No-regrets from near field exploration, but higher risk, frontier exploration require bold moves.
The NCS Exploration Strategy 2020 conference took place in November with presentations by oil companies on their strategies and plans. In addition, both NPD and the Ministry of Petroleum gave important contributions.
My write-up below is based on some of the key take-aways from the conference as well as some of my additional analyses.
Historic and forecast production from NCS including contributions from exploration yet to find, as per NPD Resource Report 2020 Exploration. Left axis: Thousand boe/day.
The overall message is that near field exploration (referred to as ILX, PLX, distance to hub of <50 km, mature, etc), typically of smaller size, is increasingly recognized as a source of “high value barrels” that can be tied efficiently into existing infrastructure, both with respect to cost and time. This will be even more important in the current market conditions of lowered oil prices and the increased uncertainty of how the energy transition will unfold over time.
The traditional frontier exploration, targeting higher risk and larger find size opportunities (or what Lundin Energy simply refers to as “big finds” or Equinor using “step out wells, material, or play opening potential, for new hubs”). These should be sized in the hundreds of million boe but have not delivered significant results in the recent years.
Importantly, this is not for the lack of trying.
Companies like Lundin and Petoro seem to have targeted larger sized prospects, with limited success, and they have therefore performed below the industry average in terms of success rates and return on exploration spend. Petoro, or the SDFI, licence awards are believed to include the high potential licences, which seems not to have delivered on the upside.
Some of the frontier type licences have resulted in marginal or non-commercial discoveries, such as Korpfjell and Intrepid Eagle in the Barents Sea, Toutatis and Balderbrå in the Norwegian Sea, the dry wells Vågar and Silfari, also in the Norwegian Sea, and Nipa and Driva in the North Sea.
The consultants from Westwood Global Energy Group pointed out that Norway was the top one province globally for high impact wells in 2019. A decline was experienced in 2020, but Norway could be back again in 2021.
Old is good
As a consequence, the find sizes from the NCS continued to decline, the largest discoveries in the last 5 years have all been below 150 million boe, and the 2 largest ones, Liatårnet and Grosbeak West, are also next to existing infrastructure (and arguably discoveries that had already been made further back in time).
The NPD’s estimates of YTF (yet to find, undiscovered resources) potential for the NCS remain largely unchanged in their RESOURCE REPORT 2020 Exploration.
However, NPD believes positive surprises are needed to deliver. As an illustration, NPD has calculated that the Barents Sea South would require 77 years of exploration drilling at the current rate and small find sizes to deliver the YTF base estimate, which is clearly too long.
NPD still recognizes the importance of the smaller discoveries, as the NPD’s report shows that in the last 20 years the top 11 discoveries contributed 42% of the economic value whilst another 168 discoveries contributed the remaining 58%.
The presentation from the Ministry of Petroleum, held by Lars Erik Aamot, emphasized – with reference to the temporary tax changes that were introduced to incentivize development activity in response to the drop in oil prices – the importance of focusing beyond “PDO by 2022”.
Presumably, this would include continued focus on frontier, higher risk opportunities.
To look beyond the near field, near term, to test new plays requires oil companies to be “daring”, according to Aker BP’s Evy Glørstad.
Lundin is targeting salt diapers in the Barents Sea, Toutatis follow-up, and deepwater Vøring (together with several others, including Total), while Equinor and Vår favour the sometimes “chaotic” Cretaceous plays in the Norwegian Sea.
Even smaller companies are taking bets, e.g. INEOS and Lime going all-in for the Fat Canyon, an upper Jurassic pinch-out prospect, Petrolia (with Equinor) targets the Molaris basement play, MOL takes a last shot at the Mandal high, and PGNiG persisted successfully with the Warka prospect.
Vår Energi is forward leaning on the doability of Barents Sea gas export solutions to unlock the resource potential.
Oil companies are continuously seeking new ways of working, for example by integrating their exploration and production teams (Aker BP has named this EXPRES), to digitize, manage and share data and information, combine the competence of service companies with in-house expertise, and unlock new ideas from their own staff (even of old school type, according to Equinor, with reference to the small Swisher discovery this year), and ensure diversity among the exploration companies.
All this, whilst recognizing the challenge of the energy transition and reducing emissions.
In summary, NCS exploration delivers good results. The last 3 years had returns on exploration spend well above the period since 2011, although still not at the level since 2010 when the Johan Sverdrup discovery was made.
Exploration spend has come down to moderate levels, valuable discoveries are being made, despite being small, and companies report exploration is getting back to levels pre-covid and oil price drop.
Large discoveries will, however, remain important for the long term. The illustration below, based on NPD projections, shows the impact of once again making a giant discovery of Sverdrup size.
Going for the big finds requires bold moves, whilst near field exploration is no-regrets.
Wittemann E&P Consulting