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May 2018
What is the best exploration strategy for the recovery? Executive summary The exploration industry is searching for a new way forward. As prices recover, companies want to retain their hard-won new discipline and to avoid mistakes of the past. Explorers are spending less and drilling fewer wells. This means smaller volumes found and a diminished role in reserve replacement. Two questions need an answer. Firstly, does exploration still have a future? As the industry eyes the coming Energy Transition, not everyone is convinced the drill bit still offers the best way to replace volumes and drive growth. A decade of poor economic returns fuels such doubts. Current exploration spend will replace less than one quarter of global oil and gas production. But there are still true believers. Future upstream renewal strategies might have exploration accountable for anywhere between zero and 100%. Secondly, for those that do continue to explore, which strategic themes are best? The basic menu is unchanged by the downturn, but the relative merits of different themes have moved. Explorers must choose one or more of the following:
•
High-impact deepwater
•
High-impact conventional onshore and shelf
•
Near-field conventional
•
New unconventionals
Each theme has its pros and cons. Many companies traditionally balanced their exploration investment across all such themes. But the future could become much more polarised. Because exploration’s role will be smaller, success is achievable with morefocused strategies. Now might be a good time to stop backing all horses and pick a winner. The largest explorers, including the Majors, prioritise materiality of volume and value. Their need for scale can lead to hybrid strategies that span all themes. But even this group has become narrower in its choices. All are increasing focus on deepwater and most also target unconventionals. Smaller companies with growth strategies wholly or largely dependent on exploration are also zooming in on deepwater. Highimpact shelf and onshore plays are rarer, but can be important in some regions such as Mexico and Norway.
What is the best exploration strategy for the recovery? Few companies can specialise exclusively on near-field exploration. Volumes are just too small. This theme is more usually part of a broader strategy to improve recovery of producing assets and/or drive growth through inorganic means.
The oil and gas industry expects less from exploration Four years of low prices have taken their toll. The exploration industry now emerging from this downturn looks quite different. It is smaller with fewer active companies. Explorers spend less, drill fewer wells, and find smaller volumes. So companies must revise their goals for exploration, usually downwards. We see widespread scaling-back of exploration’s role right across the industry. A decade ago, many IOCs looked to conventional discoveries to fully replace production. But years of poor exploration performance have since dampened such expectations. Most companies had long been struggling to achieve acceptable economic returns. Costs were too high, and too few discoveries converted into production. Future new discoveries will be insufficient to replace everyone’s production. We forecast global conventional exploration will find less than 20 billion boe of resource per year for the next several years. Not all will be commercial. This resource might convert to 10-15 billion boe commercial reserves per year. Such volumes would replace barely one-quarter of global oil and gas production. Even if it is the IOCs that own most of these future discoveries, they will still need other renewal options. Conventional exploration must work with and complement M&A, discovered resource opportunities, enhanced recovery and unconventionals. Most of the Majors are setting exploration strategies designed to replace up to 50% of production. Only a few specialist E&P companies, such as Cairn, Kosmos and Tullow, continue to rely solely on conventional exploration. These ‘true believers’ see exploration as the way to value creation and have been successful in the past. Many Large Caps, including previously high-profile wildcatters such as Anadarko and Noble Energy, now see conventional exploration as subordinate to onshore Lower 48 unconventional plays.
New exploration goals need new strategies Each company that resets its exploration goals also needs to revisit its exploration strategy. Re-examination and discussion of different options is widespread. Explorers know that any return to the old ways – low returns – would not be welcome. Whilst the downturn has trimmed ambition, it has not changed the menu of possible strategic themes. In broad terms, companies that choose to explore must pick one or more of the following themes:
•
High-impact deepwater
•
High-impact conventional onshore and shelf
•
Near-field conventional
•
New unconventionals
The new price and costs environment changes the relative merits of these different themes. Today’s oil price of US$70+ is not yet a planning assumption, but it is a price which makes more discoveries economic. Traditionally, many explorers would spread their exploration investment across all themes. Many saw virtue in this balanced approach, avoiding all eggs in one basket. The future could become much more polarised. Because exploration’s role will be smaller, success is achievable with more-focused strategies.
Insight - 15 May 2018
Page 2 of 7
What is the best exploration strategy for the recovery?
Four possible exploration themes compared Here we summarise the main strategic themes for explorers, outlining some key arguments for and against. We characterise four broad categories based on impact and water depth. These simplify the complex reality of exploration strategies which can be defined according to a myriad of other factors including materiality, hydrocarbon phase, timing, risk, geography, geopolitics, subsurface and existing portfolio. Our four themes are generic. Every company has its own specific factors and sources of competitive advantage to consider. Fit with existing portfolios, particular competencies or preferential access can be critical. So too are timing considerations. Those with the cushion of a robust near-term production outlook will take a different approach to those that face greater urgency to replace output.
Theme one: high-impact deepwater exploration Deepwater exploration is the highest-impact strategy. These opportunities stand out on all volume metrics. Success can be material enough to transform even the largest company. Wells are expensive but economies of scale keep a lid on unit costs and allow breakeven prices to be competitive with shelf and onshore opportunities. But deepwater is not for everyone. High well costs make it difficult for companies with modest budgets to spread risks. Only a few companies have the financial strength to operate deepwater developments. And as oil prices recover, intense competition for the best new licences is leading to aggressive bids with the potential to seriously erode returns.
The case for high-impact deepwater exploration Positives
Negatives
Large share of overall volumes - over 110 billion barrels in past decade (43% of volumes in global new discoveries)
Long lead times - average eight years from discovery to first production, double the duration elsewhere, with significant erosion of value and risk of budget blowout
Large discovery sizes - average find over 200 mmboe, more than five times larger than finds made elsewhere
High costs per well - average exploration spend per well of US$133 million (including non-drilling costs) over past ten years is nearly five times non-deepwater costs
Attractive success rates - larger prospects does not mean
Few capable operators - only the Majors, a few NOCs and
higher risks, with ten-year average success rate of 38%
a handful of specialist E&Ps have a track record of
very similar to wildcats elsewhere
successful large development projects
Reasonable finding and development costs - economies
Maximum capital exposure - average project costs of
of scale keep ten-year average unit costs (US$15/boe) not
US$3 billion are an uncomfortable concentration of
far above onshore (US$13/boe) and below shallow offshore (US$17/boe)
execution risk for smaller players, and limit investment flexibility for all companies
Government support - most countries recognise the
High access costs - recent licensing rounds with multi-
additional technical challenge and offer fiscal incentives
hundred million dollar signature bonus bids confirm very
and longer licence durations
strong competition for proven sweet spots such as Brazil
Source: Wood Mackenzie
Insight - 15 May 2018
Page 3 of 7
What is the best exploration strategy for the recovery?
Theme two: high-impact onshore and shelf exploration Away from deepwater, high-impact conventional exploration suggests a compelling mix of materiality and low costs. But most of the proven basins have been readily accessible for decades and are now very mature. Explorers choosing this theme will usually need to compromise, accepting high subsurface risk, challenging logistics or tough fiscal terms. One approach is to hunt for new plays in old basins. Geologically-complex basins might reward new ideas or better seismic. The best is example of recent years is Johan Sverdrup in Norway. Other good opportunities may arise where countries open new acreage to international companies for the first time. The 2017 discovery of Zama in Mexico is a good example.
The case for high-impact onshore and shelf exploration Positives
Negatives
Low exploration costs - well costs much cheaper than in deepwater, allowing companies with modest budgets to
Quality prospects in short supply - large and giant discoveries are rare away from the NOC-dominated basins
spread risk across a wide portfolio
of the Middle East
Low development costs - particularly onshore, with greater scope to phase developments than in deepwater
Low success rates - remaining large prospects are usually in untested plays or stratigraphic traps with high subsurface risk
Technology transfer from unconventional plays onshore potential in overlooked low permeability reservoirs
Difficult operating environments - much of the best onshore prospectivity is hard to explore because of
may now be commercial using new production technologies
remoteness, or terrain such as rain forest or mountainous fold belts, and much of the offshore potential lies in Arctic regions
Short lead times - scope to quickly monetise discoveries
Harsh fiscal terms - especially in the Middle East
Diverse corporate landscape - opportunity-rich business environment with large numbers of large and small
Limited access to onshore super-basins - NOC strangleholds across much of the Middle East, Russia,
companies
Venezuela, North Africa
Source: Wood Mackenzie
Theme three: near-field conventional exploration Many observers, ourselves included, thought near-field exploration would be the obvious refuge of the exploration industry in the downturn. Infrastructure owners are motivated to prolong the life of their assets. Companies would reduce risk tolerance and shorten their time horizons, and be attracted to this theme by the promise of high success rates and short development lead times. Volumes will always be small but can include some of the highest-value barrels available anywhere. That this has not really happened reflects the great maturity of most producing basins. Many remaining prospects are barely above minimum economic field sizes, even as satellite projects. The very small size of these discoveries makes finding costs high and many struggle to be commercialised. This problem can be particularly acute for explorers that do not own the production or export infrastructure, with tariffs further eroding margins.
Insight - 15 May 2018
Page 4 of 7
What is the best exploration strategy for the recovery? The case for near-field conventional exploration Positives
Negatives
High success rates - around 40% of all near field exploration wells make a discovery
Small volumes - average discovery sizes of less than 15 mmboe limit impact on production and reserves
Short lead times - average of just over two years from discovery to first production
High finding costs - resource discovery costs of over US$5/boe are more than double global average
Leverages infrastructure - operators have scope to extend the productive life of their existing fields
High development costs - marginal field volumes are often a bigger problem than any gains from sharing infrastructure
Adds high value barrels - larger near-field finds can have very healthy development economics
Poor full-cycle returns - high costs and below-average commercialisation of discoveries cause average IRR to be 5% lower than high-impact exploration
Benefits from production tax shelter - reducing post-tax exploration costs and allowing rapid spend recovery
Poor visibility of success - can be hard to distinguish from incremental development, potentially an issue where exploration requires investor support
Source: Wood Mackenzie
Theme four: unconventional exploration Unconventional plays have been the great disruptor for the whole upstream industry, not just exploration. Many of the larger companies have established huge positions through inorganic means, with growth achieved through drill-out of proven plays. Exploration of new plays can be a secondary part of the unconventionals growth story. Large volumes and low subsurface risks are the main attractions. But questions on full-cycle returns persist, especially once high (and rising) land access costs are factored in.
Insight - 15 May 2018
Page 5 of 7
What is the best exploration strategy for the recovery? The case for unconventional exploration Positives
Negatives
Large resource potential - commercial plays hold volumes to match the largest of conventional prospects
Rising costs - inflation for many critical services starting to increase in key basins as active rig counts grow
Investment flexibility - easy to control timing of spend and phasing of drilling and completion schedules
High access costs - inflated land and asset prices in many of the best plays undermine value for new entrants
Short lead times - time to first production typically measured in months not years
Marginal economics away from sweet spots - reduced IP rates and smaller EUR severely erode returns
Low geological risk - few surprises through drill out of known plays, although uncertainty will increase as
International disappointments - outside North America, many basins and plays have been drilled but very few have
companies move beyond familiar sweet spots
achieved substantial commercial production
Mainly North America location - US opportunities avoid complex international above-ground risks that can deter
Negative public opinion - leading to outright drilling bans in some US States and international locations
investors
Source: Wood Mackenzie
Which strategic themes to choose? There is no single exploration theme that wins outright. Each company’s goals and objectives determine its optimum mix of strategic themes. Key targets are contribution to overall reserve replacement and timing of associated production growth. Each company will have its own idea of what exploration success looks like. And each can leverage its own unique mix of capabilities, portfolio and sources of competitive advantage. The following table illustrates the general fit of the four exploration themes with a range of typical performance goals.
Alignment of exploration themes with different performance goals
Source: Wood Mackenzie. Green = primary theme supporting metric; Amber = theme can locally support metric; Red = theme unlikely to support outperformance against metric.
Insight - 15 May 2018
Page 6 of 7
What is the best exploration strategy for the recovery? The Majors and other large explorers need scale. This can lead to hybrid strategies that spread across all exploration themes. But as these companies have dialled back their materiality ambitions, they have become more polarised in their choices. Almost all are increasing focus on deepwater. Most also target unconventionals. Many international E&Ps have growth strategies wholly or largely based on exploration. Most are also focusing on deepwater, such as Cairn Energy in Senegal and Kosmos in Mauritania/Senegal. There are local examples targeting high-impact shelf and onshore plays, such as Lundin in Norway, Premier in Mexico and Tullow in Kenya. Few companies focus exclusively on near-field exploration. This theme is mainly part of a broader strategy to improve recovery of producing assets and/or drive growth through inorganic means.
Fit of exploration themes with company peer groups
Source: Wood Mackenzie. Company peer groups based on Corporate Benchmarking Tool. Green = primary theme; Amber = secondary theme; Red = not usually a critical part of the group’s exploration strategy.
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Americas
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These materials, including any updates to them, are published by and remain subject to the copyright of the Wood Mackenzie group ("Wood Mackenzie"), and are made available to clients of Wood Mackenzie under terms agreed between Wood Mackenzie and those clients. The use of these materials is governed by the terms and conditions of the agreement under which they were provided. The content and conclusions contained are confidential and may not be disclosed to any other person without Wood Mackenzie's prior written permission. Wood Mackenzie makes no warranty or representation about the accuracy or completeness of the information and data contained in these materials, which are provided 'as is'. The opinions expressed in these materials are those of Wood Mackenzie, and nothing contained in them constitutes an offer to buy or to sell securities, or investment advice. Wood Mackenzie's products do not provide a comprehensive analysis of the financial position or prospects of any company or entity and nothing in any such product should be taken as comment regarding the value of the securities of any entity. If, notwithstanding the foregoing, you or any other person relies upon these materials in any way, Wood Mackenzie does not accept, and hereby disclaims to the extent permitted by law, all liability for any loss and damage suffered arising in connection with such reliance. Please also note that the laws of certain jurisdictions may prohibit or regulate the dissemination of certain types of information contained in these materials, such as maps, and accordingly it is your responsibility to ensure that any dissemination of such information across national boundaries within your organisation is permitted under the laws of the relevant jurisdiction. Copyright © 2015, Wood Mackenzie Limited. All rights reserved. Wood Mackenzie is a Verisk Analytics business.
Insight - 15 May 2018
Page 7 of 7
What is the best exploration strategy for the recovery? Executive summary The exploration industry is searching for a new way forward. As prices recover, companies want to retain their hard-won new discipline and to avoid mistakes of the past. Explorers are spending less and drilling fewer wells. This means smaller volumes found and a diminished role in reserve replacement. Two questions need an answer. Firstly, does exploration still have a future? As the industry eyes the coming Energy Transition, not everyone is convinced the drill bit still offers the best way to replace volumes and drive growth. A decade of poor economic returns fuels such doubts. Current exploration spend will replace less than one quarter of global oil and gas production. But there are still true believers. Future upstream renewal strategies might have exploration accountable for anywhere between zero and 100%. Secondly, for those that do continue to explore, which strategic themes are best? The basic menu is unchanged by the downturn, but the relative merits of different themes have moved. Explorers must choose one or more of the following:
•
High-impact deepwater
•
High-impact conventional onshore and shelf
•
Near-field conventional
•
New unconventionals
Each theme has its pros and cons. Many companies traditionally balanced their exploration investment across all such themes. But the future could become much more polarised. Because exploration’s role will be smaller, success is achievable with morefocused strategies. Now might be a good time to stop backing all horses and pick a winner. The largest explorers, including the Majors, prioritise materiality of volume and value. Their need for scale can lead to hybrid strategies that span all themes. But even this group has become narrower in its choices. All are increasing focus on deepwater and most also target unconventionals. Smaller companies with growth strategies wholly or largely dependent on exploration are also zooming in on deepwater. Highimpact shelf and onshore plays are rarer, but can be important in some regions such as Mexico and Norway.
What is the best exploration strategy for the recovery? Few companies can specialise exclusively on near-field exploration. Volumes are just too small. This theme is more usually part of a broader strategy to improve recovery of producing assets and/or drive growth through inorganic means.
The oil and gas industry expects less from exploration Four years of low prices have taken their toll. The exploration industry now emerging from this downturn looks quite different. It is smaller with fewer active companies. Explorers spend less, drill fewer wells, and find smaller volumes. So companies must revise their goals for exploration, usually downwards. We see widespread scaling-back of exploration’s role right across the industry. A decade ago, many IOCs looked to conventional discoveries to fully replace production. But years of poor exploration performance have since dampened such expectations. Most companies had long been struggling to achieve acceptable economic returns. Costs were too high, and too few discoveries converted into production. Future new discoveries will be insufficient to replace everyone’s production. We forecast global conventional exploration will find less than 20 billion boe of resource per year for the next several years. Not all will be commercial. This resource might convert to 10-15 billion boe commercial reserves per year. Such volumes would replace barely one-quarter of global oil and gas production. Even if it is the IOCs that own most of these future discoveries, they will still need other renewal options. Conventional exploration must work with and complement M&A, discovered resource opportunities, enhanced recovery and unconventionals. Most of the Majors are setting exploration strategies designed to replace up to 50% of production. Only a few specialist E&P companies, such as Cairn, Kosmos and Tullow, continue to rely solely on conventional exploration. These ‘true believers’ see exploration as the way to value creation and have been successful in the past. Many Large Caps, including previously high-profile wildcatters such as Anadarko and Noble Energy, now see conventional exploration as subordinate to onshore Lower 48 unconventional plays.
New exploration goals need new strategies Each company that resets its exploration goals also needs to revisit its exploration strategy. Re-examination and discussion of different options is widespread. Explorers know that any return to the old ways – low returns – would not be welcome. Whilst the downturn has trimmed ambition, it has not changed the menu of possible strategic themes. In broad terms, companies that choose to explore must pick one or more of the following themes:
•
High-impact deepwater
•
High-impact conventional onshore and shelf
•
Near-field conventional
•
New unconventionals
The new price and costs environment changes the relative merits of these different themes. Today’s oil price of US$70+ is not yet a planning assumption, but it is a price which makes more discoveries economic. Traditionally, many explorers would spread their exploration investment across all themes. Many saw virtue in this balanced approach, avoiding all eggs in one basket. The future could become much more polarised. Because exploration’s role will be smaller, success is achievable with more-focused strategies.
Insight - 15 May 2018
Page 2 of 7
What is the best exploration strategy for the recovery?
Four possible exploration themes compared Here we summarise the main strategic themes for explorers, outlining some key arguments for and against. We characterise four broad categories based on impact and water depth. These simplify the complex reality of exploration strategies which can be defined according to a myriad of other factors including materiality, hydrocarbon phase, timing, risk, geography, geopolitics, subsurface and existing portfolio. Our four themes are generic. Every company has its own specific factors and sources of competitive advantage to consider. Fit with existing portfolios, particular competencies or preferential access can be critical. So too are timing considerations. Those with the cushion of a robust near-term production outlook will take a different approach to those that face greater urgency to replace output.
Theme one: high-impact deepwater exploration Deepwater exploration is the highest-impact strategy. These opportunities stand out on all volume metrics. Success can be material enough to transform even the largest company. Wells are expensive but economies of scale keep a lid on unit costs and allow breakeven prices to be competitive with shelf and onshore opportunities. But deepwater is not for everyone. High well costs make it difficult for companies with modest budgets to spread risks. Only a few companies have the financial strength to operate deepwater developments. And as oil prices recover, intense competition for the best new licences is leading to aggressive bids with the potential to seriously erode returns.
The case for high-impact deepwater exploration Positives
Negatives
Large share of overall volumes - over 110 billion barrels in past decade (43% of volumes in global new discoveries)
Long lead times - average eight years from discovery to first production, double the duration elsewhere, with significant erosion of value and risk of budget blowout
Large discovery sizes - average find over 200 mmboe, more than five times larger than finds made elsewhere
High costs per well - average exploration spend per well of US$133 million (including non-drilling costs) over past ten years is nearly five times non-deepwater costs
Attractive success rates - larger prospects does not mean
Few capable operators - only the Majors, a few NOCs and
higher risks, with ten-year average success rate of 38%
a handful of specialist E&Ps have a track record of
very similar to wildcats elsewhere
successful large development projects
Reasonable finding and development costs - economies
Maximum capital exposure - average project costs of
of scale keep ten-year average unit costs (US$15/boe) not
US$3 billion are an uncomfortable concentration of
far above onshore (US$13/boe) and below shallow offshore (US$17/boe)
execution risk for smaller players, and limit investment flexibility for all companies
Government support - most countries recognise the
High access costs - recent licensing rounds with multi-
additional technical challenge and offer fiscal incentives
hundred million dollar signature bonus bids confirm very
and longer licence durations
strong competition for proven sweet spots such as Brazil
Source: Wood Mackenzie
Insight - 15 May 2018
Page 3 of 7
What is the best exploration strategy for the recovery?
Theme two: high-impact onshore and shelf exploration Away from deepwater, high-impact conventional exploration suggests a compelling mix of materiality and low costs. But most of the proven basins have been readily accessible for decades and are now very mature. Explorers choosing this theme will usually need to compromise, accepting high subsurface risk, challenging logistics or tough fiscal terms. One approach is to hunt for new plays in old basins. Geologically-complex basins might reward new ideas or better seismic. The best is example of recent years is Johan Sverdrup in Norway. Other good opportunities may arise where countries open new acreage to international companies for the first time. The 2017 discovery of Zama in Mexico is a good example.
The case for high-impact onshore and shelf exploration Positives
Negatives
Low exploration costs - well costs much cheaper than in deepwater, allowing companies with modest budgets to
Quality prospects in short supply - large and giant discoveries are rare away from the NOC-dominated basins
spread risk across a wide portfolio
of the Middle East
Low development costs - particularly onshore, with greater scope to phase developments than in deepwater
Low success rates - remaining large prospects are usually in untested plays or stratigraphic traps with high subsurface risk
Technology transfer from unconventional plays onshore potential in overlooked low permeability reservoirs
Difficult operating environments - much of the best onshore prospectivity is hard to explore because of
may now be commercial using new production technologies
remoteness, or terrain such as rain forest or mountainous fold belts, and much of the offshore potential lies in Arctic regions
Short lead times - scope to quickly monetise discoveries
Harsh fiscal terms - especially in the Middle East
Diverse corporate landscape - opportunity-rich business environment with large numbers of large and small
Limited access to onshore super-basins - NOC strangleholds across much of the Middle East, Russia,
companies
Venezuela, North Africa
Source: Wood Mackenzie
Theme three: near-field conventional exploration Many observers, ourselves included, thought near-field exploration would be the obvious refuge of the exploration industry in the downturn. Infrastructure owners are motivated to prolong the life of their assets. Companies would reduce risk tolerance and shorten their time horizons, and be attracted to this theme by the promise of high success rates and short development lead times. Volumes will always be small but can include some of the highest-value barrels available anywhere. That this has not really happened reflects the great maturity of most producing basins. Many remaining prospects are barely above minimum economic field sizes, even as satellite projects. The very small size of these discoveries makes finding costs high and many struggle to be commercialised. This problem can be particularly acute for explorers that do not own the production or export infrastructure, with tariffs further eroding margins.
Insight - 15 May 2018
Page 4 of 7
What is the best exploration strategy for the recovery? The case for near-field conventional exploration Positives
Negatives
High success rates - around 40% of all near field exploration wells make a discovery
Small volumes - average discovery sizes of less than 15 mmboe limit impact on production and reserves
Short lead times - average of just over two years from discovery to first production
High finding costs - resource discovery costs of over US$5/boe are more than double global average
Leverages infrastructure - operators have scope to extend the productive life of their existing fields
High development costs - marginal field volumes are often a bigger problem than any gains from sharing infrastructure
Adds high value barrels - larger near-field finds can have very healthy development economics
Poor full-cycle returns - high costs and below-average commercialisation of discoveries cause average IRR to be 5% lower than high-impact exploration
Benefits from production tax shelter - reducing post-tax exploration costs and allowing rapid spend recovery
Poor visibility of success - can be hard to distinguish from incremental development, potentially an issue where exploration requires investor support
Source: Wood Mackenzie
Theme four: unconventional exploration Unconventional plays have been the great disruptor for the whole upstream industry, not just exploration. Many of the larger companies have established huge positions through inorganic means, with growth achieved through drill-out of proven plays. Exploration of new plays can be a secondary part of the unconventionals growth story. Large volumes and low subsurface risks are the main attractions. But questions on full-cycle returns persist, especially once high (and rising) land access costs are factored in.
Insight - 15 May 2018
Page 5 of 7
What is the best exploration strategy for the recovery? The case for unconventional exploration Positives
Negatives
Large resource potential - commercial plays hold volumes to match the largest of conventional prospects
Rising costs - inflation for many critical services starting to increase in key basins as active rig counts grow
Investment flexibility - easy to control timing of spend and phasing of drilling and completion schedules
High access costs - inflated land and asset prices in many of the best plays undermine value for new entrants
Short lead times - time to first production typically measured in months not years
Marginal economics away from sweet spots - reduced IP rates and smaller EUR severely erode returns
Low geological risk - few surprises through drill out of known plays, although uncertainty will increase as
International disappointments - outside North America, many basins and plays have been drilled but very few have
companies move beyond familiar sweet spots
achieved substantial commercial production
Mainly North America location - US opportunities avoid complex international above-ground risks that can deter
Negative public opinion - leading to outright drilling bans in some US States and international locations
investors
Source: Wood Mackenzie
Which strategic themes to choose? There is no single exploration theme that wins outright. Each company’s goals and objectives determine its optimum mix of strategic themes. Key targets are contribution to overall reserve replacement and timing of associated production growth. Each company will have its own idea of what exploration success looks like. And each can leverage its own unique mix of capabilities, portfolio and sources of competitive advantage. The following table illustrates the general fit of the four exploration themes with a range of typical performance goals.
Alignment of exploration themes with different performance goals
Source: Wood Mackenzie. Green = primary theme supporting metric; Amber = theme can locally support metric; Red = theme unlikely to support outperformance against metric.
Insight - 15 May 2018
Page 6 of 7
What is the best exploration strategy for the recovery? The Majors and other large explorers need scale. This can lead to hybrid strategies that spread across all exploration themes. But as these companies have dialled back their materiality ambitions, they have become more polarised in their choices. Almost all are increasing focus on deepwater. Most also target unconventionals. Many international E&Ps have growth strategies wholly or largely based on exploration. Most are also focusing on deepwater, such as Cairn Energy in Senegal and Kosmos in Mauritania/Senegal. There are local examples targeting high-impact shelf and onshore plays, such as Lundin in Norway, Premier in Mexico and Tullow in Kenya. Few companies focus exclusively on near-field exploration. This theme is mainly part of a broader strategy to improve recovery of producing assets and/or drive growth through inorganic means.
Fit of exploration themes with company peer groups
Source: Wood Mackenzie. Company peer groups based on Corporate Benchmarking Tool. Green = primary theme; Amber = secondary theme; Red = not usually a critical part of the group’s exploration strategy.
Client Helpdesk
Europe
Americas
Asia Pacific
[email protected]
+44 131 243 4477
+1 713 470 1700
+65 6518 0888
These materials, including any updates to them, are published by and remain subject to the copyright of the Wood Mackenzie group ("Wood Mackenzie"), and are made available to clients of Wood Mackenzie under terms agreed between Wood Mackenzie and those clients. The use of these materials is governed by the terms and conditions of the agreement under which they were provided. The content and conclusions contained are confidential and may not be disclosed to any other person without Wood Mackenzie's prior written permission. Wood Mackenzie makes no warranty or representation about the accuracy or completeness of the information and data contained in these materials, which are provided 'as is'. The opinions expressed in these materials are those of Wood Mackenzie, and nothing contained in them constitutes an offer to buy or to sell securities, or investment advice. Wood Mackenzie's products do not provide a comprehensive analysis of the financial position or prospects of any company or entity and nothing in any such product should be taken as comment regarding the value of the securities of any entity. If, notwithstanding the foregoing, you or any other person relies upon these materials in any way, Wood Mackenzie does not accept, and hereby disclaims to the extent permitted by law, all liability for any loss and damage suffered arising in connection with such reliance. Please also note that the laws of certain jurisdictions may prohibit or regulate the dissemination of certain types of information contained in these materials, such as maps, and accordingly it is your responsibility to ensure that any dissemination of such information across national boundaries within your organisation is permitted under the laws of the relevant jurisdiction. Copyright © 2015, Wood Mackenzie Limited. All rights reserved. Wood Mackenzie is a Verisk Analytics business.
Insight - 15 May 2018
Page 7 of 7
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