Oil Exploration, Appraisal Outlook Appears Promising after ‘Savage Year’

Following a 64% plunge in drilling spend with less than two dozen wells drilled in 2020, analysts expect operators to ramp up high-impact appraisal activity this year with a continued focus on oil.

The outlook—centered on resources of at least 100 million barrels of oil, 1 Tcf of natural gas and play-opening frontier discoveries—was delivered as the oil and gas industry continued to claw its way from the pandemic-driven drop in oil demand that slowed exploration and appraisal activity and further squeezed spending.

“We expect there to be an increase in activity to 32 wells with 26 of these clusters firm and a further six is probable,” Joe Killen, an exploration and appraisal analyst for Westwood Global Energy Group, said on a recent webinar. “We see a continuation of trends that we saw with appraisal of oil over gas, with a focus on producing basins.”

In all, analysts expect about 4.7 billion barrels of oil and 30 Tcf of gas will be appraised this year.

A dozen of those appraisal wells have already spud, he said.

So far, about 15 high-impact exploration wells have been completed in the first quarter with three potential commercial discoveries, according to Graeme Bagley, head of global exploration and appraisal for Westwood.

Analysts forecast about 65 to 80 high-impact wells will be drilled this year.

Among the successes to date are the Beacon Offshore Energy LLC-operated Winterfell infrastructure-led exploration well in the U.S. Gulf of Mexico’s Green Canyon Block 944 and the Pemex-operated Dzimpona oil discovery in Mexico’s Campeche Basin in Tabasco state. The list also includes Apache Corp. and Total SA’s Keskesi-East offshore Suriname, where substantial pressure increases forced the operator to stop drilling before reaching Neocomian targets.

The year has also brought some disappointments, Bagley said, pointing out Exxon Mobil Corp.’s noncommercial discoveries at Bulletwood on the Canje Block and Hassa-1 on the Stabroek Block offshore Guyana.

Still, there are “plenty of exciting wells to come,” Bagley added.

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However, don’t expect to see many operators direct more attention to natural gas, despite the transition to cleaner energy sources.

More than 80% of high-impact wells planned for 2021 are targeting oil to maximize cash flow, Bagley said. He added that about 80% of the natural gas discovered 10 years ago remains in the ground.

Looking Back

Hopes for a promising year ahead comes after the oil and gas industry saw exploration and appraisal drilling activity and spending dip last year.

Killen called 2020 a “pretty savage year” for drilling activity with the oil price crash, pandemic-driven operational restrictions and accelerated energy transition agendas that put pressure on drilling and development programs.

Average appraisal well costs dropped to $39 million, down from $53 million. “This lower average well cost reflects the substantial decrease in the number of deepwater appraisal programs,” Killen said, noting COVID-19 prompted some companies to postpone appraisal programs.

The number of high-impact appraisal wells drilled last year dropped by 51% to 21, compared to 2019, Killen said, as spend fell by 64% to about $900 million, Westwood data show.

Exploration drilling spend inched up to $3.9 billion from $3.8 billion, though the high-impact exploration well count fell by 26%.

Killen said it’s likely easier for companies to defer appraisal drilling, unlike exploration drilling commitments.

For the most part, the appraisal programs focused on oil discoveries.

“Despite the narrative of increasing the relative proportion of gas in company portfolios, companies remain more focused on appraising oil rather than gas,” Killen said. Thirteen of the programs centered on oil, compared to eight on gas or gas condensate discoveries.

None were appraised for greenfield LNG projects, he said, reflecting “the industry’s wariness of these long, lengthy projects with massive upfront development costs in favor of the shorter cycle oil and condensate projects.”

Upgrades, Downgrades

There were resource hits and misses across the 19 basins where exploration and appraisal programs were carried out in addition to some resource upgrades and downgrades following appraisal.

Looking at North America, where six high-impact appraisal programs were completed, appraisal at Pemex’s Quesqui discovery led to a resource upgrade from 390 MMboe to up to 500 million barrels. Positive appraisal results were also seen at Royal Dutch Shell Plc’s Blacktip discovery in the Perdido area of the Gulf of Mexico.

88 Energy Ltd.’s Charlie well on Alaska’s North Slope proved the presence of condensate gas in the Torok Formation. However, its appraisal of the Malguk discovery failed to prove commercial hydrocarbons in the upper and lower Cretaceous play. Equinor ASA’s appraisal sidetrack of the Upper Jurassic Cappahayden in the Flemish Pass offshore Canada’s Newfoundland was also considered noncommercial, Killen said.

South America’s three high-impact appraisal programs added resources. The Exxon-operated Yellowtail discovery offshore Guyana leapfrogged Hammerhead as the potential next development on the Stabroek Block, Killen said, while all three wells of a Sergipe-Alagoas Basin drilling campaign by Petrobras appraising discoveries in the Moita Bonita area found hydrocarbons.

“In the Santos [offshore Brazil], Shell praised the Gato do Mato discovery,” Killen added. “The [appraisal] well was drilled about seven kilometers south of the discovery well and again successfully found hydrocarbons. The JV is running a subsea development tieback to an FPSO, which was actually tendered last year.”

Revisiting Old Finds

In some instances, appraising old discoveries has paid off.

ConocoPhillips Co.’s Willow oil discovery in the National Petroleum Reserve-Alaska, SOCAR and Equinor’s Karabagh oil discovery in the Azerbaijan sector of the Caspian Sea and PTTEP’s Lang Lebah gas discovery offshore Malaysia are among the hits.

“These are all discoveries which were considered noncommercial by the previous operators, either because economic conditions weren’t favorable at the time or because upside volume potential hadn’t been recognized,” Killen said.

In Lang Lebah’s case, new HP/HT technology was key.

Lang Lebah is a good example of how drilling and production technology advances can unlock resources, said Edwige Zanella, senior associate at Westwood. The well was first tested by JX Nippon in 1994, just peeking at the top of the HP/HT Miocene carbonate reservoir, she said. It was abandoned and re-drilled later that year, penetrating only 48 m into the Miocene carbonate and failing to confirm the presence of gas.

“The discovery was estimated at the time to have the resources of just 16 Bcf and it was relinquished,” Zanella said. “The PTTEP-led JV acquired the block in 2016 and reassessed the discovery and they drilled the Lang Lebah-2 in 2019. The well found 252 net gas pay in the Miocene carbonate. … After the well results, PTTEP reported the resource range of 2 to 4 Tcf.”

After the Lang Lebah-2 appraisal well was completed in mid-January 2021, PTTEP in February heralded the gas discovery as its largest to date. It proved more than 600 m of the net gas pay, and flowed at a rate of 50 MMcf/d, accelerating development plans. The company’s partners are Kuwait’s KUFPEC and Petronas Carigali Sdn Bhd.

In all, 2020 appraisal programs added 1.9 Bboe of commercial resources to the existing 17 Bbbl of high-impact commercial resources which were tested, Killen said.

“And importantly, five discoveries were moved into the development selection phase after receiving a declaration of commerciality, while another was brought online,” he said, noting one downgrade to noncommercial.

Ending on an optimistic note, Killen added Westwood expects “2021 to be a more active year for high-impact appraisal as companies look to progress oil discoveries in producing basins towards FID and production.”