Oil and Gas Exploration to Return to Profitability in 2017


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A new study by Wood Mackenzie on what to expect from global oil and gas exploration in the year ahead shows that exploration should return to profitability in 2017 after five years of only single-digit returns.

Wood Mackenzie’s analysis of the 2017 global exploration outlook showed that exploration in 2017 will continue its transformation to a smaller, and more efficient industry.

The new report titled, “Global Exploration: What to look for in 2017,” indicates that overall investments will at best match 2016 year’s spend of around $40 billion, and may yet fall further.
On the bright side, the analysis showed that lower costs mean well counts may hold up close to 2016 numbers. Flat budgets should mean exploration’s headcount cuts are now mainly in the past.

According to Wood Mackenzie, the oil majors and a handful of bolder independents will drill most of the wells to watch, as in both 2015 and 2016, while it is expected that the best discoveries would come from new plays and frontiers, despite greater emphasis on infrastructure-led drilling from many explorers.

Vice president of Exploration at Wood Mackenzie, Dr Andrew Latham, said the oil and gas industry had a good chance of achieving double digit returns in 2017.

“Smarter portfolio choices and lower costs are already paying off. More than half of the volumes are expected to be found in deep water. Here some well costs will fall to $30 million or less, with full-cycle economics that are positive at less than $50 per barrel,” Latham said.

According to Wood Mackenzie’s report, the industry has cut exploration deeper than other upstream spending.
“The industry is focusing on acreage capture and re-loading for the longer term. Companies willing to sign acreage with firm 2017 wells may be spoilt for choice. A spate of new licensing in outer slope plays will continue as explorers digest news of better-than-expected reservoir quality and source rock potential in these ultra-deepwater settings,” Latham added.

“Its share of upstream investment will dip to a new low of just eight per cent in 2017. An eventual return to historic norms – around one dollar in seven – depends on oil price recovery. Wood Mackenzie expects the Brent price to rise sharply from 2019, averaging $77 per barrel in real terms for the year. If this happens, then recovery in exploration spend will follow a year or two later,” said the report.

Some of the emerging exploration themes in 2017, according to Wood Mackenzie, include: exploration for pipe gas opportunities near under-supplied markets such as parts of North Africa, Eastern Europe and Latin America; and over-supplied LNG plays that will be de-emphasised.

The report also argued that high-cost frontiers, such as the ice-impacted offshore Arctic and extreme high pressure/high temperature plays, will be shunned.

“After a decade in the doldrums, the majors’ returns from conventional exploration improved to nearly 10 per cent in 2015. The rest of the industry is heading in the same direction. Fewer, better wells promise a brighter future for explorers,” Latham added.