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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The Single Biggest Challenge For The Oil & Gas Industry

The string of new oil discoveries off the coast of Guyana has lifted spirits recently, creating the impression that the energy industry is back on its feet and making more and more discoveries. However, this may not be the case.

According to a report from Westwood Global Energy Group released earlier this month, for example, the success rate of exploration activity has fallen in the past five years, and it has fallen by a lot.

“In the downturn success rates had increased as companies high graded their portfolios to ensure that only the best prospects were drilled. Unfortunately, this didn’t last, and 2018 saw discovered volumes, average discovery size and success rates all decline.”

This development was most pronounced in the high-impact drilling segment, the company said. New oil and gas discovered through high-impact drilling fell by as much as 50 percent between 2014 and 2018. The slump was the result of a combination of factors, Westwood Global Energy Group said, including a 28-percent decline in the number of new wells drilled, lower success rates and lower reservoir volumes.

This may sound shocking given the abundance of new discovery announcements from different parts of the world—not to mention the invariably bullish forecasts about U.S. shale oil production in the medium term—but these are not the only discovery news stories out there.

Recently, for example, the Norwegian Petroleum Directorate warned crude oil production in the country could drop to a 30-year low precisely because of the lack of new discoveries despite a lot of exploration efforts.

Pakistan also recently announced the end of exploratory drilling in the Arabian Sea after the companies leading the project—Exxon and Eni—failed to find any commercial amounts of hydrocarbons. Related: Have Gasoline Prices Peaked For 2019?

Yet not everyone is pessimistic. Rystad Energy has calculated that new oil and gas discoveries in the first quarter of the year hit 3.2 billion barrels of oil equivalent. They also said that many more new wells are scheduled for drilling through the end of the year. However, more than a third of the first-quarter discoveries—38 percent to be precise—were made by Exxon and Hess in the Stabroek block off the Guyana coast. For new well drilling, Westwood Global Energy Group cautions that these have often yielded lower volumes of oil and gas than preliminary estimates suggested, and this may well continue to be the case.

“With oil companies planning to increase exploration drilling in 2019, the question is whether the global drilling portfolio for both near-field and high impact prospects is strong enough to sustain an increase in activity without sacrificing exploration performance,” the company said in its report.

On the other hand, "Majors are leading the charge in exploration, reporting more than 2.4 billion boe of discovered resources. The six largest discoveries by the majors each exceed 150 million boe, and the top three could even hold more than 300 million boe apiece," according to Rystad upstream analyst Taiyab Zain Shariff, As quoted by Forbes Gaurav Sharma. If this rate of new discoveries continues, Shariff added, the total will be 30 percent higher than discoveries made in 2018. Related: Renewables Investment To Overtake Oil & Gas In Asia

This dual information published by these research companies paint a mixed picture in new exploration. While there are still large discoveries being made, due to the very nature of hydrocarbon resources—that is, the fact they are finite—there are increasingly fewer untapped reservoirs left in the world. Many of these are in remote areas where exploration is hampered by harsh weather or a “difficult” rock structure: the Arctic and China’s shale formations are examples of these two, respectively.

What’s more, it seems increasingly clear that even the latest in exploration technology cannot guarantee a discovery even if it makes discoveries more likely. As per Westwood Global Energy Group’s data, exploration success rates last year were down to 33 percent from 48 percent in 2017. Interestingly, this was despite the fact—or probably because—energy companies became bolder with investments.

During the downturn, every E&P picked their new exploration projects carefully to make sure the returns would be as high as possible with the costs and risks as low as possible. This boosted the success rate of new discoveries considerably. Now that prices have stabilized and there is more money to spend on drilling, companies are taking greater risks with exploration and it is showing in the success rate. What we are seeing is yet another cycle in the oil and gas industry with the only difference that there are less resources left to discover.

By Irina Slav for Oilprice.com

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