Oil, Gas Discoveries Count Falls, Despite Recent Uptick

Oil companies are still finding success with the drillbit as the exploration spending slowdown begins to pick up speed.

However, companies have a lot of ground to make up when compared to past decades.

Data from the Norway-based Rystad Energy consultancy show that 2016 oil and gas discoveries plummeted to levels not seen since the 1940s. The volume of liquids discovered offshore was 2.3 billion barrels (Bbbl), or 90% lower than in 2010, Rystad Energy said in a Jan. 18 report.

Perhaps more tellingly, the “replacement ratio”—the amount of resources discovered compared to the volume of products used—fell below 10% in 2016, Rystad said.

“For comparison, the replacement ratio for liquids in 2013 was as high as ~30%,” the report said.

So far, the oil and gas sector has kicked off 2017 with several discoveries.

Recent Finds

Statoil ASA (NYSE: STO) is among the latest making oil discoveries. The company, which recently said that it is stepping up exploration drilling amid improved market conditions, declared a commercial discovery in the Norwegian Sea on Jan. 17. Estimated recoverable resources for the Cape Vulture discovery near the Norne Field are between 20 million and 80 million oil-equivalent barrels (MMboe).

News of the discovery was delivered less than a week after ExxonMobil Corp. (NYSE: XOM) struck oil again offshore Guyana, further solidifying the region’s Stabroek Block as an exploration province. The Payara discovery, with resources estimated between 100 MMboe and 150 MMboe, followed the company’s impressive Liza discovery where resources are estimated to be more than 1 Bboe.

Earlier this month, the U.S. Gulf of Mexico also grabbed attention as W&T Offshore hit oil pay at the Mahogany Field.

Despite the exploration wins, analysts don’t expect offshore exploration activity to substantially pick up this year.

Going Down

Rystad forecasts such offshore exploration activity to drop further, with about 10% fewer wells drilled in 2017 compared to last year.

“On that backdrop, the E&P companies must achieve a higher success rate to see a higher total number of discoveries compared to 2016,” Nils-Henrik Bjurstrøm, senior project manager for Rystad told Hart Energy in a statement. “But there is a significant potential for an increase in discovered volumes driven by exploration activities in frontier areas.”

Take, for example, continuing appraisal work offshore Guyana, where ExxonMobil recently said the Liza-3 appraisal well found additional high-quality, deeper reservoirs below the Liza Field.

Bjurstrøm also noted Kosmos Energy’s exploration drilling plans offshore Senegal and Mauritana. Kosmos recently partnered with BP Plc (NYSE: BP), which on Dec. 19, 2016, said it signed deals to buy a 62% working interest and operatorship, in Kosmos’ Mauritania blocks and a 32.49% interest in Kosmos’ Senegal exploration blocks.

Kosmos has its sights set on finding liquids during its second-phase exploration program currently underway in the region. Plans include testing up to four prospects on each basin floor fan fairway in Mauritania and Senegal with a potential of 10 Bboe to 15 Bboe, Kosmos said during a Jan. 4 presentation.

“There are also other significant wells ‘to watch’ in offshore regions like Mozambique, which could translate into sizable volumes,” Bjurstrøm added.

Demand Impact

The falling number of oil and gas discoveries does not necessarily mean the world won’t have enough oil and gas to meet its needs—at least not as the situation stands today.

“The lack of discovered volumes in 2016 will not have an immediate impact on the global oil supply in the short term, given the lead time it takes from the discovery to startup of a field’s production,” Sona Mlada, senior analyst for Rystad Energy, told Reuters.

“However, these ‘missing’ discovered volumes in the current years could have an impact on the global supply some 10 years down the line, depending on the investment decisions of the exploration companies,” Mlada said.

Worldwide oil demand is forecast to continue to increase, rising by 1.16 MMbbl/d year-on-year to average 95.6 MMbbl/d in 2017, OPEC said in its January 2017 oil report.

Work In Progress

Cutbacks in spending and regulatory hurdles have hurt exploration efforts during the past two years in many parts of the world. But operators have still managed to make progress in some areas, including frontier regions, despite tough market conditions.

In addition to Guyana and the U.S., where discovered volumes were called “relatively stable,” Rystad highlighted Angola, the South African country where companies such as Sonangol, BP and Cobalt International Energy have made oil and gas discoveries. These include the Golfinho oil discovery along trend with the Cameia discovery in Block 21 and the Zalophus gas find in Block 20.

Brazil—home of the Lula, Libra and Buzios discoveries, which together hold about 20 Bbbl of liquids—was also mentioned for its role in offshore liquids development. Rystad noted that presalt basins led to large Campos and Santos basin discoveries near the start of the decade; however, the streak didn’t continue in 2016 due to factors such as “limited capital to develop projects that were previously discovered or local content regulations, among others.”

Making changes to regulations could help.

A decision by Brazilian authorities that removes Petrobras’ obligation to operate all offshore presalt fields is already having an impact, according to Rystad’s Brazil head, Kjetil Solbraekke, who said major oil companies are already showing more interest.

“However, there are still pitfalls linked to taxation, environmental licenses and local content regulation,” Solbraekke said. “The new government has a more open attitude towards the industry and economic growth in general. But the opposition is still strong and includes opportunistic politicians who might still prefer short-term gains than supporting long-term necessary changes.”

Necessary changes are expected to come, but implementation will be slow, Solbraekke added.

Velda Addison can be reached at vaddison@hartenergy.com.