Investments in Exploration

By Ramesh Akkineni
from an article in BusinessLine

Investments in Exploration

The claims about fall in exploration activity are also not entirely correct. On account of the oil crises of the 1970s, a massive investment boom in the exploration industry followed, in which the number of rigs increased from a little over 2,000 in 1970 to more than 5,500 by 1980. This increased exploration did not evidently result in greater discoveries, for reasons explained above.

However, it is true that post-1980, the world saw a major decline in the exploration sector with the number or rigs today at about 3,000. Consequently, the drilling industry had a two-decade bear market, with the result that only50 rigs/year can be manufactured today.

So, even to reach the 1980s level of exploration activity, we will require another 50 years at current production levels. Not that it would guarantee anything in return, but it indicates that exploration capacity just cannot be increased significantly in the foreseeable future.

With the increase in oil prices in the last few years, the oil majors have increased their exploration spending, but what they are discovering is that this increased spending does not necessarily translate into reserve additions. Despite a $65-billion increase in capital spending of the oil majors, reserve additions actually fell in 2005 compared to 2004. The 36 per cent increase in upstream investments resulted in a very marginal increase in reserves. This is nothing more than the law of diminishing marginal returns operating that started in the 1960s, at the peak of the discovery curve.

In fact, there is strong evidence that the oil majors themselves recognise this. The cash payouts to shareholders in the form of dividends and share buybacks have approached 50 per cent of the capital outlays. So the question is why the oil majors are not investing in additional exploration at a time of such high prices and profits.

The answer is that they are behaving in a manner that is consistent with their shareholders' interests — that is, instead of investing in exploration that is not going to provide meaningful returns, as evidenced, they are returning the surplus cash to the owners.

Comparing oil-fields with land

In some ways, the discovery of oil-fields can be compared to that of the land-masses. All of the inhabitable continents and large islands were discovered as early as 40,000 years ago, with very elementary sea-craft.

Some of the smallest and most remote Polynesian islands were discovered as early as 900 AD and even the most advanced remote-sensing satellite today has not discovered any other islands — not because there is anything wrong with the technology, but simply because there is nothing left to be discovered in the first place.

In terms of oil-field discovery today, we are at a stage comparable to when the continents and other large islands have been discovered. Maybe we will discover some medium-sized oil-fields, but these are not even going to compensate for the decline in production from the elephant oil-fields, let alone increase the overall capacity.

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