The oil and natural gas sector continues to grapple with the commodity price rout, but the industry, and in particular Big Oil, is headed into a recovery leaner, more efficient and profitable as conventional exploration is increasingly eschewed, according to Wood Mackenzie Ltd.

In a new report issued Tuesday, "Exploration Benchmarking -- Majors 2006-2015," Wood Mackenzie researchers said the oil majors, like their independent brethren, are relying more to less costly unconventionals to restock their reserves.

"Exploration has a new role: less is more," said Wood Mackenzie Vice President Andrew Latham, who oversees exploration research.

Between 2006 and 2015, the oil majors invested $169 billion in exploration, adding a total of 72 billion boe to their resource base. Of this, about one-third, or 25 billion boe, was from unconventional plays. Resource discovery costs for the period averaged $1.78/boe. Returns over the period were only 6%, versus an industry average of 10%.

"Our research shows that a number of things needed to, and are, changing," said Latham. "One positive side effect of the downturn that we have seen is that the majors have changed the way they approach exploration, leading to improved returns, even at lower prices."

Steep cuts in exploration spending during 2015 led to high-grading across the board, which in turn enhanced Big Oil's prospect quality. Unconventionals have become increasingly important, attracting 15% of the majors' exploration spending and outperforming returns from conventional exploration since 2013.

For example, last year, 11.6 billion boe was discovered through traditional, vertical drilling, according to Wood Mackenzie. That was 21% less in reserves (3 billion boe less) than in 1994.

The majors are no longer "elephant hunting in the Arctic, for example," Latham said. After spending billions and waging legal battles for years, Alaska's biggest offshore explorer, Royal Dutch Shell plc, earlier this year abandoned all but one leasehold in the Chukchi Sea and was evaluating its Beaufort Sea holdings, citing an "unpredictable" regulatory environment and poor initial drilling results (see Daily GPIMay 11). ConocoPhillips and two other operators also dropped hundreds of offshore leaseholds.

"The new economics of exploration mean...the majors have become more conscious of costs," Latham said. "Smaller budgets have required them to choose only their best prospects for drilling, including more wells close to existing fields. The industry now has in prospect a different -- and potentially more profitable -- future."

The Big Oil companies moved quickly last year to improve their weak exploration returns, cutting spending, which has forced them to high-grade prospects and sell off less desirable, i.e., more costly, enterprises. Unconventionals have become increasingly important to their portfolios, attracting an estimated 15% of total spending.

Unconventional holdings have outperformed conventional exploration returns-wise since 2013, Wood Mackenzie said.

"Good conventional exploration volumes, together with large adds from unconventionals, saw the majors add resources well ahead of the volumes they produced every year from 2011. Resource discovery costs also fell, with the lowest costs recorded in 2015."

However, conventional exploration's role in reserves replacement is diminishing. "Renewal" options, which include unconventional adds, discovered resource opportunities, enhanced recovery techniques and mergers/acquisitions, likely will prove key to future reserves replacement.

""The early indications are that the majors are now getting the exploration economics right," Latham said. "Their exploration spend halved in 2015 versus 2014, with spend per well drilled falling to levels not seen since 2008. However, there has been a shift in ambition. Companies are no longer trying to fully replace production via conventional exploration, as they used to. Now their reserves replacement will also require inorganic, brownfield or shale investments. Exploration has become incremental."

Natural gas also is going to be a bigger factor down the road, he said.

Operators "are not replacing volumes in the same ratios as their production, or in the same way. Discoveries break down to about one-quarter oil and three-quarters gas, while global production is currently nearer two-thirds oil and one-third gas. The future will become steadily more gassy."