From a global perspective, conventional exploration and discoveries are at the lowest level in seven decades. In many ways, the rise of unconventional resources has diverted some attention away from conventional E&P. However, there are many other factors that could be playing into the story. Our research experts Keith King and Jerry Kepes join Upstream in Perspective to share insights on the topic.

Jessica Nelson:
Keith, I prefaced a little bit of that on the state of the conventional E&P, can you give us a summary of the current trends in exploration?

Keith King:
If we look at the last four years, we're discovering about 13 billion barrels a year. The world consumes somewhere around 55 billion barrels equivalent, oil and gas. So we're not replacing what we produce. And, we're also not replacing what we develop. So we're actually discovering less than we develop, and developing less than we produce. So, 13 billion barrels a year for the last four years. If you take the five years prior to that, it's about twice that amount.

Hill Vaden:
Are these barrels of oil or barrels of oil equivalent?

Keith King:
Both oil equivalent and oil.

Jerry Kepes:
Well, I think we should say, I know you would, Keith, that the unseen actor in our time here today is unconventional, which has been filling in some of that gap. So it's not quite as dire, but nonetheless even with the unconventional, there's a gap.

Keith King:
There's a gap, and if you look at the production of oil, for example, about 90% of it is conventional. So replacing the conventional is an important issue. The unconventional has added about seven million barrels a day of production, so it's certainly not insignificant, and it's kind of diverging and going along its own course. Although, after the price collapse in 2014, we saw that conventional spending, conventional drilling & conventional discoveries maintain sort of a flattish profile. Since then, we saw a big uptake in the amount of unconventional drilling and unconventional production. So you're right, conventional has suffered, because there's been more and more money spent on the unconventional side.

Hill Vaden:
If there's such a thing as a brand name in exploration, there's some names that are tossed around. Guyana, obviously, is in the headlines as one of the successes over the past five years or so. And then you've got all of what's happening in the Eastern Med, predominately gas, and then a little bit more quietly, but there was a lot of headlines around Senegal over the past couple of years. What's the status of some of these big names? Of them, I feel like Guyana's only the one oil big name out there. The rest are very gassy.

Keith King:
Yes, Guyana is oil prone. It's about seven billion barrels discovered so far, I believe, six or seven. And probably has that much to go again. We still don't know the limits of the play. We don't know to what extent it goes into Suriname. Apache made a discovery in Suriname. So it at least goes into Suriname to some extent, but we don't know how big the play is. But yes, if you look at the last 10 years or so, it's been kind of a gassy picture.

Jerry Kepes:
There's a story around who the explorations are as companies versus the basins where the explorations generate the best result. Should we go into that now or how best to address that?

Keith King:
Well, one of the interesting things is that companies have looked at this downturn and responded differently. So some companies have pulled back completely into the unconventional plays, Marathon would be an example of that. These companies are probably losing their deep water expertise so people are becoming more specialized. It'd be difficult to imagine Pioneer or Parsley going out in deep water and drilling a well today, given the fact that they focus so much on the unconventional.

People are also specializing in basins. People are participating in fewer basins than they did five or 10 years ago. They're specializing. They're not exploring as widely as they did before. The other thing that's interesting is companies like ExxonMobil actually have become more aggressive in frontier and emerging areas. Where most companies have become less aggressive in frontier and emerging areas and has chosen to focus on maturing areas.

Hill Vaden:
And these mature & frontier classifications are referring to the system that you guys introduced last year on basin life cycles?

Keith King:
Yes, so life cycles, that expression, it starts out with frontier, that is prior to the first commercial discovery. After the first commercial discovery, it enters an emerging period, where you're exploring to the geographic and stratigraphic limits of the basin. Guyana is a good example of that.

Hill Vaden:
Sorry. Guyana's emerging or frontier?

Keith King:
Emerging. So, it was emerging really because there's onshore discoveries, that entered the emerging stage, when those discoveries were made 10s of years ago. So when you're exploring to the stratigraphic limits of the basin, it's in the emerging phase. And then the maturing phase is when the discoveries year-on-year is declining, but infrastructure's at place so it can still be very economic and we're seeing more people focusing on the maturing stage. The reason is they can bring things on quicker in the North Sea and Gulf of Mexico, are good examples.

Jerry Kepes:
Hey, can I add to that Keith, because I think they're very important. Keith basically created a classification system that we have used for several years now to reach across roughly twenty-five hundred basins, globally, that are in the IHS Markit EDIN database. And its allowed us to be much more quantitative, with judgment, in terms of what kind of basins are most likely to be favorable for exploration. And where companies are really spending their exploration dollars. So there's a couple things that are really important to talk about and Keith, forgive me.

One is, roughly, depending where you're talking, 80-90% of all conventional new field wildcats, are drilled in these maturing phase basins that Keith just talked about. Prior to the price of oil drop in 2015, it was about 80%; the last five years it jumped to 86-87%. So most conventional new-field Wildcats are not in frontier basins, they're in these maturing basins where the risk propositioned is more favorable, although you're much more likely to find these smaller fields. Right? And it's more favorable commercially because it's close to infrastructure, it's much more likely that you'll get those even smaller fields on-stream, in shorter time periods.

So, going back to the frontier, if I could say... So when we talk about the companies, think about... It was always a small set of companies who were successful in frontier, emerging phase basin exploration because that where the highest risk activities take place. That's always been difficult. And there's nothing wrong with it, right? Some of the best exploration values really generated in maturing phase basins. Although the size of the fields, as Keith would've said, is generally much smaller. So we actually have to be much more specific about what kind of exploration we mean, and who's good at what.

Now, I've been looking at this and I'm an exploration geologist myself back in the day, but since that time it seems to me, and this can be demonstrating that, this is a bit episodic, that every 10 or 15 years the industry situation changes a bit. There's only been, in any 10-15 year period, there's less successful exploration companies than the fingers of my hand; which is 10, right? Successful exploration is, those in frontier emerging, those that can have success in at least two different basins. Okay? Because this is a very difficult business.

Hear the full episode where Keith and Jerry discuss conventional exploration trends.

Learn more about our plays and basins insights.

Posted 04 March 2020.

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.