The drilling segment of the oil and gas industry has suffered more than its fair share of trouble since the oil price crash began in 2014. Unlike upstreamers and refiners, drillers and other service providers have had to not just agree to reduce their prices substantially in order to remain in business, but they have also suffered the fallout from huge cuts in exploration spending.
This, according to a new report from Wood Mackenzie, is set to continue for another year: in 2017, the company estimates that oil and gas exploration investment will slump further still, to $37 billion. That would be the lowest exploration investment level since at least 2009. To compare, in 2014 exploration investment hit $100 billion.
In 2018, however, things will start recovering, Wood Mac analysts said, and by the following year investments in exploration should reach about $50 billion, growing further still in 2020 to $60 billion.
This should be good news for drillers, and particularly offshore drillers. This segment has been hit harder than land drilling because offshore wells are much costlier. Yet, faced with depleting wells both on land and in shallow waters, Big Oil is turning increasingly to deepwater offshore exploration in the so-called frontier regions, in a diligent search for untapped deposits.
One recent example is Shell’s launch of its second deepwater project in Malaysia, and it’s a very good example because it demonstrates the changes that Big Oil has had to undergo in the last couple of years to improve its resilience to price crashes and raise its successful discovery rates.
An older report from Wood Mac warned that the rate of successful oil and gas discoveries had fallen drastically over the last decade. Energy companies have poured billions into exploration projects only to find nothing commercially viable and, since 2014, have had to cancel projects because of the oil price crash. This is just what Shell did with its Arctic exploration program, which cost it $7 billion before it was shuttered.
Yet, this crisis has proved beneficial in a few ways: Big Oil is now leaner, smarter and more wary when picking investment targets. Also, it strengthened its focus on developing newer and more advanced exploration and production technologies to maximize returns and minimize cost.
Enter Shell with its Malikai deepwater project. Over the last 28 months, the company has made 16 discoveries along the Malaysian coast, uncovering oil and gas reserves of about a billion barrels of oil equivalent. Shell did this by combining cutting-edge technology with its undisputed expertise in exploration.
Deep waters are a major frontier region for future oil and gas investments and drillers, which as Wood Mac analysts note, have not sat idly by. On the contrary, like onshore drillers who have bet big on efficiency improvements to bring down costs in the cost-cut rush, offshore drillers have been working on their efficiency. As a result, the cost for drilling an offshore well should go down to $30 million or less, which, according to Wood Mac, will make these wells commercially viable even if oil remains around $50 a barrel.
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