Major oil and gas discoveries are at a 20-year low and depressed oil prices have already translated into smaller exploration budgets. That will diminish the chances of reversing this trend.
But over the long term, global oil demand will grow and remain strong. How can companies survive the current period of depressed prices while still produce over the long-term when demand is expected to be higher?
Finding new sources of oil has always been the primary strategy of the oil industry. But digging more efficiently is perhaps of greater importance when finances are stretched and untested areas more risky. Instead, producers are faced with three options:
- Increase production from existing assets.
- Monetize known resources.
- Reduce exploration and production costs.
How to extend the lifespan of existing assets is not a new dilemma. The recovery rate of conventional oil reserves averages just 30% to 35%. Tertiary or enhanced oil recovery could ultimately free up to 60% or more of a conventional reservoir's resources. In general, this is carried out through injecting steam, injecting gas such as CO2, or injecting additional chemicals into the well.
Service companies such as Halliburton (HAL) and Schlumberger (SLB) have made a business out of extracting more oil out of mature fields. In the U.S., the CO2 injection technique has been successful in West Texas and New Mexico in particular. In Mexico, authorities hope that the country's mature fields will spark similar interest in its newer offers.
The unconventional space is the latest target for enhanced recovery techniques. Many hope that "re-fracking" existing wells will be a way for struggling shale companies to reduce costs and maintain production amid a dismal oil price outlook.
While some smaller shale companies and service firms have heralded the re-frack as a way to reduce costs, the process has, at best, produced mixed results. According to one report, 86% of refracks in the Bakken shale resulted in net positive value compared to just 52% of refracks in the Eagle Ford.
This is due in part to the fact that not all shales are created equal. Still, with re-fracking around a quarter of the cost of a new well, there is no doubt we will see an increase in the practice over the coming year.
While new major discoveries may not be forthcoming, there are many areas of the world where oil deposits are well known, but for a variety of reasons, have not yet been fully developed. The below-ground risks are low (as the resource potential has been properly determined) but there are a series of above-ground factors have prevented their exploitation. The seven-decade monopoly enjoyed by Mexico's national oil company is one example. The recent political instability and, at times, hostility in Argentina and Venezuela are others.
Lower exploration budgets mean that Mexico's rich deepwater areas will have to compete more fiercely with other offshore options across the globe, but that does not make them less desirable. The Gulf of Mexico in particular should attract widespread interest. The culmination of the nation's first bid round later this year will be telling.
In Argentina, the presidential election in October this year will likely usher in a more pro-business administration. Meanwhile, the current government is committed to reducing the cost of drilling to $7 million per well by the end of 2015. A more attractive business environment and lower costs will increase Argentina's competitiveness.
Venezuela has an immense conventional oil and natural gas resource potential. Yet, the South American OPEC member is mired in an ever-deepening economic and political crisis. With bungling leadership from President Nicolas Maduro, it is unclear at what point this will turn around. Still, the resource potential alone will attract interest from some of the braver oil drillers out there.
And this is only the Western Hemisphere. Russia, Asia and Africa share many of these traits and opportunities. Still, many of these projects have medium- to long-term horizons and will not provide much assistance in the short term.
The final option -- and perhaps the most immediate -- is to lower costs. There are several ways to do this, from reducing human capital to increasing efficiency to technological innovation. Jobs in U.S. shale fields are already disappearing, with at least 100,000 layoffs reported and more to come. Or one can simply remove human capital from the equation entirely. Offshore oil rigs are increasingly unmanned, for example.
Tough times have also prompted more innovative cost-cutting measures. A so-called "fracklog" -- or backlog of unfracked wells -- has emerged as drillers respond to low oil prices in the spot market compared to higher futures prices. Some of the larger companies, such as EOG Resources (EOG) and Anadarko (APC) are drilling but not completing wells, which allows them to sell the oil forward while storing it effectively until delivery.
This may allow the larger companies some breathing space to weather the low oil price storm but it is unlikely to provide much relief to those already struggling. In this current oil price environment, and with the chance of major oil discoveries increasingly remote, even more innovative solutions are no doubt on the horizon.
By Alexis Arthur of Oilprice.com