IEA: $1 TRLN INVESTMENTS
The rate of oil discoveries continues to disappoint after a record low last year and firms could even cut their exploration budgets to save on costs, a risk to long-term supplies and prices, industry executives said.
Explorers are finding so little oil, many are retreating from high-risk frontier areas to safer bets like North American shale, executives at a major Norway oil conference said. This will likely force them to buy expensive discoveries once investor sentiment shifts focus to reserves from cash flow.
"If you look back on 2013, it was a record low year in terms of discovering new resources," Helge Lund, the CEO of Norway's Statoil, said. "And year to date it's been around 4.4 billion barrels of oil equivalents, the lowest I have seen for decades."
Last year only half as much crude was discovered as consumed, according to consultancy Wood Mackenzie. Big exploration campaigns in frontier places like West Africa and the Arctic Barents Sea have yielded little.
Just last week Maersk oil, part of Danish shipping conglomerate A.P. Moller-Maersk said it would virtually cease exploration in Brazil and the U.S. Gulf of Mexico after an impairment and dry wells, even though its reserves equal just 4.6 years of production, below an average of 5-10 years for its peers.
HIGHER OIL PRICE?
The world is expected to consume around 34 billion barrels of oil this year and the International Energy Agency estimates that around $1 trillion of investment is needed each year just to keep output steady.
Global oil and gas capital spending is expected to exceed $700 billion this year, analysts said, a record, but much of the growth is coming from national oil companies, while majors like Shell, Chevron, BP and Statoil say they are cutting spending or keeping it flat.Barclays expects the national oil companies to raise spending 10 percent this year while the oil majors keep spending flat.
"A lot of companies have so much pressure from investors to produce short-term returns. And when you invest in exploration you need to think and invest long term," said Ashley Heppenstall, the CEO of Lundin Petroleum, one of the most successful firms in adding new reserves.
In the late 1960s when ConocoPhillips discovered the giant Ekofisk field off Norway, it needed just two years to get the field into production. A half a century later Statoil will need 10 years to start producing at Johan Sverdrup, a similarly large find.
"I think the majors will come and realize that they don't have enough resources," Heppenstall said. "Then suddenly investors will change their focus and majors will have to go out and buy them."
Buying an undeveloped barrel of oil costs around $8-$10 in a place like the North Sea, while the cost of the discovery is $1-$3 per barrel, so oil firms face a big future acquisition cost or falling resources.
"This cycle is comparable to the Asian crisis in 1998 when exploration activity stayed flat for six years," Jon Olaisen, an analyst at ABG Sundal Collier said.
"It will impact the oil price, and I think it already has because if you look at the oil futures now, they are moving upwards while the spot price is falling," Olaisen said.
Even as front-month oil futures eased by over 7 percent this year, the price of oil for delivery in around 2020 has risen by 12 percent.
The rise of shale production has been among the forces behind the exploration retreat as the lead time from drilling to production is a tenth of what it takes to develop an offshore field.
"There's a lot of companies, particularly a lot of the larger North American independents, that have pulled out of the international exploration market and are retreating to safer domestic opportunities," Andrew Latham, a vice president for exploration services at Wood Mackenzie, said.
Energy firms argue that increased recovery from existing fields will add to reserves, offsetting the poor rate of discoveries. The global recovery rate is around 30-35 percent of a field's total reserves while firms in mature parts of the North Sea squeeze over 50 percent from assets. But the reality may be different.
"Increased oil recovery is marginal by nature," said Grethe Moen, the CEO of Petoro, the firm that oversees Norway's state oil and gas investments. "If you have stricter prioritisation of capital and a lower budget for investments, often these projects are the most easy to cut back.
Costs are also a big problem with drilling costs tripling in ten years due to slower work, higher rig rates and increasing bureaucracy, thwarting exploration.
"If we just continue to make this more and more expensive, then (Tesla CEO Elon) Musk with his batteries and solar panels will become cheaper than us and we'll be out of business," said Hege Kverneland, the Chief Technology Office of National Oilwell Varco.
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