The last three years has been the worst stretch of time in seventy years for new conventional oil discoveries.

A new report from IHS Markit finds that conventional oil discoveries plunged to a seven-decade low and “a significant rebound is not expected.” Conventional exploration – as opposed to unconventional development, including shale – had already been trending down following the 2008 global financial crisis and its aftermath, which overlapped with the rise of horizontal drilling and hydraulic fracturing in several U.S. shale basins.

But the collapse of oil prices in 2014 really knocked conventional exploration – and thus, discoveries – on its back.

After OPEC refrained from cutting production in the face of a swelling supply surplus in late 2014, prices fell sharply…and continued to fall for much of the next year and a half. WTI bottomed out in early 2016 below $30 per barrel, before a pullback in drilling and production cuts by OPEC+ led to a more durable price rebound beginning in 2017.

But the multi-year downturn hit conventional exploration in multiple ways. Not only were companies slashing spending and cancelling riskier ventures, but the oil majors and investors began to view short-cycle shale drilling as inherently less risky. That was because drilling was quick – companies were able to turn projects around in a matter of weeks or months, not the years that large-scale conventional projects took, particularly those offshore in deepwater. Capital flowed en masse from conventional to unconventional development.

Predictably, that led to a steep rise in U.S. shale output, while simultaneously leading to a sharp contraction in conventional discoveries. “One of the main drivers here is the shift of investment by US independents from international exploration to shale opportunities in the United States—shorter cycle-time projects—with greater flexibility to respond to changing market conditions,” Keith King, senior advisor at IHS Markit and author of the report, said in a statement. “These operators can quickly turn an unconventional project off and stop or postpone drilling next month if oil prices fall.” Related: Trump’s Latest Trade War Move Sends Oil Tanking

Chevron and ExxonMobil are now some of the largest producers in the Permian after arriving late to the scene.

However, at the same time, this is not a story only of a shift of preferences from drillers and low oil prices. IHS also said that the average size of conventional oil discoveries has declined as the industry has shifted away from riskier “frontier” and “emerging” areas, to more mature regions. The number of wells drilled in unproven areas in deepwater dropped from 161 in 2014 to just 68 in 2018.

The oil majors left deep- and ultra-deepwater and began to increasingly focus on shallower water and onshore areas. The riskier fields in deepwater are the ones that have yet to be picked over, and thus contain much larger reserves, but mature shallow water carries less uncertainty and lead times are shorter. The shift in focus has meant that when a driller made a discovery, it was smaller on average in the last few years.

IHS says that basins early in their life cycle tend to have reserves that are ten times as large as mature basins. An average discovery in early-life basins held roughly 210 million barrels compared to just 25 million barrels from the average discovery in a more mature area.

There are some exceptions to the general trend, with some large companies still pushing the bounds offshore, but industry-wide spending and exploration is down.

However, the problems in U.S. shale might mean that the pendulum swings back in favor of offshore drilling. With wrecked balance sheets, high debt levels, shareholder scrutiny on spending and a growing number of operational problems, the shale complex is falling out of favor with investors. “Lackluster financial returns from unconventional production onshore in North America may drive more operators back to conventional exploration in the longer-term,” Keith King of IHS said in a statement.

By Nick Cunningham of Oilprice.com

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