The success of unconventional drilling has transformed the energy industry; unconventionals, or the tight rock play, has brought different options to the table over how we've explored in the past.

The concept of bringing short cycle barrels to market in existing or mature basins has meant companies can deliver production within a tighter timeframe. Existing infrastructure can get a well online in record time so for obvious cost and time saving reasons, companies want to explore in mature basins (like the North Sea and the Gulf of Mexico). As a result, because so many resources have been delivered and thereby changing the narrative from a supply scarcity to a supply abundance, exploration in general, has fallen out of favor.

Although there have been successes with unconventional drilling, it's hard to dispute the fact that conventional exploration today accounts for 90% of the world's oil and gas production (and more than 80% of these significant finds have been in deep water). That number may have experienced a consistent downward slope since 2010, but it continues to produce high volumes which has stumped the industry; some anticipate a turnaround, but it never materializes.

There are still discoveries being made (namely offshore) but not at the rate we have seen historically. For example, Total recently made a discover in the South Outeniqua Basin off of South Africa; ExxonMobil continues to make exciting discoveries in the Guyana Basin.

It is a contrarian environment.

While smaller companies focus on unconventionals and exploration opportunities in maturing areas, there is less competition in the frontier and emerging areas; the majors are taking advantage of this by increasing their acreage position. This is a bit of a gamble with the energy transition coming into full swing; if the shift to renewables takes longer than expected and shale starts to roll over, just as IHS Markit anticipates, this could be an enormous windfall for those companies focused on newfields.

Add to this now the impact of technology and innovation on lowering cost in general. Automation of offshore wells (from onshore operations) is a reality, we can monitor from anywhere in the world in real time.

Then we must ask ourselves why, when it is factually the cheapest time to drill a well, shoot seismic, and to explore in general, are investors saying we need to show shareholder value?

For the financial industry, the oil and gas sector has underperformed over the last 10 years, and what they are looking for is certainty. They want to know that the companies they invest in can manage the cycle and provide ROI regardless of oil price. The goal is to give back 4 - 5% and grow 2 - 4%, systematically no matter where the price is; to prove you can provide good returns. If your performance swings with the price, it shows you cannot 're not control cost and have a tendency to overspend when prices are high. For the financial industry it is a matter of production not exploration.

Price is going to continue to be volatile, as is the market and its geopolitics. The biggest catalyst is how each company will define exploration and how they can articulate that value story to investors.

Watch a panel of our experts for more information and detail on the business of exploration.

Posted 23 May 2019

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.