Lost in exploration
An oil surplus may eventually become a shortage, experts warn.
THE Great Australian Bight, an undisturbed marine reserve for whales and hundreds of aquatic species, was one of the oil industry’s most promising deep-water frontiers — a frontier where BP planned to drill.
For years, environmental groups waged war on those plans until BP gave them up in October. But it wasn’t the fierce opposition that drove BP to leave behind an estimated 2 billion barrels of crude oil off the southern coast of Australia. Rather, it was the market and persistently low oil prices.
The British oil company is hardly alone in the retreat. For the past three years, the energy industry’s search for deep-sea pools of oil has almost completely stalled in the energy slump. Last year, oil companies discovered the smallest amount of oil on record, according to the International Energy Agency, and companies replaced just a fraction of the crude reserves they pumped.
“Exploration drilling has fallen off the map,” said Bob Fryklund, chief upstream strategist at IHS Markit. “If you don’t drill wells, you can’t find oil.”
This week, the energy industry will show off its latest technological breakthroughs to a giant throng of oil and gas professionals at the Offshore Technology Conference in Houston. But even though oil prices have risen, the three-year slump in the exploration business will hang over the gathering at NRG Center, where seismic imaging companies and offshore rig contractors will try to sell services the industry still isn’t buying.
If there’s anything romantic about the oil industry, it’s the
“In five years, we’re going to need that oil, and we’re not going to have it.” Robert McNally, president of the energ y consultancy Rapidan Group
way colossal steel beasts pumping oil hundreds of miles from land spring from a hunch of some unsung geologist, and then are designed by petroleum engineers with all the complexity of a space shuttle flight.
But it costs $100 million just to drill a deep-water exploration well to see whether there’s really oil in the ground, with the payoff of these engineering feats coming decades after companies study the first seismic maps of some unexplored territory off the coast of West Africa or South America.
That’s why exploration spending is always the first casualty of oil busts and the last of the industry’s businesses to recover. Even as higher prices have spurred a drilling revival in U.S. shale plays, investments in frontier ventures around the world fell to $34 billion last year, down from a recent peak of $94 billion in 2013. Analysts say they don’t see any signs that activity will return to that level anytime soon.
“Maybe never,” said Julie Wilson, an analyst at energy research firm Wood Mackenzie in Houston. “The industry is still very constrained.”
The oil industry only found 2.4 billion barrels of oil last year, the smallest annual figure the IEA has recorded. That compares with an average 9 billion barrels discovered each year between 2000 and 2015, the Paris-based adviser to oil-importing countries said in a report last week.
Energy companies last year also sanctioned the lowest number of conventional oil projects — containing some 4.7 billion barrels — in more than seven decades, the IEA said, even as investments in the U.S. shale industry has surged by $100 billion, according to Norwegian consultancy Rystad Energy.
Last year, only 13 percent of the oil exploration that companies sanctioned was offshore, compared to an average of 40 percent in the previous 15 years, according to the IEA. The Paris-based group believes exploration spending will sink lower this year, to half of its 2014 level.
Seismic imaging companies like Houston’s ION Geophysical and CGG Veritas, based in Paris but with offices in Houston, have both lost two-thirds of their revenue since 2013 because oil companies have lost interest in maps of the deep. Offshore drilling contractors with local connections like Transocean, Diamond Offshore and Noble Corp. have suffered as well, though they have found some work drilling wells closer to existing offshore platforms.
Fewer discoveries
The number of oil and gas discoveries has fallen from 700 in 2008 to less than 200 in 2016, and only a handful last year were considered major discoveries, according to IHS. The number of exploration wells companies drill each year has steadily dropped since the industry’s peak in 1982, at 2,500, to less than 500 last year.
Outside of North America, the oil industry has added reserves of 215 billion barrels of oil equivalent between 2005 and 2016. That’s compared to 356 billion barrels discovered across the United States and Canada with the advent of U.S. shale plays, which start up much faster than deep-water fields and, in recent months, have attracted billions of dollars in investment even as offshore spending languishes.
In January, Exxon Mobil agreed to buy private companies and 275,000 acres in the Permian Basin for $6.6 billion. In a decade, the Irving-based oil giant expects U.S. shale oil production will make up a quarter of its global output. Chevron Corp., which owns land in the same West Texas region, has made the same projection.
Marginalized by shale
It’s another sign that deep-water fields, once the oil industry’s go-to frontier for more oil and gas, has been marginalized by the advent of shale drilling in the United States — a far less risky bet for oil and gas companies, said Bill Herbert, an analyst at investment bank Simmons & Company International in Houston, a Piper Jaffray company.
“Major resource holders are fighting the tyranny of their dividend streams, which are based on outdated oil prices,” Herbert said. “They simply can’t afford to allocate scarce funds into exploration.”
IHS believes the combination of rising energy demand and the offshore slowdown could lead to a global undersupply of oil of 1 million barrels a day by the end of the decade, with the production declines coming mostly from countries outside the U.S. and OPEC. Globally, the oil industry has cut oil and gas investments by $1 trillion since 2014, the peak of the last boom.
Last year, oil companies pumped 30 billion barrels of oil equivalent but discovered fewer than 5 billion barrels, led by Exxon Mobil’s recent finds in Guyana, and discoveries in Alaska and on the maritime border between the West African countries Senegal and Mauritania, according to Wood Mackenzie.
But as long as oil storage tanks are brimming — U.S. crude inventories remain near record highs — there’s little chance oil companies will risk billions on new ventures. But when exploration spending and new oil discoveries disappear, it means the world could be short on oil in just a few years. But until then, many of the tools peddled by local seismic companies and drilling contractors will collect dust.
“The market is still going to be oversupplied with equipment and services,” said James West, an oil field services analyst at investment bank Evercore ISI.
Flipping the market?
The IEA expects global oil demand to increase 1.2 million barrels a day each year over the next half decade, which could eventually flip the oil market on its head, with demand rising above supply.
“In five years, we’re going to need that oil, and we’re not going to have it,” said Robert McNally, president of the energy consultancy Rapidan Group.
Paal Kibsgaard, CEO of Schlumberger, said his oil field services company has seen an uptick in interest in seismic maps of offshore fields in Mexico, but apart from that, there’s no sign exploration will pick up globally.
Still, even in Mexico, which recently opened its oil and gas fields to foreign investment, companies are worried the country’s domestic politics could upend their plans for the region, even after multibillion-dollar offshore auctions over the past year.
On the other side of the maritime border, in the U.S. Gulf of Mexico, oil companies drilled 80 exploration wells last year, down by a third from 2012. Deep-water development wells — the wells that flow oil to the surface — came in 80 percent lower last year, from 235 in 2012 to 50 in 2016.
With sluggish oil exploration around the world, countries like Venezuela and Nigeria could see oil production drop further. These nations don’t grab oilmarket headlines as often as Saudi Arabia and Russia, but together they contribute about 3.4 million barrels a day to global oil production.
“That’s not really sustainable,” said Bill Ebanks, co-head of the oil, gas and chemicals practice and managing director at the consultancy AlixPartners. “There’s going to be a hole the industry has to fill.”