According to Wood Mackenzie, investment in oil and gas exploration has dropped two-thirds in the past decade. “It is under attack on both environmental and economic grounds, with many stakeholders happy to stop drilling altogether,” the firm writes.

But neglecting exploration would be unwise, the analysis cautions. “Successful exploration lowers the cost of oil and gas to consumers, cuts carbon intensity and adds value for both resource holders and explorers,” it explains. “Demand is proving resilient and investment in new supply is needed.”

New supplies matter even though the industry has 3 trillion barrels of oil equivalent in inventory, enough to satisfy oil demand for 45 years and gas needs for 60, Wood Mackenzie says. “The industry urgently needs new barrels to help fix its acute shortage of advantaged resources. These are the low-cost, lower-emissions resources needed to displace dirtier and higher-cost alternatives,” the firm argues.

Exploration’s Track Record

According to Wood Mackenzie, searching for “advantaged resources” can deliver substantial returns. “Full-cycle returns have been consistently in double digits every year since 2015, averaging 15%,” the analysis details. “We value new field discoveries at much more than they cost to find, with net value creation of over $160 billion since 2015, assuming an industry planning price of $65/bbl Brent long term.”

Of course, it acknowledges, exploration can be risky. “There is no guarantee that any individual explorer will enjoy these positive returns,” the company says. “Long-established industry success rates see only one well in three making a discovery, of which only half typically prove commercial.”

Given that reality, Wood Mackenzie recommends that oil and gas companies “spread their exploration risk and invest consistently over several years to improve their chances of delivering average or above-average returns.” The company cautions that “one-off shots or a scattergun strategy are recipes for failure.”

While it’s possible to gain advantaged resources through acquisitions, Wood Mackenzie says exploration usually ends up being cheaper. “The mergers and acquisitions market for advantaged pre-final investment decision (FID) assets is very competitive and fully priced, whether these are conventional or shale reservoirs,” the firm explains.

“Over the past five years, we calculate industry-average breakeven prices for exploration at around $45 per boe (Brent, net present value 10%) versus $65 per boe for M&A. The gap for advantaged resources is even wider because of the shortage of such assets on the market,” Wood Mackenzie comments.

The Environmental Case

In addition to reducing costs, investing in exploration can help companies minimize their environmental impacts, Wood Mackenzie argues. “New fields are cleaner, thanks to modern decarbonization technologies and higher facilities throughput,” it says.

Citing its Lens Upstream service, the firm estimates that fields that are about to begin production in the next few years will have an average scope 1 and 2 emissions intensity of 17 kilograms of carbon dioxide equivalent for each barrel of oil equivalent from 2025-2030. That is 11 kilograms less per boe than existing fields.

Despite new fields’ lower emissions, the analysis notes that some environmentalists may object to exploration for fear it will increase hydrocarbon demand. “In fact, new fields do not swell demand,” Wood Mackenzie assesses. “Global oil and gas demand growth of almost 50% since 2000 is far in excess of everything happening in exploration. Demand neither grows when exploration succeeds nor shrinks when it fails. The main exception is where gas discoveries can displace high-carbon-intensity coal in the power sector.”

Recipes for Success

Exploration is one area where the adage that the early bird gets the worm applies. “First movers and fast followers into new basins and plays capture most of the value,” Wood Mackenzie finds.

The analysis adds that explorers usually find their biggest discoveries in deepwater. “To make a difference, explorers will usually need new frontiers or deepwater, or very often both,” it says.

“Frontier drilling added over 80 million boe per well, more than seven times wells in mature plays,” the company continues. “Most of these new frontiers are in the deep offshore, which also stands out by scale of resources. Deepwater projects enjoy high recovery per well, and tend to have lower emissions intensity than shelf and onshore projects.”

The firm acknowledges that frontier plays generally have more dry holes, longer lead times between discovery and production, and limited infrastructure availability, as well as potentially untested regulatory structures. “While frontier-focused strategies win on resource scale and value, overall returns in frontiers and mature plays turn out to be roughly similar,” it assesses.

Untapped Potential

It’s unlikely oil and gas explorationists will run out of promising prospects, Wood Mackenzie assures, noting that “the next big thing is seldom obvious before its discovery.”

“Very often, it is new technology that provides the key—for example, the ability to drill in ever deeper waters,” Wood Mackenzie reflects. “Today, the industry is excited about the potential of artificial intelligence (AI) to continue improving seismic data and interpretation. Ever-sharper resolution of the subsurface could be the catalyst for a wave of innovation and new geological ideas. AI should also bring efficiency gains that will be invaluable for exploration teams, which suffered deep headcount cuts during the pandemic years.”

Experience suggests explorationists will continue to find attractive development opportunities, the company says. Even with dry holes included, the average discovery well adds 30 million barrels of oil equivalent to the world’s reserves, Wood Mackenzie estimates. “(This is) a trend unchanged over the past four decades and more than 50,000 wells,” the analysis says. “An abrupt decline in such a long-established trend seems unlikely.”As an example of an area that continues to yield giant discoveries despite a long history of development, Wood Mackenzie points to West Africa’s Côte d’Ivoire basin, which has been explored since the 1950s. “In 2007, Kosmos decided to venture out from drilling mature plays in the shelf and test the deepwater sandstone play, resulting in the Jubilee oil discovery. In 2021, Eni struck gold when it boldly tested a new deepwater carbonate play in the same basin, resulting in the giant Baleine oil discovery,” the firm recalls.

“There’s a strong case to be made for further investment in high-impact exploration,” Wood Mackenzie says. Among other reasons, it reiterates that “discoveries are worth much more than they cost to find, as evidenced by the sector’s long track record of successful value creation.”

Unfortunately, the firm continues, exploration suffers from image issues. “The widespread perception that exploration is bad for the climate threatens everything from access to opportunity and the social license to operate to talent attraction and retention. That misconceptions abound in this regard does not mean they will be easily overcome,” it clarifies.

“Exploration needs to better market its role in decarbonizing oil and gas supply, as well as its disconnection from demand growth,” Wood Mackenzie suggests. “Many explorers know this will remain a hard sell and choose to fly under the radar, quietly delivering returns while keeping a low profile.”

For the full post, see No Country for Old Fields: Why High-Impact Oil and Gas Exploration is Still Needed. In addition to comments on majors’ current investments in exploration, the analysis includes maps and figures showing the size and location of recent discoveries, the amount of value exploration creates at different oil prices, and the drastic difference in per-well discovery volumes between frontier plays and established ones.