Oil Discoveries Lowest Since 1952: Is This The Bottom?

Per a report by research firm IHS, the year 2015 marks the least amount of oil and gas discovered in over the last 64 years.

New oil discovered outside North America in 2015 totaled 2.8 billion barrels, the lowest amount since the industry actively started its worldwide oil exploration after World War II. The year also represented the fourth straight year of declining oil volumes – something that had never happened before.

Notably, about 9 billion barrels of oil equivalent (BOE) was added through gas discoveries in the year. This signifies the fifth consecutive year wherein gas volumes discovered surpassed oil volumes discovered.

Factors Behind the Decline in Volumes

Per Morgan Stanley (NYSE:MS), major oil players have been forced to make substantial budget cuts to combat the freefall in oil prices. This is particularly true with respect to exploration, where spending was reduced to a meager $95 billion in 2015 from $168 billion two years earlier. ExxonMobil Corp. (NYSE:XOM) , Royal Dutch Shell (LON:RDSa) plc RDS.A, ConocoPhillips (NYSE:COP) , Hess Corp. (TO:E) and EOG Resources Inc (TO:E) are among the long list of companies that have slashed their capital budget.

Moreover, the industry-wide pullback of drillships from international waters as companies began to shift focus to shale formations in Texas, North Dakota and Oklahoma resulted in decline in discoveries. Given that investments in shales are both cheaper and less risky than drilling in international waters, the move was an expected one in the lackluster commodity price scenario.

However, analysts are of the opinion that the unconventional oil in North America is not sufficient to resolve the lack of discoveries. Tight oil production is estimated to account for about 15% of global output by 2040.

At the start of the decade, when oil demand rose rapidly, explorers were seen splurging astronomically on exploration. However, the outcome was poor with only a few notable hydrocarbon discoveries, such as Statoil (OL:STL) ASA's (NYSE:STO) Johan Sverdrup field off Norway's coast or EniSpA's (TO:E) giant Zohr gas field off Egypt.

In 2015, companies drilled about 4,300 conventional exploration and appraisal wells compared with 5,200 in 2014 and 5,300 in 2012. Deep-water drilling, which means drilling in 1,000 to 5,000 feet of water, decreased by more than 20% and the ultra-deepwater well count plunged more than 40% from 2014.

However, a surge in new oil fields in recent years and the increase of Iran's production on the back of international sanctions raises optimism about exploration in the short term.

Over the longer run we feel to avoid any supply gap in the future, we believe that exploration companies should continue to focus on exploring instead of waiting for the commodity price to improve. In case the companies do not take immediate action, the challenges may be difficult to overcome. After all oil discoveries are essential to substitute resources, meet an ever-growing demand and offset the depletion of existing fields.

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