Providing coverage of Alaska and northern Canada's oil and gas industry
July 2020

Vol. 25, No.28 Week of July 12, 2020

Explorers still needed

Discoveries to plug supply gap of 460 billion to 760 billion boe into 2040

Steve Sutherlin

Petroleum News

Slashed oil and gas exploration budgets due to the COVID-19 oil market crash of 2020 have led to a sharp drop in discoveries.

Global discoveries of conventional resource volumes reached just 4.9 billion barrels of oil equivalent in the first half of 2020, the weakest-performing first half of the 21st century, according to Rystad Energy estimates.

Resource volumes were 42% lower, while the number of discoveries dropped by 31% versus the same period in 2019, Rystad said, adding that the average monthly discovered volumes so far this year are estimated at 810 million barrels of oil equivalent, a 34% drop from the same period last year.

“Last year we saw the highest volumes of discovered resources since the last downturn. Based on the large number of high-impact exploration wells planned for this year, 2020 was meant to follow the same path,” said Rystad Energy upstream analyst Taiyab Zain Shariff. “But then COVID-19 struck, and the oil market crashed in 2020 first quarter, resulting in delays and cancellations as operators cut budgets.”

As 2020 exploration results plummet, a future opportunity for explorers may be emerging.

A Wood Mackenzie report says upstream exploration is needed, and exploration will be critical in meeting future global energy demand, much of which is set to rely on oil and gas until well beyond 2040.

“Only about half the supply needed to 2040 is guaranteed from fields already onstream,” Wood Mackenzie said. “The rest requires new capital investment and is up for grabs.”

“Cumulative global demand for oil and gas over the next two decades will total at least 1,100 billion boe even in a 2° C scenario, and it could run as high as 1,400 billion boe on our base case forecasts,” Wood Mackenzie said, adding that some 640 billion boe can be met by proven developed supply from onstream fields, leaving a “supply gap” of some 460 billion to 760 billion boe.

Exploration can hold its own

With additional investment, all or more of the supply gap could be met from existing discoveries; exploration can hold its own in competition, Wood Mackenzie said.

“Only resources with the lowest cost and best economics are advantaged and should attract capital,” it said.

Carbon emissions mitigation actually could be a wildcard favoring exploration, as companies struggling to decarbonize disadvantaged older assets might find it cheaper to start afresh with new discoveries, Wood Mackenzie said.

“We think over 100 billion boe - split roughly 50:50 between oil and gas - will come from exploration, this means the industry needs to maintain its success rate of the past five years until at least 2030,” Wood Mackenzie said. “Full-cycle costs including discovery are surprisingly similar to point-forward costs of incremental brownfield and greenfield alternatives.”

Gains incremental volumes enjoy from existing infrastructure are offset by the law of diminishing returns; the easy barrels have been developed and remaining resources are harder to recover, Wood Mackenzie said.

Summer vacation for traders

A lack of oil price volatility has led to many traders sitting out the action as markets move sideways in recent weeks. Market volatility is at its lowest level since February.

In the first week of July, volumes for Brent crude dropped by a third, Bloomberg reported.

The number of contracts changing hands fell by 32% versus the average in June - down almost two-thirds from the price collapse in March.

“It’s a stark contrast with March and April, which saw frenzied trading of both major oil benchmarks as West Texas Intermediate crashed below zero for the first time on record,” Bloomberg said.

Output cuts from OPEC and its allies have helped re-balance the market, but prices have stalled as coronavirus cases spread worldwide.

“We have come to a natural pause,” said Harry Tchilinguirian, head of commodities strategy at BNP Paribas.

Traders are looking for signs that demand will recover or be hampered by the outbreak, he said.

In July, prices have traded in a range of less than $3, Bloomberg said, adding that in the unlikely event Brent were to stay in that range for the rest of the month, it would be the smallest monthly band since 2004, according to an analysis of ICE Futures Europe data.

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