The problem is that the recent rate of commercial volumes found gives little confidence that there will be enough new discoveries to fill the gap. Spend on oil exploration globally has collapsed from US$60 bn p.a. in 2014 to just US$25 bn p.a. in 2018. The drop has fed directly through to significantly lower volumes of reserves discovered. Exploration found 8 bn bbls p.a. of commercial liquids on average in the early part of this decade; it’s only delivered around 2 bn bbls p.a. in the three years since 2014.



The oil market could be running short of oil capacity by the late-2020s at the current, low discovery rate. That’s worryingly near at hand given it takes the best part of 10 years for the average new discovery to build to peak production even with a marked improvement in project execution post-downturn. Even if new volumes discovered double, a gap opens up in the 2030s and climbs to 6 million b/d by 2040. This will have to be filled by presently sub-commercial discoveries with implications for price.



The one bit of good news is that volumes discovered correlate with spend. Reserves per exploration well has held at a reassuringly consistent rate of 25 mn boe since 2014, around half liquids.

The oil is out there – what three things have to happen for the industry to crank up investment and do the job?

First, capital availability.

Major or minnow, explorers have found it difficult to persuade boards and investors to fund high impact exploration since the downturn. But in 2018, there is money – around US$160 bn p.a. of free cash flow for the 48 IOCs and NOCs covered in our Corporate Service. The mind set for most E&Ps is still to be conservative, and default is to return capital to shareholders. Yet the duty to shareholders' interests cannot be myopically short term. More of the ‘windfall’ cash needs to find its way into exploration to sustain the business in the long term.

Second, the reward has to justify the risk.

Exploration is performing better now than it was when oil prices were above US$100 per barrel. Tight discipline has led to double-digit returns in 2017, the highest for more than a decade. So better economics justify more investment; the industry just needs to demonstrate it can continue to create value as it ramps up spend.



Third, a portfolio that can deliver.

Big oil discoveries are more likely to be made in frontier areas. As well as Guyana, among the most eagerly watched potential play opening wells will be in Suriname, and the Brazilian Equatorial Margin; Mexico; Senegal, Gambia, Namibia and South Africa; Australia (where Quadrant’s Dorado discovery is the biggest oil discovery this century); and Alaska. The Majors, a few internationalising NOCs and a handful of global E&Ps have built exposure in some of these frontier provinces.



More explorers need to get in on the action if the spectre of ‘peak supply’ is to be kept at bay.