Big company or small company, which will succeed in exploration?
Alan Murray
Wood Mackenzie
Majors focus on big-payoff potential
In studying exploration strategy and results, three clear groups of companies emerge, defined by their size and priorities.
The largest operators are the major oil and gas companies, which are most concerned with materiality in exploration, as they need to make large discoveries to have any impact on their reserve base and be able to deliver profits across a price cycle.
Independent companies are smaller and have more focus on near-term profitability than overall materiality. These companies need to show that they can generate strong returns from distinct business models in order to justify their ongoing investment in the inherently risky exploration sector.
National oil companies form the third group. These companies generally have large upstream operations in their own countries and are entering the international arena to offset production decline or demand increase at home.
Big plays
The successful majors have been those that have maintained focus on carefully selected basins that offer the potential for discoveries of hundreds of millions of barrels.
These large companies have strong balance sheets and large production bases that can support longer term investment in frontier regions where the need to understand new structures requires. They thrive when they become “basin perfectionists.”
The critical success factor for the basin perfectionist is identifying and getting access to the most promising basins at an early stage in their lifetime, and getting access to more of these basins is currently a major challenge.
Some of the most geologically promising plays are in areas that are closed to international oil companies, and persuading governments that only the international companies have the ability to find and develop reserves is increasing difficult as technologies become commoditised.
Thus, many conventional opportunities in the Middle East, Mexico, and Venezuela will likely remain outside the reach of the majors for the current time.
Therefore, the majors will need to provide other incentives to host governments. This incentive will come in the form of newer technologies, particularly those associated with deepwater development and heavy oil production, and also the ability to develop and market gas discoveries in areas remote to the major gas markets of North America and Europe.
Recently, we have seen a number of majors announce strategic partnerships with national oil companies based around LNG and deepwater developments. This is a strategy that may become more common as the need to improve the value propositions to governments increases.
Without unlimited access to emerging geographies, the majors will have to look to new technologies to unlock areas with large potential. In practice, this will mean exploring in ultra deepwater, exceptionally deeply buried plays, and in arctic latitudes.
Ultra deepwater has proven successful so far in Brazil, Angola, and the Gulf of Mexico, and opportunities remain in these areas as well as other deepwater basins around the world.
Many major companies have operated in arctic conditions for a number of years, mainly in Alaska and Canada. Higher prices may mean that there is a greater willingness to move exploration into more remote areas of the arctic, such as offshore Siberia and East Central Greenland.
Maximizing recoveries
The independent companies that have delivered the best performance are those that have focused on the second string of opportunities available when the larger companies have proven the potential of a basin and have less interest in the smaller, but still profitable, remaining prospects.
This has been a clear trend in the deepwater GoM, and we are now seeing that the deepwater basins of West Africa are increasingly open to independent companies.
These companies, therefore, have a range of opportunities open to them in maturing deepwater basins with a proven track record of prospectivity and stability.
Another successful strategy for these companies has been a close alliance of exploration and business development activity.
Companies have shown that by acquiring reasonably priced producing assets they can add significant value through near field exploration around these assets and access prospects which would not have been material enough for the majors.
The challenge for this strategy at the current time is being able to purchase producing assets with near field exploration potential at a reasonable price. Many of the majors are still keen to divest mature assets, however the prevalent oil prices mean it will be harder to strike a deal at a comfortable price for both parties.
Security of supply vs. economic gains
The national oil companies (NOCs) have a mixed history of exploring overseas. Petrobras’ success has come because it has a leading deepwater offering to take to new countries, but few other NOCs have such a unique offering to take into new territories.
A higher level of scrutiny into overseas investments by an NOC can also mean that it is difficult for them to sustain long-term investment into newer plays, particularly when success is not quickly forthcoming. These companies also have to decide whether it is acceptable to invest national funds in high risk exploration, which is necessary to unlock material finds.
NOCs therefore have to decide whether or not they wish to act in line with the majors, or in line with the independents.
Their size may mean that they feel that their natural peers are the majors, and they should be able to compete with them for the prime opportunities. This is something that we have seen recently in bid rounds and acquisitions in Africa.
However, their appetite for risk and need for early success, may mean that the strategy of using acquisitions to enter a region and build on this through exploration, may be more appropriate. A number of NOCs have made ambitious acquisitions to enter new areas in the last few years.
NOCs have a very different perspective compared with those of the other companies, in that they are often more concerned with ensuring security of supply rather than generating economic returns. This priority can make them aggressive bidders in auctions for licenses and assets.
In conclusion, there appears to be a natural order in the exploration business, with the major companies taking the largest risks in order to make the biggest resource discoveries, and the independents moving in after a period to ensure that the overall recovery from a basin is maximised.
At the current time the majors must look to increasingly large technological challenges to continue to grow their reserves, and this will lead them into ever deeper water and even further north into the arctic.
The longer term growth may come from successfully managing to open up areas that are currently closed, by persuading governments that only a basin perfectionist has the skills and experience to effectively develop natural resources.
The independents have a number of options open to them as the deepwater basins of West Africa open up, and the continued adventurousness of the majors means that further opportunities will open to this group in due course.
NOCs in the exploration business need to decide whether they perceive themselves as a new breed of majors, or if they are most comfortable with the safer strategies used by the independents.
Undoubtedly both camps will emerge, but their chances of success will ultimately depend on their ability to compete with the established companies in the international exploration business.
