Oil and gas exploration expenditures (excluding appraisal) will rebound from historic lows, reaching an average of $22 billion annually in real terms over the next 5 years, according to a Wood Mackenzie report.
Tailwinds from appealing exploration economics, the need for energy security, and the emergence of new frontiers will incentivize oil and gas companies, predominantly National Oil Companies (NOCs) and Majors, to increase their exploration spending through 2027, the report said.
“Explorers will become bolder in the coming years,” said Julie Wilson, director of global exploration research at Wood Mackenzie. “While this rebound might surprise some, it must be seen in context. exploration went through a boom during 2006-2014 and spend peaked at $79 billion (in 2023 terms). But in the prior 6 years, the average was $27 billion per year in 2023 terms. While spending will increase, it won’t return to anywhere close to past highs and there will likely be a ceiling on the increase. There is a lack of high-quality prospects that would satisfy today’s economic and ESG metrics and a continued focus on capital discipline will keep a lid on overspending.”
The growth will begin in 2023, with spending projected to increase 6.8% over 2022 totals (in real terms). A major driver for this increased activity is the robust business case. According to Wood Mackenzie, full-cycle returns from exploration have been consistently above 10% since 2018 and exceeded 20% in 2022.
“These positive results have increased confidence in exploration,” said Wilson. “Improved results are down to many factors. Portfolio high-grading coupled with greater discipline in spending and prospect choice mean only the best prospects are drilled and waste is minimized. Efficiency gains also serve to enhance the returns from both development and exploration.”
Deepwater drives growth
“There are areas where leads and prospects are being worked up with recent seismic data, for example Uruguay, southern Argentina and deepwater Malaysia,” added Wilson. “Future spending in ‘success case’ areas is additional exploration following success, whether that's in a frontier like Namibia or Greece, or a more established province like Egypt's Nile Delta.”