Listen: Eyes on Tomorrow: The future of global oil & gas exploration

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Hill Vaden:

All right, this is Hill Vaden, one of your co-hosts with S&P Global Commodity Insights EnergyCent podcast. And I'm here as usual with Sam Humphreys. Sam, how's it going?

Sam Humphreys:

Good. Did you figure out the name of the podcast then?

Hill Vaden:

I did. There's so many words to get in there, but I got them I think. Did I miss any?

Sam Humphreys:

You got it, you did it. It's all good. No, no, you got them.

Hill Vaden:

All right. Nailed it. EnergyCents. So we recorded two podcasts today, and this was with you fighting a cough. And so people won't see the video, but for much of all of these podcasts, you're on mute, coughing hysterically.

Sam Humphreys:

Yeah, this is what happens in British summertime. The flowers come out and I love the flowers, but they make me cough and sneeze, so I sound all gravelly and ridiculous. But you know what? It makes life exciting and I pressed mute about 1,000 times. So to spare people listening, just me coughing in the air.

Hill Vaden:

I hope you feel better and I am grateful for your participation, even with your challenging lungs. So we're getting ready to turn over to Mike Wynne, who is our guest talking about global exploration. Can you flag a few things that people should listen to over the next 30, 35 minutes?

Sam Humphreys:

Yeah, absolutely. I mean, I really wanted him to say that we were back in a boom of exploration, but it was an interesting conversation. I think a key takeaway is exploration has continued and oil companies and upstream companies are continuing in the same vein that they have done it for a while to backfill some of their portfolios. They're just maybe looking at slightly different areas and what their strategies are going forward. And he set the scene quite nicely as to why we are where we are at the moment. And I think you mentioned energy transition and energy security, so it was very interesting. I think it's a good topic that we actually haven't talked about a huge amount in the last few months, but exploration is still very much alive. What about you?

Hill Vaden:

Yeah, I think that he did a good job putting into perspective. I don't know if the new world of exploration is the right way to think about it, but...

Sam Humphreys:

Let's go with that.

Hill Vaden:

You've got exploration, having had to respond to the post-COVID world, to energy transition priorities to goals by oil companies, to decarbonize and to get into cap and carbon sequestration, all these other things. And so how does exploration as a business unit or as a place to put capital, how does that work? Not to mention the fact that the globe itself, it is harder to discover and in some ways that has led to some exploration success lately because you're drilling better prospects.

Sam Humphreys:

That's right.

Hill Vaden:

There's a lot to cover. Mike does a really good job and we hope everybody enjoys it. Hello and welcome to EnergyCents by S&P Global Commodity Insights, where we talk all things related to the intersection of energy and finance. This is Hill Vaden, your host. Today we are talking with Mike Wynne and Sam Humphreys. And Sam, I got to ask you before we bring in Mike and talk about upstream exploration, I watched the little clip this weekend of the guards of Buckingham Palace playing Shake It Off because Taylor Swift was of course in town. Was that as...

Sam Humphreys:

And Prince William was at Taylor Swift, so I think that's why they were playing it because he was doing some excellent dad dancing with Princess Charlotte at the concert, which if you haven't seen that clip, you should probably check it out.

Hill Vaden:

Yeah, are there any...

Sam Humphreys:

It's amazing.

Hill Vaden:

So speaking of dad dancing, what a great way to bring in Mike Wynne. Are there any clips of you dancing to Taylor Swift that we should watch out for Mike?

Michael Wynne:

No, but it is great to be here. I think possibly the most important piece of advice is as a dad dancer, you always have to throw shapes in the most embarrassing way possible.

Hill Vaden:

I think that's probably true. All right, well we are here to talk about upstream exploration. And so we've been trading emails for a couple of days, a couple of weeks now. Mike is a hard celebrity to pin down. So we've finally gotten on his calendar and the one thing that you don't want to talk about, Mike, is what we're going to lead with. And that is the words, a return to exploration. There's more activity in exploration happening right now. And some of our preparatory notes say this is not a return to exploration and the boom bust ways of the past. So can you help us frame where we are in exploration right now and why there's more attention, but perhaps not where we were call it 10 years ago?

Michael Wynne:

Yeah, it is very easy. You get terms like some have called it a false storm. So there's a bit of a spectrum of opinion at the moment on whether or not we're in an exploration phase. I would contend that we've never actually given up on exploration overall the level of activity in terms of the number of new field wildcats, that's always been a leading metric of exploration, that disconnected from the oil price some time ago and remains disconnected from it, as does the amount of new seismic or perhaps an even more useful indicator is the level of contracts and leases that are being taken.

Those remain firmly disconnected once absolutely inaliently connected leading indicators of the health of exploration against the oil price that they're fundamentally disconnected. Now are we still seeing people explore? Of course we are. There's things that matter, well, I'm sure we'll get into talking about the energy transition, but when we look at many of the scenarios playing out today, and I've even heard the concept of are we giving up on net-zero bandied around the fundamental demand for hydrocarbons remains reasonably resilient post 2050 in all except for the most dramatic transition scenarios.

So we have to continue exploring our mature planet for these resources because we see demands going to be there. But the boom days of exploration massive fleet, huge adventurous NFW programs. No, the NFW count of history is not the NFW count of today than you feel well count of today, which is much lower.

Sam Humphreys:

So you touched on energy transition there, so that is one factor in all of this, but can you just expand a little bit on how exploration trends have shifted in just even the last five years? Because if we take a look at Europe for example, this is very selfish, because that's the region I know we saw things sort of slow down and then start picking up and there's a multitude of reasons for that. So maybe you could just go into that and maybe at a European and a global level, just what has been driving this slight shifting trend?

Michael Wynne:

Yeah, so it's an odd thing. Everything happened all at once. Everything happened all at once. So the energy transition had been loitering in the background 2017, 2018, we were coming out of a significant downturn and then it became a real thing strategically. Lots of companies talking about their strategies on scope one, scope two, scope three governments getting involved. So you saw strategies coming out and then bang, we hit COVID. And if you wanted a rapid transition simulator where demand destruction happens almost overnight, that was it, right? So companies had literally started to get their early plans out, which were quite linear in nature, that the timeframe for the energy transition was 2020 to 2050. So initially there was some quite linear plans around that timeframe. And then we hit COVID and we all got to see what happens in a fairly rapid demand destruction because global transport effectively stopped overnight and almost reinforced, "Hey, if this is where we're going, how long do we need hydrocarbons?"

And can we economically survive as a business in that environment? Now we came out of COVID and things began to pick up slowly. And now today, if you look at indicators like global aviation, freight transport, they're all rapidly rising. If you look at the investments that are going into those sectors, they're significant. So we see that the return of demand and then we have an energy security moment where at least in Europe, there was a pretty significant hit on our primary source of gas, which was of course Russia. And so you had several things playing out at once. You've been through this event that proved what happens when demand disappears, but then demand comes back and at the same time you're suddenly needing to diversify. If you can't produce what you need at home, you're beginning to need to diversify that and governments start to wrestle with those problems.

You've begun to hear terms like the energy trilemma talking about security and affordability and reliability of energy supply. And governments begun to wrestle with that in different ways. Europe, very, very committed to the transition, began to legislate and regulate to control emissions, which you could argue is a way of managing demand. America began with the IRA, the Inflation Reduction Act to generate a transition through investment, if you like. And then developing countries appeared at the table and said, "Yeah, but you know what? We've got here the right to have a just transition," which means bringing many of our population out of energy poverty has an awful lot of factors playing that makes the energy business quite complicated and overarching if you've got all of these scenarios that have different demand outcomes depending on which way we trend. So a very complicated place to do business, but we still believe there will be demand for hydrocarbons, and that's what we're trying to navigate.

Hill Vaden:

So talk to me a little bit, that's a good summary of all that has changed over the post COVID period. And Mike, you and I used to talk often when we were in that structure, short cycle barrels were a constant theme, right? Because that was a way to manage projects without taking on a lot of long lead time risk. And now exploration is by definition more of a long cycle barrel. Post COVID we've lost a lot of the explorationists. So a lot of the companies that were pure play explorers have been acquired by other companies or have gone out of business or whatever. You've also lost a lot of the exploration capability within an organization because some of these teams have downsized their headcount. How does the industry continue to explore given some of these changes and headcount and strategies within these companies?

Michael Wynne:

Let's make a very simple assumption at the moment that there's, let's say two types exploration, there's exploration into frontier areas or expiration building out still big discoveries and mature basins. And then at the other end of the spectrum you've got ILX that relies on prospects we know there and an infrastructure that's available.

Sam Humphreys:

And ILX is what, sorry?

Michael Wynne:

Infrastructure-Led Exploration. So in terms of the people and the capability, yes, as long ago as 2008, it seems forever ago as you did a paper called Gray 2K, and it was a little play on the Y2K bug that all of a sudden we'd wake up one day and all the expertise would've retired and the industry would not manage to exist. These days, many of the technologies we saw might become possible then are becoming possible. We're seeing the onset of AI, a big, big, big investment for many companies, especially the larger ones.

So the relentless focus on success we've had that's seen NFW, New Field Wildcat, success rates continually increase over the past few decades from a real risky bet to a much less risky bet. To some extent, that capability can be encapsulated into technology. Technology can help you continue to minimize the risk. But equally, we've seen companies bring new talent on, and that's one of the things that we struggle with in oil and gas, right? If you go into universities these days, all the petroleum geoscience, certainly in the US, in Europe, many of the petroleum geoscience courses are finished. They are no more. And young people don't necessarily want to work in what they see as a dirty, highly criticized industry. But what we are seeing now happen in many of the biggest players is a relentless focus on the career of geoscience, which doesn't necessarily have to all be about just finding, producing oil and gas.

It's finding producing oil and gas with additional constraints these days, such as a relentless focus on low carbon intensity, reducing the carbon intensity of your portfolio. Its alternative careers in geothermal, in mineral mining from produced fluids in CCS. So as keeping exploration on the agenda, yes, that's been quite a struggle as expertise leaves the industry, but between technology and a focus on recruitment, companies are managing to keep things going.

Now where it's going to go over the next five years, I don't know, but maybe we can have a conversation about whether or not come the end of this decade we'll need exploration or we'll have all the projects in the hopper that we need to have to see through the transition. But it's a challenge. It's a challenge when you work in an industry that fundamentally is very difficult for you to recharge your skills base. And that's not the same across the world, right? In Africa today, they've got a petroleum university that exists across, I believe three countries, each one giving graduates expertise in different settings. So they're quite keen to create local content in say, Africa. So maybe there's a solution there though if that's, say a region why we're going to continue to explore and produce heavily.

Sam Humphreys:

So one thing I'm interested in, and you did touch on it slightly, is where this exploration is focused because a lot of the older regions, more mature regions, everything is going to be predominantly either infrastructure led or small little discoveries that are just going to add to the companies portfolios, the production portfolios. But we're not expecting to see any big changes in... We're not going to find another super giant gas field in the Netherlands, for example, or somewhere else that's also equally mature. So if we are looking at some of the international companies, is there a shift in focus on looking at some of these new higher risk areas where they could have larger discoveries? We've talked a lot about Africa, I'm not going to say the same names. We've talked about them, Ghana or in Brazil, Africa and Namibia. Is there a shift in company strategy into where they're exploring or are they covering all bases? What are we looking at?

Michael Wynne:

No, no. So the biggest companies, I've got to answer this in a number of ways because bought up both frontier exploration, a return of frontier exploration, and also very mature what happens in very mature locations. So let's start with frontier exploration. The biggest companies in this world are household names that we all know. They continually invest a percentage of their cashflow into exploration. So that's not gone away. They are driven today by several things, but one fines need to be material in size. There is a threshold below which the biggest companies just cannot make a project work, right? It's just not feasible. So if you are in mature, ultra mature basins, the probability is as you begin to eek out that creaming curve, the kind of materiality you need is not there. You need to go somewhere else. But we're not back to... And I don't say this in the wrong way.

We're not about to throw in darts at a map of the world and then drilling where they land, far from it. There's a framework that exists in most of the big companies that revolves around the geology being right, their belief that the geology of a given basin is what they're looking for and it can contain material reserves at the size and scale they need. They need to have, and this is a big change. They're very picky now about where they'll work based on the above ground risks, the terms that they can achieve because this really affects the cashflow and the viability of a project. And then last but absolutely not least is this relentless focus on reducing the carbon intensity of your portfolio, which requires you to look for better grades of crude for example, if you're chasing liquids, there's a clear link between the crude grade and the carbon intensity, the effort it takes to recover and process.

So we're seeing disciplined exploration and it's not at the rate it was, right? I think nine super basins discovered so far this century we're 24 years in, well, 23 and a bit years in. Eight of them were found in the first 15 years. And then the orange basin since confirmed a superbase. So that's frontier exploration. So it's not the gamble game you could call it, where once upon a time a smaller company could raise some capital on a justified plan and go and drill somewhere that was really frontier. Today's companies are using a lot of data, a lot of information, a lot of sound judgment say, "This is where we think there's things that have been overlooked or not explored, and we'll go after it." In the very mature basins like Europe, well who's encouraging you to explore? That's really, really difficult. So the day you've got ILX and ILX is different around the world. In some locations, in some continents there are good ILX players who themselves have been so successful that their sense of materiality shifts as well.

And the scale of discovery that they now need to make to keep growing has increased to the point where they even have to consider being more adventurous in terms of their approach to risk and exploration in say Europe, you could argue that the geopolitical uncertainties are so significant that that's actually beginning to stifle, exploit that will control geopolitics and the approach to how we manage the transition in terms of legislature, that's going to have a dramatic effect on the EMP landscape. Here you can see scenarios where, for example, the North Sea may disappear as a producing province. And I think there are things that perhaps policy makers aren't thinking about long-term issues such as carbon sequestration when they begin to make these decisions. But you could argue that yeah, there'll be places where exploration is or already has been legislated off the agenda.

Hill Vaden:

So talk a little bit more about within the company you've mentioned you decarbonization, you've mentioned geothermal, you mentioned a lot of other things. So if I'm sitting in an oil company right now and I have to think about my capital allocation, historically there was a percentage that went to exploration for a lot of these big companies or for some of these small independents where it was a much larger. Now there's fewer independents who were going to devote that core competency to exploration. And if I'm a large integrated oil company or a large national oil company, how are these guys looking at exploration relative to decarbonization investment or relative to geothermal proving up or something like that? And I was in a meeting last week where this was a representative from a large oil company. He said, "Decarbonization is the new upstream challenge. We've done deep water, we've done shale, we've done these things from an engineering perspective and we'll do this again." So how do we think about exploration as it is competing for these other perhaps flashier investment criteria?

Michael Wynne:

Yeah, that's really good. And it's interesting right, Hill. So again, everyone exists on a spectrum and on one end of the spectrum you've got large companies that have not abandoned their majority focus on being on the molecule, right? Let's call it the molecule. Whether that molecule is a naturally produced hydrocarbon molecule or a synthetic molecule. These companies are producing Jet AV today and also looking at how to produce synthetic Jet AV at scale to fuel the continued growth of aviation. So those companies have a very disciplined way. They've got their molecule focus, they'll put some money into that molecule in whatever form it takes, and that can include processing the molecules that produced water to mine lithium out of it. It can be synthetic fuels or it can be continuing to make sure that there is a good hopper of oil and gas projects. What they do, those oil and gas projects I already said, they aim to find the right crude that reduces carbon intensity of their portfolio, but they also invest heavily in efficient production then.

That means that you are largely electrically driven wherever possible. And we've seen in Namibia for example, there's a desire, certainly from the government to try and power offshore production from onshore power. Now that's been proven as a concept, but the further you get offshore and the deeper you get, it becomes a whole lot more challenging. But there is a commitment to decarbonizing, decarbonizing production and making sure you are producing the lowest carbon molecules that you can find the lowest carbon intensity molecules you can find. Then you have companies that bet on several technologies as a diversification, a way of diversifying, maybe it was solar, maybe it was wind. I think we can all cite the things that happened, the wind projects where suddenly the breakeven moved completely off the scale. The fact that for investors and shareholders, and I think the financial markets have a very difficult challenge if they're not absolutely wedded to a particular approach that we do not ever go near oil and gas.

They don't have that if you are still on the fence. Companies that went into alternative technologies didn't actually do well with their returns. The returns are not like upstream. Upstream's always provided good cash flow, good returns for most of the time. And so those companies, we've seen a change in their strategies and I think sometimes that's where... Let's start with, let's go back to where we started today. I think that's where this concept of the return to expiration may have come from. We've not seen companies reverse their strategies, but they've just said, actually, "We are actually just going to change our policy around exploration because we think now we need these performing portfolios, upstream portfolios to continue to provide the cash flow."

So diversification has not been perfect, but I know NOCs and IOCs alike are investing heavily in either decarbonization technology or into things like CCS. So there's a lot of things you can go and do as a subsurface operator, CCS, geothermals and another one, plenty of proof projects going on. And we've even had the industry go and look at things like white hydrogen, naturally occurring hydrogen that in theory could be produced at a significantly lower rate than any other types of hydrogen production. But I think there are significant challenges associated with white hydrogen that will perhaps have that in the slow lane for the foreseeable future.

Sam Humphreys:

I'm just looking at the time, it would be great if you could give us some of the highlights that you think we need to be watching over the next six to 12 months in terms of company's strategy for global exploration. Without saying Guyana, Suriname, or Namibia, what areas should we be looking at?

Michael Wynne:

Geographically we're obviously going to see continued activity in Africa. I know that some other companies have looked at other parts of Latin America as potential. There's a huge amount of potential being well exploited with ILX in places like the Gulf of Mexico and it will become naturally constrained. Look at what happened here in the UK. We had the potential for hydrocarbon production from a place called Horse Hill in Surrey. Not a huge groundbreaking project, but it was there and the courts ruled against it based on I understand and my simple brain is not legally charged, right, but based upon scope three and the potential damage to humanity. So once you cross that line, you begin to say, "Well, does that mean that the UK North Sea is going to a place where we just will not do exploration?" We're looking at the changing government potentially with the general election here.

The indication is that that government or labor government, if it came in, may not give permission to future projects such as Rose Bank. What I wonder about though is if you have aspirations to be an energy hub. So take Norway for example, you continue to see activity there. They want to be an energy hub, a supplier of energy and a supplier of sequestration. But if we abandon expiration production, the infrastructure that we might later come to rely on for CCS rapidly becomes unusable. So what I'm trying to say using the UK as an example, is that some parts of the world post-election may constrain themselves out of the exploration scene and you'll see a greater concentration in developing parts of the world where there is a desire to be energy self-sufficient to reduce energy poverty, and also to be a supplier of reliable oil and gas to the world in the future decades as we go through the energy transition.

Hill Vaden:

All right, and you didn't mention Namibia or Ghana or Suriname.

Michael Wynne:

What a great success story for them, right? I mean it's transformative for those countries. You see the benefit of Africa's asserting a right to adjust energy transition to its own if you like, Industrial Revolution. And you have to look at statistics like the fact that within the next two decades they'll have the largest working age population on the planet and that they want to move energy poverty, create equality, and drive a way forward for Africa as a continent. And the upstream industries often help to drive that change to fund that sort of change. But none of us know exactly where things are going to land. I think wait for COP29 too, where all those countries signed up do sit down and figure out what we can afford and how we manage the emissions, including the fact that emerging nation emissions will grow in common scenarios, will grow and need to be accommodated maybe by cut elsewhere in the developed world.

Hill Vaden:

All right, well thank you for joining us. Exploration has in some sense come back, but not the return to the boom bust that it was of times before. So we're expecting perhaps more prudence and a lot of uncertainty and hopefully we can pick this conversation up again sometime soon.

Michael Wynne:

That'd be great. Thanks for having me.