Quarterly losses, dividends cut, budgets slashed – oil companies are in survival mode. Protecting cash flow is a top priority, so why continue to spend on exploration? The primary long-term organic growth engine of the upstream industry now looks like a dispensable luxury. Investment in exploration grew at a dizzying pace for over a decade, but falling returns – even at $80/bbl planning prices – caused many to question the role of exploration in their business.
Spend on exploration and appraisal (E&A), outside of the shale plays, tripled between 2005 and 2014 to a peak of $95 billion. During that time, the number of E&A wells drilled actually fell. The entire industry was subject to spiraling cost escalation throughout this period, reflecting the rise in oil prices. What changed in exploration was not only the cost base, but also the nature of the wells. Fewer cheap wells were drilled onshore (excluding US shales), while more wells were drilled in expensive deep waters. Over the decade, explorers moved to ever-deeper waters, and targeted more deeply buried and complex reservoirs. These increasingly challenging wells required newer drilling rigs with greater capabilities – which came at a cost.
To secure a new-build rig, oil companies had to sign multi-year contracts, typically at day rates of $600,000 or more, triple the average day rate in early 2005. The wells took longer to drill (because of the greater depth), pushing up total well cost. And, of course, these higher drilling costs not only applied to exploration, but also to any potential development of the discoveries.
Exploration spend was buoyed by higher oil prices, but was also success-driven. The years 2009 to 2012 were outstanding for finding giant fields off Brazil, West Africa, East Africa and elsewhere, and successful exploration companies were the darlings of the stock market. Total annual discovered volumes averaged over 35 billion barrels of oil equivalent (boe) during these years.
The last three years have been much less prolific. Once drilling activity shifted from exploration to appraisal in the two mega-regions of Brazil and East Africa, total discovered volumes fell away to average less than half the volumes of the previous four years – despite continuing high levels of spend. That said, the technical risks remained largely unchanged, even with the increasing complexity. Across the decade, a little more than one in three wells found hydrocarbons.
More worrying than the fall in overall volumes is that proportionally fewer discoveries were considered commercially viable. Wood Mackenzie analyses each discovery on its individual merits to decide whether it is likely to be developed and commercialized. Before 2013, around half the discoveries (and the resources discovered) were considered commercial. Of the 2014 finds, only 20% are currently thought to be commercially viable. Mostly this drop was because the costs of developing the oil and gas were too high. But our team of exploration analysts determined that there were other factors exacerbating the trend:
The result: across the industry, full-cycle returns fell. Our in-depth work analysing the full extent of exploration activity, from initial geophysical studies through to appraisal, and including all dry holes, showed that full-cycle returns dropped from an average of 12% (IRR) in the five years to 2012, to below 5% in 2014, even at $80/bbl long-term. This metric is hopelessly short of the typical cost of capital for an E&P business of say 10%. Our analysis of the top explorers shows that individual company results varied markedly during this period, but falling commodity prices that weren’t matched by falling costs meant that almost everybody’s results slid compared to prior years.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
In the last week, global crude oil price benchmarks have leapt up by some US$5/b. Brent is now in the US$66/b range, while WTI maintains its preferred US$10/b discount at US$56/b. On the surface, it would seem that the new OPEC+ supply deal – scheduled to last until April – is working. But the drivers pushing on the current rally are a bit more complicated.
Pledges by OPEC members are the main force behind the rise. After displaying some reticence over the timeline of cuts, Russia has now promised to ‘speed up cuts’ to its oil production in line with other key members of OPEC. Saudi Arabia, along with main allies the UAE and Kuwait, have been at the forefront of this – having made deeper-than-promised cuts in January with plans to go a bit further in February. After looking a bit shaky – a joint Saudi Arabia-Russia meeting was called off at the recent World Economic Forum in Davos in January – the bromance of world’s two oil superpowers looks to have resumed. And with it, confidence in the OPEC+ club’s abilities.
Russia and Saudi Arabia both making new pledges on supply cuts comes despite supply issues elsewhere in OPEC, which could have provided some cushion for smaller cuts. Iranian production remains constrained by new American sanctions; targeted waivers have provided some relief – and indeed Iranian crude exports have grown slightly over January and February – but the waivers expire in May and there is uncertainty over their extension. Meanwhile, the implosion in Venezuela continues, with the USA slapping new sanctions on the Venezuelan crude complex in hopes of spurring regime change. The situation in Libya – with the Sharara field swinging between closure and operation due to ongoing militant action – is dicey. And in Saudi Arabia, a damaged power repair cable has curbed output at the giant 1.2 mmb/d Safaniuyah field.
So the supply situation is supportive of a rally, from both planned and unplanned actions. But crude prices are also reacting to developments in the wider geopolitical world. The USA and China are still locked in an impasse over trade, with a March 1 deadline looming, after which doubled US tariffs on US$200 billion worth of Chinese imports would kick in. Continued escalation in the trade war could lead to a global recession, or at least a severe slowdown. But the market is taking relief that an agreement could be made. First, US President Donald Trump alluded to the possibility of pushing the deadline by 2 months to allow for more talks. And now, chatter suggests that despite reservations, American and Chinese negotiators are now ‘approaching a consensus’. The threat of the R-word – recession – could be avoided and this is pumping some confidence back in the market. But there are more risks on the horizon. The UK is set to exit the European Union at the end of March, and there is still no deal in sight. A measured Brexit would be messy, but a no-deal Brexit would be chaotic – and that chaos would have a knock-on effect on global economies and markets.
But for now, the market assumes that there must be progress in US-China trade talks and the UK must fall in line with an orderly Brexit. If that holds – and if OPEC’s supply commitments stand – the rally in crude prices will continue. And it must. Because the alternative is frightening for all.
Factors driving the current crude rally:
Already, lubricant players have established their footholds here in Bangladesh, with international brands.
However, the situation is being tough as too many brands entered in this market. So, it is clear, the lubricants brands are struggling to sustain their market shares.
For this reason, we recommend an impression of “Lubricants shelf” to evaluate your brand visibility, which can a key indicator of the market shares of the existing brands.
Every retailer shop has different display shelves and the sellers place different product cans for the end-users. By nature, the sellers have the sole control of those shelves for the preferred product cans.The idea of “Lubricants shelf” may give the marketer an impression, how to penetrate in this competitive market.
The well-known lubricants brands automatically seized the product shelves because of the user demand. But for the struggling brands, this idea can be a key identifier of the business strategy to take over other brands.
The key objective of this impression of “Lubricants shelf” is to create an overview of your brand positioning in this competitive market.
A discussion on Lubricants Shelves; from the evaluation perspective, a discussion ground has been created to solely represent this trade, as well as its other stakeholders.Why “Lubricants shelf” is key to monitor engine oil market?
The lubricants shelves of the overall market have already placed more than 100 brands altogether and the number of brands is increasing day by day.
And the situation is being worsened while so many by name products are taking the different shelves of different clusters. This market has become more overstated in terms of brand names and local products.
You may argue with us; lubricants shelves have no more space to place your new brands. You might get surprised by hearing such a statement. For your information, it’s not a surprising one.
Regularly, lubricants retailers have to welcome the representatives of newly entered brands.
And, business Insiders has depicted this lubricants market as a silent trade with a lot of floating traders.
On an assumption, the annual domestic demand for lubricants oils is around 100 million litres, whereas base oil demand around 140 million litres.
However, the lack of market monitoring and the least reporting makes the lubricants trade unnoticeable to the public.
Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream