Global exploration success in 2018 reflected a disciplined capital approach that is likely to continue this year, with many of the leading prospects not only conventional, with many in deepwater, but also weighted to natural gas.

The sector is keen to find new reservoirs, but they are also keen to keep its finances in the black.

“We are seeing a long-overdue recovery in the sector,” said Wood Mackenzie’s Andrew Latham, global exploration vice president. “Last year conventional exploration returns hit 13% -- the highest calculated in more than a decade.

“As 2018’s discoveries are appraised and projects move through the development cycle, we expect these economics to improve further.”

The exploration sector last year added at least 10.5 billion boe in conventional newfield volumes, with a split of 40:60 oil-to-gas.

“These volumes are currently the lowest for several decades, but we expect they will increase, thanks to both further disclosure and appraisal,” Latham said. “Similar resource creep from the initial year-end estimates has averaged around 40% over the decade. In 2017, it was 50%.”
Overall volumes may be modest but some well results were encouraging, including from three discoveries in Guyana (Ranger and Hammerhead) and offshore Australia (Roebuck sub-basin).

Three giant fields were also unearthed: Novatek’s 11.3 Tcf North Obskoye gas find offshore Russia, the Calypso gas discovery offshore Cyprus and Guyana’s Hammerhead. The three fields, combined with 18 large discoveries last year, accounted for an estimated 80% of total discovered resources, according to Wood Mackenzie.

This year, the Americas are likely to receive lots of attention.

In the U.S. Gulf of Mexico, for example, Chevron Corp. plans to spud Kingsholm-1 in the prolific Mississippi Canyon toward the end of this quarter. The Kingholm prospect is high-pressure, high-temperature, and it holds an estimated 300 million boe of resource.

Latin America may also be a go-to destination for exploration, Latham said.

“Latin American plays account for one-third of global large and giant prospects scheduled for drilling in 2019,” he said. This region will also see one-third of the potential play-opening wells. Exceptional reservoirs in Brazil, Guyana and Mexico will attract the most investment. We expect billion-barrel scale volumes from these emerging and newly proven plays, as has been the case in the last couple of years.”

Southern and Western Africa may also see a resurgence in the offshore, where many of the planned wells could unveil new prospects or add large volumes from blocks initially drilled.

Worldwide, 2019 discoveries are expected add around 15-20 billion boe of new resource, according to Wood Mackenzie.

Five wells in particular bear watching, led by Peroba, a pre-salt discovery in Brazil’s Santos Basin that is on trend with the giant Lula discovery. Peroba, estimated to hold volumes of 5 billion boe-plus, could prove a significant find for Petróleo Brasileiro SA -- aka Petrobras, Brazil’s state-owned producer -- which is partnering with BP plc and China National Oil and Gas Exploration and Development Corp.

Another well to watch is Brulpadda-1 in South Africa’s frontier Outeniqua Basin. Total SA operates the well, with drilling results expected during 1Q2019. Prospect volumes are pegged at around 1 billion boe.

In Egypt’s Nile Delta, the gassy Nour-1 also is underway by Italy’s Eni SpA and its partners. If they find success, the gas well is likely to impact other projects in the region. Its near-shore location could lead to other wells being brought onstream, strengthening Egypt’s export prospects. Nour’s resource is estimated to be about 860 million boe, according to Wood Mackenzie.

The Jethro prospect on the Orinduik Block offshore Guyana is another well worth watching as it is on acreage adjacent to ExxonMobil Corp.’s prolific Stabroek Block. It would target a 200 million boe prospect in the same play as the Hammerhead find.

Worth watching too is Total’s Venus-1 well in Namibia’s ultra-deep offshore, which could be in fact the year’s largest discovery, Latham said. The wildcat is targeting 2 billion bbl in a giant Cretaceous fan play, close to the South African maritime boundary.

In any case, the exploration sector will continue to be an exclusive club in 2019, according to Wood Mackenzie. The uptick in exploration economics over the last two years has shown how the sector has slimmed down. Fewer companies are drilling fewer wells, and many operators, regardless of size, have reduced their exploration spend.

“Even as average exploration returns rise to double-digits, newcomers will be few and far between,” Latham said. “If anything, the current corporate landscape will continue to narrow.”

Exploration Is critical for the majors, while a small number of independents and international oil companies will be readying some high-impact prospects. Private equity-backed exploration is expected to decline.

“A stronger oil price, lower cost base, refocused portfolios and greater drilling success in 2017-2018, and a healthy inventory of new quality acreage have cheered up the industry,” Latham said. “It is using more efficient rigs at lower rates and avoiding technical complexity. These changes will help the industry stay on track and continue to be profitable.

“However, this more upbeat spirit has been hard-won and companies will be loath to give it away. Purse strings are not about to burst open. We expect companies will focus on their best prospects, with global exploration and appraisal spending for 2019 staying close to its 2018 level of just under $40 billion per year.”

There are issues to consider longer term, he said. “Sustainable energy technologies are advancing and public attitudes toward oil and gas exploration are changing, too. As a result, we foresee more partial or complete exploration bans.

“However, so far this is a trend for economies that can afford a declining hydrocarbon contribution in their energy mix. The industry will be watching closely to see if such bans spread to countries with greater subsurface potential.”

In Global M&A, USA Is MVP

Last year the United States undoubtedly was the most valuable player in the global mergers and acquisitions (M&A) market, accounting for more than two-thirds of total value, which was a record high share, according to Deloitte, which recently issued its year-end report with a look back at 2018 deals and the outlook for this year.

“Surprisingly, the U.S. upstream sector alone represented nearly two-thirds of global deal value in 2018,” Deloitte analysts said. U.S. royalty deal volume and value reached all-time highs of 28 deals worth $2 billion.

Regardless of the price of oil in 2019, however, M&A activity is likely to remain muted “as the return of confidence is delayed and equity markets remain closed.” Deteriorating market conditions are on the horizon, which means “caution and closed equity markets will likely continue to shape M&A activity in 2019.”

Several trends seen in 2018 are expected to play out over the course of this year, and upstream companies will need to remain “financially prudent and continue delivering sustainable returns to shareholders,” the Deloitte team noted.

Oilfield services companies still struggling to regain lost margins may be under the most pressure to consolidate, while midstream and downstream players “will need to be cautious about overcapacity risk.”

Deals could be muted until more confidence returns to the market.

“Overall, large and liquid oil and gas players will likely be in the best position to ride the cycle and perhaps take advantage of a probable shift to a buyer’s market,” according to Deloitte. “For the rest, consolidation may be key to weathering a period of deepening uncertainty.”