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Wood Mackenzie: Global Exploration: 5 Things to Look for in 2018

2018's mantra will be to keep the focus on simpler wells. With investment down and competition up, companies will focus on newly proven plays and frontiers, and capturing new acreage for the longer term.

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1. Increased competition despite fewer players

Shrinking numbers of explorers does not mean less competition as key players are on the hunt for similar exploration opportunities. We are concerned that sharper competition might erode margins as the Majors, a handful of NOCs and a few independents compete to bag high quality opportunities. We believe the most favored plays will be deepwater sweet spots promising high resource density, rapid commercialization and breakeven prices below US$50/bbl.

2. Is limited investment in exploration the new normal?

Does exploration create value? Years of lacklustre returns mean that not all management teams are convinced. Exploration’s share of upstream investment has slipped to below 10% since 2016 and is not about to recover. This could be the new normal, with the days of one dollar in six or seven going to exploration forever in the past.

We expect global 2018 investment in conventional exploration and appraisal to be around US $37 billion – 7 % less than 2017 spend and over 60% below its 2014 peak.

3. Big wells mainly in deepwater and frontiers

2018's mantra will be to keep the focus on simpler wells. More than half of all oil and gas volumes will again be found in deepwater, while explorers will steer clear of high-cost areas, difficult logistics and slow-to-drill wells. Although risk tolerance will strengthen, prospects with less than a one-in-ten chance of success are unlikely to be drilled.

4. A race for quality

As the industry plans for the future, a core focus will be capturing new acreage for the longer term. Some will want to position themselves for a lower breakeven future, while others will renew portfolios after a long period of inventory depletion. There will be approximately 40 licensing rounds during the year, and we expect strong competition for quality acreage as key players compete for a smaller pool of opportunities. Licensing rounds in Brazil and Mexico will be the ones to watch.

5. Long overdue move back to profitability

We expect the industry to achieve double-digit returns in 2018, with lower costs and redesigned portfolios already paying off. Many exploration costs have halved since a 2014 peak, thanks to a focus on achieving efficiencies while avoiding complexity.

However, the demand for quality acreage could push up prices. Can explorers hold their discipline to avoid value erosion as competition intensifies in hot plays?

In 2018, the industry will drill fewer, better wells focused on plays that are commercially attractive. After a difficult few years, the economic outlook is at last looking brighter for explorers.

Report can be obtained here

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