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Oil majors starting to re-focus on deepwater exploration

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Oilfield Technology,

Exploration strategy has evolved in a period of lower oil prices and at a time when high impact oil discoveries are proving elusive. Paul Dailly, Founding Partner and Head of New Ventures, Kosmos Energy shares his thoughts about the future of exploration.

What has caught your attention in recent exploration trends?

Looking at the recent bid rounds, it is clear that the majors are starting to re-focus back on deepwater exploration, which sends a positive message about the need and importance of offshore exploration. The BP-Kosmos alliance in West Africa is another example of this, where we are looking for unexplored or underexplored areas in emerging/frontier areas with the opportunity of finding significant resources.

Are exploration efforts being weighted more towards gas or is oil still seen as the big prize?

Definitely a mix of both. The two hottest basins in the moment are Guyana/Suriname (largely oil) and Mauritania/Senegal (largely gas) and companies are looking to have a balanced portfolio of both, particularly in a world with increasing regulation around emissions and climate change. At Kosmos, we have producing assets, which are largely oil, and a major LNG/gas development project in Senegal/Mauritania with BP. We will continue to develop both the oil and gas parts of the business, which we see many of the majors doing as well.

How are companies approaching portfolio renewal: balancing farmins, license rounds and acquisitions?

Kosmos has always tried to get into countries early to secure attractive entry/fiscal terms with large acreage positions- that generally means we prefer direct negotiation rather than bid rounds. That is what we did in Ghana before discovering Jubilee and we did the same in Senegal/Mauritania. We continue to do that with recent block acquisitions in Sao Tome & Principe and Cote d’Ivoire and are looking at other regions as part of our new venture strategy. We will also look at farm-ins and M&A, where there is clear strategic logic to the transaction (i.e. it fits with our existing asset base or is in a geography we know well). The recent acquisition of Hess’s assets in Equatorial Guinea is a good example of this and we have been very pleased with the performance of those assets since we closed the deal in November.

What do Governments need to do to make a difference to exploration investment decisions?

It is important that governments/communities benefit from resource exploitation in their countries, either through a PSC arrangement or tax/royalty system. The terms must also be attractive enough for the O&G companies to want to explore for hydrocarbons in the country, often spending hundreds of millions of dollars in exploration and potentially billions if a project moves through to development/production.

At Kosmos, we spend just as much time above the ground in a country as we do below it, working with governments and local communities to better understand the needs of the people and the opportunities to develop a sustainable oil and gas sector in the country. Both host governments & exploration companies have had issues to deal with given the change in oil prices over the last few years. We find governments generally receptive in principle to changing terms to fit the new reality of oil and gas economics, however it can take a long time for states to enact change, which can lead to them losing inward investment as exploration budgets only stretch so far.

How is conventional exploration competing with unconventional resources for capital?

For the last few years, unconventional/shale dominated the headlines across the sector, largely as a result of significant production increases in the US (Permian, Delaware etc). However, in recent months, a number of cracks have started to form in the shale story. Shale is very like deepwater exploration, i.e. the operators with the best assets in the best locations, with the best entry terms and best management/execution will be successful. This also means that overpaying for sub-optimal assets, coupled with poor execution will yield poor results (the same in both shale and deepwater). With the majors returning to the deepwater and a growing understanding that not all shale is great means there is more interest in conventional exploration again. We would expect this trend to continue as more big conventional discoveries are made (Liza, Yakaar, Zama etc).

Is there a breakthrough technology on the horizon that will impact industry performance?

Technology continues to evolve, so rather than a single “light-bulb” moment, there will be continuous improvements to all areas of the industry, e.g. seismic acquisition and processing (both the time it takes to process and the quality of the output), production optimization, EOR, drilling etc. As an example, working alongside BP in West Africa has given Kosmos access to BP’s significant technology resources, which significantly accelerates the time taken to process terabytes of data (what may have taken months in the past can be done in a number of days). However, as with all technology, it’s application by talented individuals to solve specific problems is where it can enhance value.

What insights can you provide into the future of exploration?

The future of exploration is very bright for those companies who are committed to it and have a clear focus on what it is they are trying to do/achieve. Kosmos has a very clear strategy of focusing on what we are good at (a specific geology, offshore in the Atlantic margin) and will continue to create value through the cycle but applying its exploration strategy consistently and in a disciplined manner. There are still billions of barrels of oil/oil equivalent yet to be discovered and these resources are critical to meet growing demand for both oil and gas in the future. Even more so if the rise of shale production we have seen in the last 3-4 years proves to be unsustainable. As stated above, governments need to work with the O&G players to ensure that exploration can generate sufficient returns for both the country and the companies who are looking to develop the industry in those countries.

Paul Daily will be joined by Luca Bertelli, Chief Exploration Officer, Eni; Joseba Murillas, Global Exploration Executive Director, Repsol; and Kevin McLachlan, Senior Vice President of Exploration, TOTAL S.A. at the AIPN’s (Association of International Petroleum Negotiators) International Petroleum Summit taking place at the Hilton Park Lane in London, UK on April 23 - 25, 2018.

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