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Is there
room for

exploration

in a future

low-carbon
world?



Andrew Latham, Vice President, Global Exploration


 

A PERSPECTIVE FROM WOOD MACKENZIE

JUNE 2019




We see a supply gap beyond known fields of

16

million barrels of oil a day by 2040.




The challenge for explorers focused on near-term exploration is to achieve
success at sufficient scale.




EXECUTIVE SUMMARY



What does the energy transition mean for oil and gas explorers? We are
witnessing a profound change in conventional exploration’s long-held role to
replace and to renew resource. It has always been the industry’s primary engine
of growth. As the energy transition takes long-term oil growth off the agenda,
exploration’s new role is one of portfolio improvement.

 

Our base case oil demand outlook has plenty of room for future exploration. We
see a supply gap beyond known fields of 16 million barrels of oil a day by 2040.
This represents an opportunity for the industry to continue its current rate of
exploration spending. With healthy profits from exploration at oil prices above
US$50/barrel, the economic case for exploration under this scenario is
compelling.

When, why and how is the energy transition going to happen?
Find out more about our base case scenario here.

 

 

But the pace and nature of the energy transition is highly uncertain. The world
might move more quickly to deeper decarbonisation. Even if this happens, we
still see a chance for exploration to successfully re-invent itself and retain
an important role.

Imagine a future where technology accelerates the pace of change – but a
‘2-degree world’ remains out of reach. Find out more about accelerated
decarbonisation here.

 

 

Stakeholders have their doubts. Investors worry most about capital intensity and
poor results, with demand uncertainty and environmental concerns creeping up the
agenda. Public support is fast disappearing in many places. Explorers already
face drilling bans in several countries and others may follow. Fiscal incentives
may be withdrawn.

 

The industry can address some of these stakeholders’ concerns by reducing its
carbon footprint. Lower-carbon opportunities very often have lower costs and
better economics. A focus on lighter oil is also likely to be aligned with
better returns. So too an emphasis on shorter time horizons.

 

The challenge for explorers focused on near-term exploration is to achieve
success at sufficient scale. Most of the best prospects in mature basins were
drilled out years ago. Big, valuable prospects exist mostly in new and emerging
plays.

 

Companies will drill in the hope of finding something better than the
undeveloped resources they already have – lower cost and higher margin. The
emphasis will be on short lead times and flexibility. New discoveries need to
leapfrog to the top of the queue for development.

 

So exploration is not quite done yet. The energy transition might be a threat to
the scale and diversity of the exploration industry, but it need not be a threat
to its profitability.




The energy transition will have huge implications for explorers

What does the energy transition mean for oil and gas explorers? Change is
already happening that challenges the raison d’etre of conventional exploration.
The pace and nature of this transition is highly uncertain. Its maximum impact
may still be decades away, but that is of little comfort for the long-term
business of exploration. Companies need to implement strategies today that will
be robust enough for a carbon-constrained future.

 

There is a compelling economic case for exploration. The sector is back in
profit and set to remain so as long as oil prices hold above US$50/barrel. Hot
new plays such as Guyana create huge value, and doubtless many more await
discovery. While many stakeholders are unconvinced, good explorers will continue
to thrive.

 

But there is no room for complacency. In the longer term, the need for new
discoveries will diminish. Exploration needs to reinvent itself if it is to
survive.



There is a compelling economic case for exploration. The sector is back in
profit and set to remain so as long as oil prices hold above

$50

US

per barrel




01



Peak oil demand is probably less than 20 years away and many undeveloped fields
may never be required.




So it is entirely possible that, by 2040, all but 6 million barrels of oil a day
comes from fields known today.




Is exploration still required?

Because existing fields decline, there is a need for resource replacement. This
need lessens as technology slows the field declines, and as the energy
transition erodes demand. The pace of both these factors is difficult to
predict. But whatever happens, focus on lower risk and lower cost resources will
ensure portfolio resilience.

 

Peak oil demand is probably less than 20 years away and many undeveloped fields
may never be required. It is only natural to wonder what this means for
exploration. Might we already have sufficient reserves in existing fields? Can
burgeoning tight oil supply fill the gap? Will the end of oil demand growth also
spell the end of exploration?

 

In answer to all three questions, probably not: our base case oil demand
scenario looks positive for explorers. We expect a call on yet-to-find oil that
reaches 16 million barrels a day by 2040. Current industry spending of around
US$40 billion a year looks about right, based on empirical analysis of past
discovery rates and future costs. Exploration investment can continue at this
level and demand should be met.

 

But what if environmental concerns lead to demand that is much lower than our
base case?

 

Wood Mackenzie’s carbonconstrained scenario is our analysis of how the world can
move towards deeper-decarbonisation. This scenario sees existing and viable
technology trends accelerate, steering policy to shape far faster cuts to global
emissions than those currently envisaged. We model faster adoption of electric
vehicles (EVs), higher biofuel mandates and fewer single-use plastics. These
factors together remove oil demand of 10 million barrels a day by 2040.

 

So it is entirely possible that, by 2040, all but 6 million barrels of oil a day
comes from fields known today. This would indeed be an existential threat to
exploration, for it requires only a small improvement in our underlying field
assumptions for that call on yet-to-find volumes to disappear altogether.

 

The clearest threat to future exploration comes from development and production
technologies that boost existing fields.

 

Just a 2% improvement in global recovery factors could add that 6 million
barrels of oil a day by 2040. Given that we might be on the cusp of a new
digital technology revolution – advanced seismic imaging, data analytics,
machine learning and artificial intelligence, the cloud and supercomputing –
such an improved recovery scenario is hardly fanciful. Conventional explorers
must keep their discipline and focus only on the best prospects.

Base case global Liquids capacity by field status, with expected call on future
exploration

GLOBAL OIL DEMAND UNDER BASE CASE AND CARBON CONSTRAINED SCENARIOS





The energy transition FOR GAs is a different story

On an oil-equivalent basis, gas accounts for around half the volumes added by
exploration over the past decade. Base case global gas demand grows by 30% to
2040, driven by the switch away from coal. Even under our carbon-constrained
scenario, we still model gas growth of 15% over the next 20 years. The explorer
of the future is likely to be increasingly looking for, and happy to discover,
gas. But only in the right locations. There is already no shortage of stranded
gas assets.

 




Base case global gas demand grows by

Carbon-constrained scenario global gas demand grows by

30

15

%

%

by 2040

by 2040




Explore our latest Gas & LNG analysis.















Explore our latest Gas & LNG analysis.




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