Oil Firms Seen Cutting Exploration Spending

Global oil firms, hit by one of the worst years for discovery in two decades, are about to cut exploration spending, pulling back from frontier areas and jeopardising their future reserves, industry insiders say.

Notable exploration failures in high-profile places such as Africa’s west coast, from Angola all the way up to Sierra Leone, have pushed down valuations for exploration-focused firms and are now forcing oil majors to change tack.

“It is becoming increasingly difficult to find new oil and gas, and in particular new oil,” says Tim Dodson, the exploration chief of Statoil, the world’s top conventional explorer last year.

“The discoveries tend to be somewhat smaller, more complex, more remote, so it is very difficult to see a reversal of that trend,” Dodson told Reuters. “The industry at large will probably struggle going forward with reserve replacement.”

Although final numbers are not yet available, Dodson said 2013 may have been the industry’s worst year for oil exploration since 1995.

As a result, exploration will probably be cut, especially in the newest areas, said Lysle Brinker, the director of energy equity research at consultancy firm IHS.

“They’ll be scaling back on some exploration, like the Arctic or the deepest waters with limited infrastructure … So places like the Gulf of Mexico and Brazil will continue to see a lot of activity, but frontier regions will see some scaling back,” he said.

Oil majors, which have a large resource base to maintain, are suffering the most, as the world is running out of very large conventional oil fields, and access to acreage, particularly in the Middle East, is limited.

That is leaving them with an increasing number of gas projects.

“When you look at the mix of oil and gas of the majors, it is definitely moving towards gas – simply because they can’t access conventional oil, which ultimately I believe will have an impact on oil prices,” said Ashley Heppenstall, the CEO of Sweden’s Lundin Petroleum, which co-discovered Johan Sverdrup, the biggest North Sea oil field in decades.

Prices Down Then Up

Before oil prices rise from a lack of exploration, they are first expected to fall, squeezing margins and forcing further investment cutbacks.

The International Energy Agency sees oil prices down at $102 per barrel next year from the current $108 as several producers ramp up output.

“Oil prices need to remain at elevated levels because there is a risk that a fall in oil prices or a cutback in investments by companies will mean that production growth slows,” said Virendra Chauhan, an oil analyst at consultancy Energy Aspects.

Although world oil reserves increased by 1 percent in 2012, they equalled just 52.9 years of global consumption, down from 54.2 in 2011, energy firm BP has said previously. BP sees consumption up by 19 million barrels a day by 2035, which would represent a 21 percent increase on th U.S. Energy Information Administration’s (EIA) estimate for 2011.

Energy firms have already been shifting capital from conventional to shale production, and this trend could continue as the exploration risk is smaller, the lag from investment to cash-flow is shorter, and project sizes are more manageable.

This is weighing negatively on the shares of exploration-focused companies.

“Explorer stocks are trading at discovery value or a discount to it, so from an equity market perspective, there’s no interest in owning exploration stories. People are losing faith in exploration,” said Anish Kapadia, a research analyst at consultancy Tudor, Pickering, Holt & Co. International.

Shares in Europe’s explorers fell 20 percent over the past year, underperforming a 2-percent rise by the European oil index .

Tullow is down 39 percent in a year, while peers Cairn and Cobalt are down 33 percent, and OGX is down 92 percent.

The spending cutback also cut mergers and acquisitions activity by half last year, IHS data showed, and plans to boost shareholder returns could shift focus to cooperation rather than fully fledged takeovers.

“You will probably see more activity at the asset level more than at the corporate level … More joint ventures, swapping assets, buying and selling of assets,’ said Jeremy Bentham, Shell’s vice-president for business environment.

Insiders believe the cuts may not be reversed until capital tied up in projects like Chevron’s $54 billion Gorgon LNG or Conoco’s $25 billion Australia Pacific LNG start producing cash flow and return.

“There will be less investor pressure, then companies can get activity back up, so this may be a pause of a couple of years where companies scale back,” Brinker said.

11 Comments on "Oil Firms Seen Cutting Exploration Spending"

Davy, Hermann, MO on Tue, 18th Feb 2014 12:01 am 



Although final numbers are not yet available, Dodson said 2013 may have been the industry’s worst year for oil exploration since 1995.
–I have discovered an inverse relationship in the oil industry. When oil exploration successes are very bad the “lobby of plenty” is more vocal and aggressive. Now that sounds like cognitive dissonance oil supply style.

“They’ll be scaling back on some exploration, like the Arctic or the deepest waters with limited infrastructure … So places like the Gulf of Mexico and Brazil will continue to see a lot of activity, but frontier regions will see some scaling back,” he said.
–There! we see our answer for all that artic drilling nonsense.

The spending cutback also cut mergers and acquisitions activity by half last year, IHS data showed, and plans to boost shareholder returns could shift focus to cooperation rather than fully fledged takeovers. “You will probably see more activity at the asset level more than at the corporate level … More joint ventures, swapping assets, buying and selling of assets,’ said Jeremy Bentham, Shell’s vice-president for business environment.
–Sounds like confidence has been rattled. OK, maybe the last few articles are what I want to hear but it sure helps to feel some vindication. In the current “lobby of plenty” a splash of cold water sooner than later is a much needed wake up call. We have seen some serious market distortions by the “lobby of plenty” a more sober assessment of the situation is helpful.

Makati1 on Tue, 18th Feb 2014 1:01 am 



Oil has hit it’s high in both production and price. They are finally realizing that there is a top to their game and they have reached it. Now, we shall see which way the Ministry of Propaganda spins this bite, and how fast the rats bail out of the sinking ship.

rockman on Tue, 18th Feb 2014 12:16 pm 



“It is becoming increasingly difficult to find new oil and gas, and in particular new oil,” I always get a chuckle out of such statements. No…we weren’t drilling the “easy oil” 40 years ago. The process was more difficult to generate a good prospect when I started in 1975 than it is today…much easier. The difference between then and now is that there are much few viable exploration prospects left to find. As I’ve mentioned many times my first mentor at Mobil Oil explained PO to me 39 years ago. Mobil Oil was one of the worst explorers back then along with Gulf Oil. Which is why Mobil eventually be became ExxonMobil.

Pubcos have no choice but to spin as optimistic as possible. Otherwise why would anyone buy the stock of a company if they didn’t think it was going to increase in value. It can’t be quantified but much of the value of a number of pubco stocks is the anticipation that they’ll become acquisition targets as Big Oil attempts to add reserves in ways other then with the drill bit.

Davy, Hermann, MO on Tue, 18th Feb 2014 12:28 pm 



@rock – good summation of pubco & BOil. We too often forget Big Oil are companies in our financial system. They are following a business plan with a financial system that has rules. If one thinks something is wrong with that then by inference then our whole system is wrong. Another way to look at this is “this is what we have become”. There must be some systematic reason society has developed this situation. Let’s face it BOil gives us daily life now. Some of you may not like this “mother’s milk” but all economic activity starts with energy. You may call for a return to something more natural. Great, I would love to be there too but the problem is getting from here to there. Have we burned our bridges?

eugeni on Tue, 18th Feb 2014 1:17 pm 



Rockman;
I cannot imagine knowing about PO for 40 years…. it needs to give you some perspective about human being when you see the way thinks when down. Any hope that we change before it’s too late?

Davy, Hermann, MO on Tue, 18th Feb 2014 1:49 pm 



@eugeni – I 1st learn @ PO in college in my elective Geology class. I was originally in Geological engineering but got out of engineering because of the math. I love math but the education system failed me in a proper education with math. I got into Business administration (finance) I remember my wacky geology professor. He talked about PO in a wild and crazy way. Even before that I asked myself from time to time of “what happens when we can’t find oil in the ground” We know things run out. Of course the 80’s and 90’s hit and I began to wonder if the limits would ever hit in my life time. I was also exposed to climate change in the mid 80’s. It was an eye opener but I thought not an issue until down the road a century. I learned this in my ecology elective. At the time the biggest issue was pollution from chemicals, three mile island, water, and more smaller issues. Many of us older guys knew about this stuff but society was not very interested in these long term problems. You know the song and dance markets and technology will fix it. At the time I was more worried about accidental war with the then Soviet Union. I remember being in Germany in 1986 working on a small pipeline at Fulda on the East German border. Jets would scramble right up to the border testing each other. It is not like us older guys have not seen the abyss before us. Yet, today the abyss is more than two countries locked in an ideological battle knowing about mutual assured destruction. Today it is Mother Nature saying “that it”!

eugeni on Tue, 18th Feb 2014 2:13 pm 



Thanks Davy,
I got first contact with PO ten years ago, all the phases (denial, advice everyone, etc) check, now I just take it easy, to go on and act like nothing happens it’s the only thing I really can do (crazy), but I cannot stop thinking that the limit is right here, but, but… comments like yours remembers me the resilience of BAU.

Davy, Hermann, MO on Tue, 18th Feb 2014 2:21 pm 



@Eugeni – yeap, enjoy the good life now. In my opinion it will never be this comfortable. I will not say better because with all the comfort there is vast unhappiness. I am not talking 3rd world, yet, some of the happiest people are in the poorest countries but also mass suffering. It would be so nice if we could find ourselves as “Humans”

eugeni on Tue, 18th Feb 2014 2:39 pm 



@ Davy, Hermann, MO; I’ll try it, but it’s like to enjoy to be connected to Matrix 🙂
I think we don’t know what is to be human. What we think about ourselves as a individuals and as a spices could be really a global paranoia (always to have more, to consume more….). Maybe PO will give a hand.

nemteck on Tue, 18th Feb 2014 4:22 pm 



“Before oil prices rise from a lack of exploration, they are first expected to fall, ……as several producers ramp up output.”
Rump up? Who? Where? Hasn’t Big Oil reported a decline in revenues, shed assets, and withdraw from difficult exploration sights? It seems only Bakken and Eagle Ford will produce more for a short period. But that will hardly save the world.

rockman on Tue, 18th Feb 2014 5:50 pm 



Eugene – We didn’t call it “PO” back in the 70’s. Still don’t. It has always been the “reserve replacement problem” in the oil patch. In a way pubcos, especially major pubcos, have been a victim of their own earlier successes. They found many large conventional oil fields in the 40’s, 50’s and 60’s. This added big chunks to their proven reserve base. And these fields produced at high rate which also means they depleted rather quickly. Thus the need to replace those depleted reserves with new reserves or you end up showing a decreasing reserves base. And that it very bad for a public trying to convince folks to keep bidding their stock price higher.

I started as an offshore GOM development geologist in 1975 for Mobil Oil. And the first day through the door they beat on me to find every new bbl of oil I could in those old fields. And if I couldn’t find a new bbl at least try to produce a re-interpretation of the data to convince the auditors I did. Seriously. My group was given an acknowledgement for doing just that: adding new reserves to several fields without drilling a new well or doing a recompletion. All done on my table top with a pencil. Really.

And in every pubco I’ve worked with there was as much emphasis to “book” new proven reserves as to actually go out and drill for them. As I said elsewhere: I’ve seen many more managers get fired for not increasing reserve booking then for drilling dry holes.