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Oil firms to cut spending on new exploration for fifth year in a row

Global investment in exploration will reach $37 billion in 2018, down 7% from a year earlier

Reuters  |  London 

Oil firms to cut spending on new exploration for fifth year in a row

Despite the strongest start for prices in four years, the world's top are hesitating to accelerate the search for new resources as a determination to retain capital discipline trumps the hope of making bonanza discoveries.

Exxon Mobil, Royal Dutch Shell, Total and their peers are set to cut spending on and gas exploration for a fifth year in a row in 2018, according to consultancy (WoodMac), despite a growing urgency to replenish reserves after years of reining back investment.

Global investment in exploration, vital to increase output and offset the natural decline of existing fields, will reach $37 billion in 2018, down 7 per cent from a year earlier and over 60 percent below the 2014 peak, according to WoodMac.

For majors, spending will collectively drop by around 4 per cent this year to represent about a tenth of investment in and gas production, known as upstream.

"This could be the new normal, with the days of one dollar in six or seven going to exploration forever in the past," WoodMac said in a report.

The declines, however, mask a modest uptick in drilling activity as lower rig rates and a focused approach on well-charted basins allow firms to do more with their money, according to WoodMac

"Investment will be down year-on year but activity will be flat to slightly higher," he told in an interview.

The collapse in prices in 2014 led to a deep retrenchment in spending for the sector, but still need to increase their resources as reserves dwindle.

As crude prices and profits recover - prices are currently above $65 a barrel, the highest since mid-2015 - the push to beef up reserves will only increase.

The exploration success rate has dropped from 40 percent to 35 percent over the past decade, highlighting the importance of acquisitions as an alternative, albeit generally more expensive, to build resources.

"Exploration spending (is) to remain low ... implying the need for more merger and acquisition" activity, analysts at said.

After spending more than $30 billion on acquisitions in 2017, Majors are expected to continue to make bolt-on purchases in areas where they already operate, even though the "upstream M&A window is starting to close," RBC said, alluding to higher asset valuations and fewer distressed sellers.

The majors will once again be the ones to watch thanks to stronger balance sheets compared with smaller rivals, WoodMac's Latham said.

Exploration is expected to focus on deepwater basins such as Mexico, and where large discoveries have been made in recent years, offering more confidence that additional resources could be found, he added.

The most watched exploration wells include and in Senegal, Total and in Brazil, Exxon in Guyana, Total and Pemex in and in Cyprus, according to WoodMac.

The growing appetite for exploration was made clear last October when the top vied for blocks in Brazil's first deepwater auction for foreign operators, where Shell was awarded half of the blocks.

(Reporting by Ron Bousso; Editing by Mark Potter)

First Published: Thu, January 04 2018. 15:52 IST
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