Wood Mackenzie predicts cost reductions

Research company Wood Mackenzie says that it thinks that one oil industry response to low oil prices will be reduced exploration costs, rather than necessarily a reduction in exploration activity. Following a period of significant exploration cost inflation, exploration costs could fall by a third, softening the blow of exploration budget cuts, the company says.

“Over this decade inflation has more than offset (oil) price gains and left much of the industry struggling to create value,” said Dr. Andrew Latham, Wood Mackenzie vice president, exploration research. “Now that prices have fallen sharply, this problem has become acute. In the short term many explorers will react by simply spending lest. But what they really need is lower costs.”

In a recent report Wood Mackenzie has suggested that basic exploration costs will decline by 19 percent, with the simplification of exploration activities saving a further 5 percent. Improved efficiency could save 5 percent, while the emerging strength of the U.S. dollar could trim another 4 percent off U.S. costs. But, in the absence of a rapid recovery in the price of oil, the full impact of the exploration cost savings will not be seen until 2016, Latham said.

Tom Ellacott, Wood Mackenzie vice president, corporate upstream research, said that the oil industry has moved rapidly in cutting its exploration spend in response to low oil prices. However, the level of the cuts has varied widely, with one international explorer, for example, cutting its spend by 80 percent while some oil majors continue to invest through the price cycle. Shell, for example, has kept its conventional exploration spend flat year-on-year, Ellacott said.

In fact, explorers who keep their expenditure flat while taking advantage of reduced costs could see the current situation as a means of achieving more with less, taking a counter-cyclical strategy to increase drilling in high-impact plays, Wood Mackenzie suggests.

- Alan Bailey