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Our recent report Conventional New Field Exploration Performance and Strategy compares the individual results of the top 30 international explorers. In this Insight, we collate these results by three peer groups - the Majors, Large Companies and Medium Companies - to examine the general relationships between business scale and exploration performance.
There are broad differences between the exploration strategies of the Majors and the approach of the other two peer groups. The Majors hold both the most extensive acreage portfolios and the greatest range of other options for resource capture beyond traditional new field exploration. These factors are at the heart of the key differences we observe:
Peer group performance (1999-2008)
|
Metric |
Industry |
Majors |
Large Companies |
Medium Companies |
|
Exploration Investment (US$ billion) |
319 |
114 |
39 |
16 |
|
Exploration Reinvestment Rate (US$/boe) |
n/a |
1.40 |
2.91 |
3.07 |
|
New Field Resource Discovered (bn boe) |
231 |
97 |
21 |
9 |
|
Reserve Replacement Ratio* (%) |
n/a |
132 |
138 |
127 |
|
Discovery Cost* (US$/boe) |
1.38 |
0.98 |
1.59 |
1.80 |
|
Value Creation (US$ billion) |
n/a |
208 |
34 |
23 |
This Insight examines the exploration performance of three company peer groups that include the top 30 international explorers.
The three peer groups are based on the scale of the companies' upstream businesses. We have defined these peer groups according to reported production and reported E&A spend over the decade, shown in the chart below.
Together, these companies account for more than half of overall industry exploration spend and new field reserves discovered. The remaining share of investment, which is not covered in this Insight, has been made by National Oil Companies, a handful of large private oil companies, and a long tail of smaller exploration companies.
In relative terms, the Majors have invested much less in exploration than the other two peer groups. Over the decade 1999-2008, the Majors reinvestment rate averaged US$1.40/boe, based on reported exploration costs incurred and global production for the period. This is less than half the reinvestment rate of the Large and Medium companies, which spent US$2.91/boe and US$3.07/boe respectively.
Absolute exploration performance
The ten Majors have made the largest investments in exploration - around three times that of the Large companies and more than seven times that of the Medium companies. The greater scale of the Majors' investments means that they have been the top explorers against every absolute performance metric.
Volume
Nine of the top ten performers by overall volumes added, and eight of the top ten performers by overall value created, are Majors (see left side chart below). Only the exceptional performance of the leading Large company - BG - is of comparable scale.
Value
Value creation for the Majors correlates with the volumes, with most achieving the same or very similar rank against these two performance metrics. Except for BG, this correlation is not seen for the Large and Medium companies.
The Large companies have generally added greater volumes than their Medium competitors, but aside from BG, there is little to differentiate these two peer groups in terms of overall value creation. The top performing Medium companies -notably Murphy and Tullow - have made large or giant oil discoveries that are characterised by excellent full-cycle unit value.
Water depth
All three peer groups added at least 40% of their new volumes from waters deeper than 400 metres (see right side chart above). For the Majors, shelf areas have accounted for almost half of the total volumes, although this includes a handful of giant DROs.
Onshore exploration has been a subordinate source of new volumes for all three peer groups. For the Majors, onshore areas have accounted for barely more than one-tenth of their overall new volumes, including some large in DROs in the Middle East and North Africa. This result is more-or-less in line with the Majors' relatively small investment in onshore areas - a reflection of the limited materiality of opportunities in these basins.
Relative exploration performance
We have also considered a range of exploration performance measures that are relative rather than absolute. These include discovery costs, reserve replacement ratios and full-cycle returns (IRR). The relative measures allow us to compare the three peer groups on more of an equal basis.
Reserve replacement ratio
Reserve replacement ratio could be viewed as a hybrid metric that reflects both performance and strategy. Despite the very different upstream strategies that the various leading explorers have followed, all three peer groups have achieved remarkably similar reserve replacement ratios over the decade (see following left hand chart).
Each group has found new fields or captured DROs with volumes of around 130% of its oil and gas production over the decade. This paints an encouraging picture of organic renewal for these leading explorers, although it should be remembered that the ratio is based on new resources over produced reserves. We cannot assume when or if all of this resource will eventually become reserves.
The limited differentiation between the three peer groups over the full decade masks some important underlying trends. Most notably, DROs have been key for many of the Majors, and accounted for one-third of their volumes in the second half of the decade. The Majors' reserve replacement from new fields alone is below 100% for the years 2004-2008. The Large and Medium peer groups have placed much greater emphasis on new field exploration over DROs and have achieved over 100% reserve replacement over these five years.
Discovery costs
That the Majors' reserve replacement has matched that of the Large and Medium peer groups is remarkable given their much lower exploration reinvestment rates over the decade. It follows that this is an important area of out-performance that must relate to the Major's achievement of discovery costs less than those of the other two peer groups (see left hand chart above).
Full-cycle returns
The chart that we most often use to illustrate a summary of company exploration performance is a cross-plot of reserve replacement ratio and full-cycle returns (see right hand chart, above). These each represent key relative measures of volume and value respectively. The three peer groups all plot in a very similar position.
All 30 companies have created value from their exploration investments over the decade, which we define as achieving a full-cycle return of at least 10% nominal, assuming our Base case long term Brent price outlook of US$70/bbl. The Majors have individually achieved returns of 13-20% - which is either slightly better than, or slightly below, the industry average returns of 15% for the period.
The degree of performance variation within the different peer groups is greatest for the Medium companies and least for the Majors. This reflects the potential for one or two large discoveries to transform an individual Medium company's results to a much greater degree than is usually possible for larger enterprises.
Most of the Large and Medium companies have achieved returns that are within a few percent of the industry benchmark for the decade. At the low end, there are a handful of companies that only just pass our 10% value creation threshold. This is generally a reflection of the development economics of the discoveries involved.
A few Medium and Large companies have achieved returns in excess of 20% over the decade. This is usually a reflection of one or more of the following three factors - exceptionally high reserve replacement, early disposal of new field assets for a substantial cash consideration, or rapid development of satellite discoveries using existing infrastructure to minimise lead times. None of these factors has played a defining role in the performance of any of the Majors.
Implications for explorers
The question of which of the three peer groups has achieved the best exploration performance does not have a simple answer. Our analysis shows that results of the past decade by the various absolute and relative metrics can be quite different.
The results also reveal a picture of the wider competitive landscape in exploration:
Volumes discovered by basin ranking
Chart shows split of volumes discovered including DROs and Disposals from 1999-2008. Top Basin is the single basin with the largest volumes discovered in the period by each company. Top 3 basins are the three basins with the largest volumes discovered in the period by each company, and so on.
Looking to the future, we expect that most of the 30 companies will continue to use exploration as a central element of their overall resource replacement strategy. Many of the Majors have undertaken a substantial campaign of exploration acreage capture over the last few years. This has, in some cases, already been accompanied by a ramp-up in their reinvestment rate.
By contrast, many of the Large and Medium companies have reduced their reinvestment rate as a response to the recent economic downturn. Many companies within these peer groups are also increasing the role of unconventional plays in their renewal and growth strategies, which for some will require commensurate trimming of conventional exploration investment.