The tough couple of years that oil companies had to go through with the oil price crash has forced many of them to slash exploration investment. Significantly reduced capital expenditure resulted last year in the lowest amount of conventional oil finds since 1952, with the number of wells drilled in 2016 coming in at just one-third of wells drilled in 2014.
As bleak as the 2016 figures are, analysts reckon that last year was the bottom of the investment cycle, and companies are cautiously looking up to increasing exploration and production investments. The E&P sector is emerging ‘leaner and meaner’ from a doom-and-gloom two years after cutting costs, increasing efficiency, and optimizing the most promising and efficient projects.
Last year was probably the low point for conventional oil discoveries, with just 3.7 billion barrels found, according to analysts at energy consultancy Wood Mackenzie. This was 14 percent less than the conventional oil finds in 2015 and the lowest level in 65 years. Even if WoodMac’s updated figures are not as gloomy as earlier forecasts from August of last year, the numbers remain extremely low, with only 431 wells drilled last year.
“We may come to see 2016 as a turning point for conventional exploration,” WoodMac said in its global exploration review of 2016.
Still, one bright note last year was that although far fewer wells were drilled, discovery costs were below the 2014 costs for a second year running, according to WoodMac’s review.
Last year was surely not the year of exploration investment and drilling booms. But Wood Mackenzie now sees 2017 “as the dawn of a cautious recovery for the E&P sector, with investment edging upward”.
The energy consultancy’s analysis, ‘Cautiously optimistic: global upstream outlook for 2017,’ suggests that the tide is turning and E&P spending will rise by 3 percent, reversing a two-year plunge in investment. The expected spending for this year is still a whopping 40 percent below the 2014 capex, signaling that companies have made deep cost cuts and shifted their focus to smaller, more incremental projects, according to WoodMac. Related: Real Innovation In The Oil Patch Is Found In Data Analytics
And while oil majors would still see their combined spend on development drop by 8 percent in 2017, U.S. Independents would use their assets and access to capital to respond first to the rise in oil prices this year. Investment by U.S. unconventionals may increase by more than 25 percent this year, WoodMac reckons.
As a whole, the upstream sector is emerging from the downturn leaner and more efficient, and as confidence is expected to slowly seep back through the industry, this year’s investment cycle is expected to show the first signs of growth since 2014.
All these factors are expected to double the number of final investment decisions (FIDs) to more than 20 this year, from just 9 last year, WoodMac experts say. In terms of numbers only, the expected FIDs in 2017 would still be significantly below the 40 FIDs the industry had approved on average each year between 2010 and 2014.
However, now the projects will be more cost-efficient and the capex per barrel of oil equivalent (boe) is expected at US$7 per barrel, compared to US$17 per barrel for the projects approved in 2014. Related: How Tillerson Could Jeopardize Geopolitics In Iraq
According to Malcolm Dickson, a principal analyst for Upstream Oil and Gas for Wood Mackenzie:
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“2017 will demonstrate how efficient the oil and gas industry has become; showing projects in better shape all round.”
Companies will no doubt continue to apply capital discipline, but lower development costs in carefully selected efficient projects would allow them to seek additional opportunities to continue adapting and to start looking for growth. Increased investment - albeit even just moderately - and more FIDs sanctioned could increase exploration success rates and show that the low point is really behind us.
By Tsvetana Paraskova for Oilprice.com
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