Wood Mackenzie forecasts that a supply gap will open up in the mid-2020s, growing to a gap of 12 million bpd by 2004.
"Barring technology breakthrough, we’ll need new oil discoveries," says Simon Flowers, chairman & chief analyst, Wood Mackenzie.
Globally, spending on exploration has dropped for $60bn per year in 2014 to $25bn in 2018. The company notes a direct correlation with lower volumes of reserves discovered. Since it takes an estimated 10 years to build a new discovery to peak production, that leaves very little time to fill the gap that Wood Mackenzie expects will open up in the mid-2020s.
"The one bit of good news is that volumes discovered correlate with spend," Flowers writes. "Reserves per exploration well has held at a reassuringly consistent rate of 25 mn boe since 2014, around half liquids."
But he notes three key factors that he expects will help the industry increase investment into exploration.
During the downturn, it was difficult for explorers to convince investors and company boards to fund exploration activities. Now there is money; Wood Mackenzie estimates $160bn in free cash flow for 48 NOCs and IOCs in its corporate service. Still, companies are in a conservative mind frame following the downturn, with a focus on returning capital to shareholders. But this ignores long-term interests in favor of the short-term.
2. Reward over risk
Flowers says that exploration is performing better now than when oil prices were above $100 per barrel, and tight discipline following the downturn led to double-digit returns in 2017, which he says are the highest in more than a decade. "The industry just needs to demonstrate it can continue to create value as it ramps up spend," Flowers says.
3. Portfolios that can deliver
Big oil discoveries are more likely to be made in frontier areas, where oil majors, a few NOCs and some E&Ps have built exposure.
"As well as Guyana, among the most eagerly watched potential play opening wells will be in Suriname, and the Brazilian Equatorial Margin; Mexico; Senegal, Gambia, Namibia and South Africa; Australia (where Quadrant’s Dorado discovery is the biggest oil discovery this century); and Alaska," he says.