2017 exploration outlook - a return to profitability?

A new study by Wood Mackenzie on what to expect from global oil and gas exploration in the year ahead, Global Exploration: What to look for in 2017, shows that exploration should return to profitability in 2017, after five years of only single-digit returns.

Dr Andrew Latham, vice president of exploration at Wood Mackenzie said: "The industry has a good chance of achieving double digit returns in 2017. Smarter portfolio choices and lower costs are already paying off."

Wood Mackenzie's analysis of the 2017 global exploration outlook shows:

• Exploration in 2017 will continue its transformation to a smaller, more efficient industry; 
• Overall investment will at best match 2016 year’s spend of around US$40 billion, and may yet fall further. On the bright side, lower costs mean well counts may hold up close to 2016 numbers. Flat budgets should mean exploration’s headcount cuts are now mainly in the past;
• The majors and a handful of bolder Independents will drill most of the wells to watch, as in both 2015 and 2016. Wood Mackenzie expects the best discoveries to come from new plays and frontiers, despite greater emphasis on infrastructure-led drilling from many explorers. 

"More than half of the volumes are expected to be found in deepwater. Here some well costs will fall to $30 million or less, with full-cycle economics that are positive at less than $50 per barrel," Dr Latham said.

According to Wood Mackenzie's report, the industry has cut exploration deeper than other upstream spending. Its share of upstream investment will dip to a new low of just 8% in 2017. An eventual return to historic norms – around one dollar in seven – depends on oil price recovery. Wood Mackenzie expects the Brent price to rise sharply from 2019, averaging $77/bbl in real terms for the year. If this happens, then recovery in exploration spend will follow a year or two later.

"The industry is focusing on acreage capture and re-loading for the longer term. Companies willing to sign acreage with firm 2017 wells may be spoilt for choice. A spate of new licensing in outer slope plays will continue as explorers digest news of better-than-expected reservoir quality and source rock potential in these ultra deepwater settings," said Dr Latham.

Emerging exploration themes in 2017 include: 

• Exploration for pipe gas opportunities near under-supplied markets such as parts of North Africa, Eastern Europe and Latin America;
• Over-supplied LNG plays will be de-emphasized; 
• High-cost frontiers, such as the ice-impacted offshore Arctic and extreme high pressure/high temperature plays, will be shunned.

"After a decade in the doldrums, the majors' returns from conventional exploration improved to nearly 10% in 2015. The rest of the industry is heading in the same direction. Fewer, better wells promise a brighter future for explorers," Dr Latham added.

However, there have also been warnings that growth in shale production could still hurt offshore production, as shale producers ramp up.