Oil majors are turning away from exploration after a poor year for the sector

Oil firms to cut exploration after high-profile failures

Oil firms are about to cut exploration spending after one of the worst years for discovery in two decades, 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," said 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," he added. "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, CEO of Sweden's Lundin Petroleum, which co-discovered Johan Sverdrup, the biggest North Sea oil field in decades.

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 (£61) 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.

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, which 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.

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