Conventional Discoveries Outside North America Continue Their Decline; 2015 Marked Lowest Year for Discovered Oil and Gas Volumes Since 1952, IHS Says
North American tight oil alone cannot cover future supply gap - conventional exploration will need to resume
HOUSTON (May 23, 2016) – Volumes for conventional oil and gas discoveries made outside of North America have continued their multi-year decline, and the results are dramatic – just 12 billion barrels of oil equivalent (BOE, includes natural gas) estimated recoverable resources were discovered in 2015, a record low since 1952, when discoveries reached just 7.8 BOE, according to new analysis from IHS (NYSE: IHS), the leading global source of critical information and insight.
The volume of oil alone discovered in 2015 was only 2.8 billion barrels, a record low since the significant ramp-up of oil and gas exploration began following World War II. In terms of conventional global gas discoveries, IHS said more than 9 billion BOE of natural gas was discovered globally in 2015, marking the fifth straight year in which gas volumes discovered exceeded oil volumes discovered.
“The fall in discovered volumes for conventional oil outside North America, in particular, has been steady and dramatic during the last few years,” said Leta Smith, Ph.D., director, IHS Energy, Upstream Industry Future Service and lead author of the IHS Energy Conventional Exploration and Discovery Trends analysis. “Oil and gas volumes discovered in 2015 were the lowest in 64 years,” she said. “We’ve seen four consecutive years of declining oil volumes, which has never happened before. The bottom has completely fallen out for conventional exploration, and the result portends a supply gap in the future that is going to be challenging to overcome. In the current cost-cutting environment, the outlook for 2016 discovery volumes is not likely to be better, either.”
With the significant drop in oil prices from a high of $100 per barrel in 2014, many companies have slashed exploration budgets repeatedly to address costs and falling earnings – and have continued to do so in 2016. As a result, IHS said exploration and appraisal (E&A) drilling for conventional resources fell sharply in 2015, exacerbating the annual drop in resources found. Last year, slightly less than 4,300 conventional E&A wells were drilled outside North America, as budgets for exploration were cut. That figure compares to just slightly more than 5,200 conventional E&A wells drilled globally in 2014, and nearly 5,300 E&A conventional wells drilled in 2012, which was the peak year for E&A wells drilled during the years 2005 to 2015.
In deepwater (1,000 ft. deep to 5,000 ft. deep), Smith said the number of exploration and appraisal wells drilled worldwide dropped by more than 20 percent, while ultra-deepwater (greater than 5,000 ft. deep) E&A drilling declined by more than 40 percent, compared with 2014. Deepwater activity in 2015 also showed a marked shift toward appraisal drilling as a portion of total exploration compared with prior years, and Smith said IHS researchers expect this trend to continue into 2016.
Smith said it is noteworthy to distinguish that this discoveries analysis addresses “conventional oil,” and does not include North American shale and its significant contributions to both discovered or produced volumes of oil and gas during the past decade.
“One of the most striking developments has been the shift of investment by large independents from the international arena to the United States as the shale opportunity opened up,” Smith said. “Until they shifted their budgets to focus on shale projects in the U.S., many of these companies were among those active in international exploration, but that changed rapidly as they pulled back from the international arena. And now, even with the shift to U.S. shale, exploration budgets have been cut dramatically during the last year, owing to the downturn in price.”
Companies, Smith said, are “laser focused on cost containment and extracting resources from previously discovered or developed assets,” where risks and costs are lower, and project cycle times are reduced, until prices show some recovery. Exploration is typically a high-risk and costly endeavor, but it has long been viewed as an essential investment for most E&P companies’ future in terms of reserves growth, Smith added
“The major implication of this conventional discoveries drop is that declining discovery volumes, combined with anticipated low exploration and appraisal drilling activity for the near future, will create a ’hole’ in oil and gas operators’ portfolios and eventually negatively impact production,” Smith said. “This would be beyond the impact of current low oil-prices—more likely in the 5- to 10-year range, which is typical between discovery and first production.”
IHS researchers also observe that tight (shale) oil in North America is not enough to solve the discoveries shortfall. “Despite its contributions to North American and global supplies, and extraordinary impact on portfolios and investment strategies for many companies, renewed growth in tight oil alone cannot cover the difference in the coming supply gap,“ said Jerry Kepes, vice president of IHS Energy and a co-author of the IHS discoveries analysis. “IHS is forecasting global tight oil production in 2040 to still be in the range of 10 percent to 15 percent of total global oil production, so the world market will still need significant conventional exploration discovery and production.“
The lack of new discoveries, Kepes said, will also increase pressure on operators to develop discoveries already made, grow reserves in their producing fields with improved recovery techniques, change portfolios and investment strategies, or use mergers and acquisitions to restock portfolios in the medium term.
“Conversely, the overall dearth of exploration activity represents an opportunity for some companies, since explorationists have determined that exploration activity will be much less expensive through this period,” Kepes continued. “Some E&P companies are poised to take advantage of this cost-savings and may see attractive exploration results, even if the overall trend for industry remains more challenging.”
To speak with Leta Smith or Jerry Kepes, please contact Melissa Manning at firstname.lastname@example.org. For more information on the IHS Energy Conventional Exploration and Discovery Trends research, please contact Sheana.email@example.com.
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