North American tight oil alone cannot cover future supply gap-exploration will need to resume

According to IHS Energy Conventional Exploration and Discovery Trends analysis from our Upstream Industry Future Service, conventional oil and gas discoveries made outside onshore North America continued their multi-year decline trend last year, based on initial 2015 results. And the drop is dramatic: Oil and gas volumes discovered in 2015 were the lowest since 1952, with oil finds setting a record low since the significant ramp-up of oil and gas exploration began following World War II. As anticipated, exploration and appraisal (E&A) drilling fell sharply in 2015, exacerbating the annual drop in resources found.

A few key takeaways from the analysis:

• The 2015 volumes of conventional oil and gas found outside of onshore North America are estimated at 12 billion barrels of oil equivalent (BOE) as of March 2016. This is the lowest year for discovered volumes since 1952.
• Oil alone discovered in 2015 was only 2.8 billion barrels-a record low!
• Discovered volumes for 2016 are unlikely to improve. Exploration budgets are again being slashed, and IHS is forecasting suppressed E&A drilling outside North America for some years to come.
• In deepwater (1,000 ft. deep to 5,000 ft. deep), the number of exploration and appraisal wells drilled worldwide dropped by more than 20 percent, while ultra-deepwater (greater than 5,000 ft. deep) E&A drilling declined by more than 40 percent, compared with 2014. Deepwater activity in 2015 also showed a marked shift toward appraisal drilling as a portion of total exploration compared with prior years, and IHS researchers expect this trend to continue into 2016.

It is noteworthy that this is "conventional oil", and does not include North American shale. One of the most striking developments has been the shift of investment by large independents from the international arena to the United States as the shale opportunity opened up. Until the focus on shale, many of these companies were among those active in international exploration. They refocused their spending to projects in the United States - although these budgets have been cut dramatically during the last year, owing to the downturn in price.

The major implication of this conventional discoveries decline is that declining discovery volumes, combined with anticipated low exploration and appraisal drilling activity for the near future, will create a "hole" in portfolios and eventually negatively impact production. This would be beyond the impact of current low oil-prices-more likely in the 5-10 year range, which is typical between discovery and first production.

Furthermore, despite its contributions to North American and global supplies, tight oil alone cannot cover the difference in the coming supply gap. IHS is forecasting global tight oil production in 2040 to still be in the range of 10 percent to 15 percent of total global oil production, so the world market will still need significant conventional exploration discovery and production.

The lack of new discoveries may also increase pressure on operators to develop discoveries already made, grow the resource in their producing fields, or use mergers and acquisitions to restock portfolios in the medium term.

For more information on the IHS Energy Conventional Exploration and Discovery Trends analysis from our Upstream Industry Future Service, please contact Sheana.Hamill@ihsmarkit.com.

Leta Smith, Ph.D., is Director, Upstream Industry Future Service, IHS Energy
Posted 13 May 2016

Learn more about the IHS study on the value proposition for global gas development.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.