By Sarah Kent
LONDON -- In June, oil giant BP PLC announced what it deemed an
"important" new discovery in Egypt.
It turned out to be a modest natural-gas find that didn't even
rank in the top 50 discoveries since 2012. The fact that BP and its
partner Eni Spa hailed it as a major success is a sign of the times
for the oil industry.
For years, big oil and gas companies poured ballooning sums into
seeking mammoth reserves in difficult locations. But their recent
record was spotty, and a dearth of major finds was followed by the
oil-price slump that began in 2014. It prompted companies to cut
costs and shift away from expensive, high-risk exploration.
World-wide, oil-exploration spending last year was the lowest
since 2007. There's been less conventional oil and gas (as opposed
to resources contained in shale or oil sands) discovered in the
past 2 1/2 years than in 2012 alone, according to Edinburgh-based
consultancy Wood Mackenzie.
And oil companies will likely show continued pressure on
exploration budgets when they report their third-quarter earnings
over the coming week, say analysts.
Some in the industry say the decline in exploration spending
will eventually contribute to an oil drought -- and spiking crude
prices. Saudi Arabia's energy minister Khalid al-Falih told an oil
conference in London this month that the underinvestment caused by
weak oil prices over the past two years will result in "a period of
shortage of supply."
Others say it is the new normal, in which giants like BP and
Royal Dutch Shell PLC will increasingly focus their exploration on
less risky and more easily accessible reserves -- and spend some of
the money they used to use for exploration to buy
already-discovered resources from smaller companies.
Today's frugal period comes after oil companies boosted
exploration spending in the 2000s amid high prices and rising Asian
demand.
Drilling tested fresh ocean depths and under Arctic ice in a
search for new barrels, as output from easy-to-reach fields
declined.
But as spending increased, success didn't. Leaving aside
unconventional resources, annual volumes of oil and gas discovered
have declined successively since 2010, according to data from Wood
Mackenzie.
While big companies were drilling dry holes, small companies
pumped increasing amounts of shale oil, which helped spark the 2014
oil-price crash.
Big companies responded with big cuts. BP, Eni and their peers
cut exploration spending by 35% in 2015 compared with 2013, Wood
Mackenzie's data show. Many projects now focus on lower-risk,
lower-reward prospects as companies hope for incremental gains near
existing infrastructure that they can bring online quickly and
cheaply.
"We have pared back exploration and are focusing our efforts on
adding barrels with short-cycle time," BP's head of exploration and
production Bernard Looney said in a presentation earlier this year
published on the company's website.
BP has cut exploration spending from $3.5 billion in 2013 to
around $1 billion this year. And Eni -- one of the past decade's
most successful big explorers -- has a target to discover 1.6
billion barrels between 2016 and 2019 at a cost of $2.30 a barrel.
That comes after Eni found 11.9 billion barrels at a unit cost of
$1.20 per barrel over the past eight years.
It is a major shift for big oil companies that designed their
exploration strategies to find enough conventional oil and gas to
replace all the barrels they pump every year, says Andrew Latham,
Wood Mackenzie's vice president of exploration research.
Now, their conventional exploration seems "designed to add about
50%" of what they produce, forcing them to rely on unconventional
resources like shale and acquisitions of other companies' resources
to maintain output, Mr. Latham said.
Shell, for example, bought BG Group for roughly $50 billion
earlier this year, refilling its reserves. It also cut its
exploration budget in half this year, retreating from Alaska's
Arctic after drilling one of the most expensive dry holes of
2015.
Now "we rely less on exploration," Shell's Chief Financial
Officer Simon Henry said in June.
There have been isolated big finds in recent years. Eni last
year discovered giant gas reserves off Egypt and Exxon found oil
off Guyana. But the big companies have increasingly opted for
smaller projects.
Wood Mackenzie says that despite the big cost cuts, the number
of exploration wells completed last year fell by only 11% compared
with the average of the last four years. That is because companies
are drilling more efficient wells aimed at more modest, low-risk
gains, rather than big, risky ones in new provinces, Wood Mackenzie
says.
Shell's exploration chief, Ceri Powell, said the company has
lowered the average time it takes to start production from a new
discovery near existing infrastructure from 18 months two years ago
to less than 12 months now.
"Some frontier exploration near infrastructure is acceptable,
but really big, long-term infrastructure, deep water frontier is
probably not on the cards for us," BP CEO Bob Dudley said last
week.
Earlier this month, BP walked away from a major exploration
prospect offshore Australia following pushback from environmental
activists. The company cited budget constraints.
Write to Sarah Kent at sarah.kent@wsj.com
(END) Dow Jones Newswires
October 26, 2016 05:44 ET (09:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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