It takes a brave oil and gas major to wager on wildcat wells, as risky drilling is termed. Most have taken an axe to budgets, believing the energy transition will stem demand for fossil fuels.
Now there are inklings of excitement in exploration. That is good news for the likes of Shell, TotalEnergies and drilling services groups. But investors yearning for the return of roustabout rock ‘n’ roll in London stocks will be disappointed.
Frontier exploration peaked in the middle of the last decade. Indeed, spending fell from $100bn in 2015 to half that by 2020. Bernstein, a broker, estimates that activity is now edging up. Total spend on exploration is set to rise to $65bn in 2023, from $57.5bn last year. Oil services groups such as Saipem and Schlumberger believe rig rates will climb.
Oil majors are concentrating on some exciting plays, particularly around the Atlantic. The Orange Basin, stretching between Namibia and South Africa, yielded important discoveries for Shell and TotalEnergies last year. Exxon is having a strong run in Guyana.
Assets stranded by energy transition probably would not be giant fields like these. Their low unit costs mean they will leapfrog costlier assets. Wood Mackenzie, a consultancy, reckons discoveries made in 2022 will have a cost break-even below $40 per barrel. That points to a juicy internal rate of return of 22 per cent per year at a long-term oil price of $60 per barrel.
Smaller explorers — many listed in London — are poorly positioned, however. The North Sea, a traditional stamping ground, is wracked by political uncertainty. Globally, 80 per cent of conventional wells drilled are expensive, offshore punts majors can more easily exploit.
Sizeable recent discoveries are still small beer compared with global consumption. Demand is 102mn barrels a day and rising, says the International Energy Agency. Every year, depletion of existing fields removes some 5mn barrels per day. Peak production from new oil discoveries will probably run at less than 1mn barrels per day.
The trend is still for existing resources to be used up over time — and for oil majors to throw off a lot of cash for investors.
The Lex team is interested in hearing more from readers. Please tell us what you think of the prospects for oil explorers in the comments section below.
