The market is asking fundamental questions of exploration, according to Andrew Latham, vice president of upstream consultancy for Wood Mackenzie. Despite recent indications of declining exploration success, Latham's review of results for the prior decade shows that international oil companies (IOCs) have been adding sufficient reserves to more than replace their production. Latham presented his findings at the American Association of Petroleum Geologists' 2005 annual meeting in Calgary. "Over the last 10 years, the industry is in good shape," he said. Dramatic discoveries in Kazakhstan, Nigeria, Angola and the deepwater Gulf of Mexico have added 60 billion barrels in new-field oil reserves. Also, 200 trillion cubic feet of gas have been found in new fields during the past 10 years, with gas finds centering in Indonesia, Egypt, Norway and Trinidad and Tobago. Nonetheless, during the past two to three years there has been a marked deterioration of the percentage of commercial fields that have been found. Additionally, when viewed with a flat price deck, the average values of these discoveries have been declining. Several factors are at work in this value decline, including a shift to exploration in areas with high tax regimes, the problem of stranded gas discoveries, the long lead times necessary for development of the recent finds, and the discovery of fewer giant oil fields. Rising finding costs and falling quality of the discovered resources are hitting the industry harder, he said. Additionally, the poor results of the last few years can be partially attributed to the reluctance of the IOCs to reinvest their recent hefty profits in exploration. Relative exploration investment is down significantly: big companies have increased their production bases with mergers and acquisitions, but they have not correspondingly increased their exploration spending. "There are obviously other means to achieve growth, but exploration is still the main source of organic growth for the largest majors." Going forward, if IOCs expect to replace their production, they will have to ramp up investment to drive discovery rates back to previous levels, switch to strategies to exploit unconventional plays or acquire major resource-holders. "We expect industry response to be both complex and varied-accentuating the differentiation between company growth strategies."

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