Whatever the pace of the energy transition, the world will continue to rely on oil and gas for much of its energy needs until well beyond 2040. Exploration will be critical in meeting this future demand.
Yet exploration is widely perceived as discretionary, even unwarranted. Doubters see a world of risk, declining demand, enormous existing resources, and a supply pecking order that ranks exploration squarely in last place.
Andrew Latham and Adam Wilson, both of Wood Mackenzie Global Exploration, offered a different perspective in their June 2020 report “Exploration’s Future in a Low-Cost, Low-Carbon World.”
Only about half the supply needed to reach 2040 is guaranteed from fields already on stream, they said. The rest requires new capital investment and is up for grabs.
Cumulative global demand during the next 20 years will be at least 1,100 billion BOE, even in a 2°C scenario, and could reach 1,400 billion BOE. Around 640 billion BOE can be met by on-stream fields, leaving a supply gap of some 460 billion to 760 billion BOE.
While this gap could be bridged through existing discoveries with sufficient investment, the economics of those resources rarely attract capital funds. The easy barrels have been developed already, and, with diminishing returns, the remaining resources will be harder to recover.
On the other hand, Latham and Wilson said they believe that exploration for new resources, with a comparably low cost and high return, will account for more than 100 billion BOE of that required oil and gas if we continue on the path of the past 5 years until at least 2030.
New technologies such as digitalization could be a game changer for field recovery rates. Gains could improve development economics for brownfields and greenfields alike. Any such wins would similarly enhance exploration economics by boosting the value of new discoveries.
Reporting of environmental, social, and governance performance will become obligatory and universal, the authors said. Carbon emissions mitigation could be a wildcard favoring exploration. Companies struggling to decarbonize disadvantaged older assets might even find it cheaper to start afresh with new discoveries.
The Unmet Oil and Gas Supply Opportunity Is Huge
Financially, exploration can compete with greenfield and brownfield resources to meet future supply needs; full-cycle costs and point-forward costs are similar.
Two factors influence the opportunity for new volumes: demand throughout the energy transition and supply from on-stream fields.
Wood Mackenzie considers three demand scenarios for the longer term:
- The energy transition outlook (ETO) represents their base-case view of the energy world, broadly consistent with a 3°C global warming view.
- The accelerated energy transition (AET) represents how the world can accelerate decarbonization to around or just below 2.5°C of warming.
- The accelerated energy transition 2°C scenario (AET-2) represents how the world can drive toward deep decarbonization on a path to reach 2°C global warming by 2050.
The implications for oil and gas are vast. The highest oil demand scenario (ETO) requires 840 billion bbl production by 2040. The most advantaged are 330 billion bbl costing less than $10/bbl. These are mainly proven developed resources; just 2% are exploration opportunities.
The highest gas demand scenario (ETO) requires 550 billion BOE production by 2040. The most advantaged are 360 billion BOE costing less than $10/BOE. These are largely proven developed resources; less than 10% are exploration opportunities.
Cumulative demand to 2040 under the ETO scenario is almost 200 billion bbl of oil and 100 billion BOE of gas higher than the AET-2 scenario.
Near-term demand depends on a worldwide recession of the pandemic and the ability of OPEC+ to manage supply. But, in the authors’ analysis of post-COVID demand, near-term and long-term fundamentals are nearly the same.
The second factor affecting opportunity is uncertain supply from on-stream fields.
Most upstream capital investment in the base case is uncommitted and indeed may never happen. Almost $4 trillion over the next 20 years goes to sustaining output from fields already on stream.
As soon as the industry steps off its investment treadmill, production from on-stream fields will fall fast. The authors estimate average annual decline rates of 8% for oil and 6% for gas.
A nil-investment scenario cuts more than 200 billion bbl of oil and 100 billion BOE of gas from the base case supply by 2040.
