Commentary, 5/6 2016

Published Jun 13, 2016
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Essential Exploration

The long, slow oil price decline from mid 2014 through 2015 is showing signs of easing – we hope. Since the beginning of 2016, oil prices have risen by some 20%.

The turning point may or may not have been reached. Short-term increases in production or a drop in demand could signal the beginning of a loss of the recent gains.

The thousands of drilled but uncompleted (DUC) wells in North America – whether for oil or gas – are something of a wildcard in terms of potential production. Already drilled, these well have yet to be fracked, and the DUC-owning companies have been waiting for oil prices to rise to profitable levels before taking that next step.

While the US has begun exporting gas, increased oil production has only put at dent in the country’s total oil imports. And production nearly doubled from 2011 through mid 2015, peaking late last year at close to 10 million barrels per day – slightly more than half of the county’s demand. But it has now waned by nearly a million barrels per day as oil prices dropped below break-even.

So in the short term, supply may outstrip demand, but the margin is growing thinner. On the demand side, the market worries about weak growth numbers from giants like China, yet China’s demand – as has the world’s – has continued to slowly increase.

But taking a longer view, the rate at which new reserves are being added is not expected to keep pace with production and this increasing demand. The days of “easy oil” are long gone, and exploration in difficult areas has waned in light of low oil prices.

Drilling costs have meant a significant drop in exploration drilling – far fewer wells have been drilled recently compared to 2 to 3 years ago. But taking a longer view, fewer exploration wells means fewer discoveries. And at the rate that oil is consumed, a decline in worldwide reserves is inevitable in the long term.

One encouraging sign is that the interest in licensing rounds around the world has endured, despite low oil prices.

The awards in Norway’s 23rd licensing round included acreage that up until recently had the “Grey Zone”, offshore territory claimed by both Norway and Russia. Following the signing of the Treaty on Maritime Delimitation and Cooperation in the Barents Sea and the Arctic Ocean between Russia and Norway, the Barents Sea southeast became a part of the Norwegian Continental Shelf on 7 July 2011. In 2013, the Norwegian Parliament opened the Barents Sea southeast to petroleum activity.

The first exploration well in the Norwegian Barents Sea was spudded in 1980. The following year, the first discovery was made – a part of the Snøhvit gas development – and production started in 2007.

The first Barents Sea oil development, the Goliat field, started production earlier this year. So far, 130 wells have been drilled in the Barents Sea, and 49 of these have been successful discoveries. Current new field developments in the Barents Sea include Johan Castberg, Wisting and Alta/Gotha.

Sissel Eriksen, Director of Exploration at the Norwegian Petroleum Directorate is pleased with the results of Norway’s 23rd round, saying “I am eagerly awaiting the result of the first exploration well.” So we hopefully can expect new reserves on the books before too long.

The market has traditionally been cyclic, with activity rising and falling in tune with rising and falling demand. And for nearly 2 years now, E&P companies and oilfield service companies have been hard at work to reduce their cost of doing business. Already leaner, they are increasingly ready to take advantage of the upturn as it develops.

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