ahead.
“Some investors are questioning the need to explore at all given the vast discovered resource base yet to be developed,” Alana Tischuk, from Wood Mackenzie’s global exploration team, said. “However, lower-carbon opportunities very often have lower costs and better economics. The challenge is to achieve success at scale.”
“Companies will drill in the hope of finding better resources than those they already have – lower cost barrels with a higher margin,” Ms Tischuk added.
Ms Tischuk said that, while new opportunities exist, these large, valuable prospects lie mostly in new and emerging plays. The majors are likely to remain prominent participants in high-impact exploration plays. NOCs, which are less exposed to investor concerns, may also be able to step up their exploration game.
Some companies may announce a strategic move towards acquisition-led growth or new energy businesses. Others are boosting their gas portfolios, viewing it as the fuel that will power the energy transition.
“The move towards gas shows that exploration is not mutually exclusive with a low-carbon future,” Ms Tischuk noted. “A diverse inventory of low-breakeven opportunities will be key as the energy transition unfolds. Those prospects with a clear route to commercialization are likeliest to be drilled.”
One of the characteristics of successful, independent explorers is quickly exiting plays where they have limited early success, Ms Tischuk added.
“Traditionally, majors have held their acreage to the end of term, but we expect them to adopt the swift turnaround approach of their smaller, nimbler cousins. Many of the areas the majors have added are ultra-frontier, giant blocks, added for minimal commitments. This trend of fast turnover of new acreage may not become apparent in 2020, but instead materialize in the next three years or so.”
Globally, Wood Mackenzie expects 500-600 wildcats to be completed during 2020, adding around 15 billion BOE resources, in line with industry performance since 2014. Investment should hold steady at between $25-30 billion, similar to that spent in 2019. However, spend could slip by as much as 5-15% as cost efficiencies continue.
Ms Tischuk said the Americas will continue to see increased levels of exploration this year, particularly Brazil and Mexico, as will sub-Saharan Africa. Total has high hopes for South Africa after making the giant Brulpadda gas condensate discovery in 2019. The company plans to drill up to four exploration wells in the country in 2020, three targeting oil in the deepwater Outeniqua Basin. The company will also drill its giant (2 billion bbl) Venus oil prospect in deepwater Namibia. Shell and Kosmos are also among the companies hunting giants offshore Namibia in 2020.
“Drilling in Guyana will continue both in the prolific Stabroek block and beyond it. In Suriname, where Apache made the giant Maka Central discovery at the end of last year, we expect wells on four blocks in 2020, operated by Apache, Petronas, Kosmos and Tullow,” Ms Tischuk noted.
Russia may once again see some of the largest volumes overall as domestic companies continue their exploration of giant gas plays in the Arctic offshore and emerging offshore oil plays in the far east.
“The move from Big Oil to Big Energy is under way, but building materiality will take time,” Ms Tischuk said. “How will the Majors sustain themselves through the energy transition? Exploration budgets may shrink for those that choose to focus on resource exploitation. Others, however, will shift their portfolios to the lower end of the cost curve and focus on high-impact exploration.”
Overall, the NOCs are well placed to step into the space left by retreating IOCs. Resource-rich NOCs have advantaged positions at home, but many have lofty expansion goals that will be tough to meet with domestic drilling alone. Qatar Petroleum is one that has already sought to go international. Wood Mackenzie expects other NOCs to follow Qatar Petroleum’s lead in looking for international exploration opportunities.
Increasing output and investment are key for Chinese NOCs as they look to meet steep growth targets. International exploration will be required given the scale of future production decline, and high-impact acreage capture in Latin America and West Africa is likely. Meanwhile, gas exploration will be key for Southeast Asian NOCs looking to grow into the energy transition by adding cleaner energy to their portfolios.
Ms Tischuk said that exploration success will continue to be concentrated in the hands of relatively few companies. Fewer companies are drilling fewer wells and the corporate landscape has narrowed by 50% since 2013. Many of the companies being squeezed out are small independents and private equity backed companies that lack the cash or the risk appetite to stay in the longer-term exploration game. Exploration M&A levels will likely remain low in 2020.