Full-cycle profitability of exploration

Resrapp2016engelsk-ingress
04.05.2016
Exploration contributed substantial value to society between 2000 and 2014, according to the NPD’s analysis of its full-cycle profitability during this period. Overall net cash flow from discoveries made in these years is estimated at roughly NOK 2 000 billion after deducting exploration costs.

The analysis shows that exploration made a positive contribution to value creation in all parts of the NCS. Both activity and resource growth have clearly been greatest in the North Sea, with Johan Sverdrup as the biggest contributor to value creation. Exploration in the Norwegian and Barents Seas has also generated substantial value.

Exploration contributed substantial value to society between 2000 and 2014, according to the NPD’s analysis of its full-cycle profitability during this period.

Overall net cash flow from discoveries made in these years is estimated at about NOK 2 000 billion after deducting exploration costs.

The analysis shows that exploration made a positive contribution to value creation in all parts of the NCS. Both activity and resource growth have clearly been greatest in the North Sea, with Johan Sverdrup as the biggest contributor to value creation, but exploration in the Norwegian and Barents Seas has also generated substantial value. A large proportion of this value will fall to the government through the tax system and the State’s Direct Financial Interest (SDFI) in petroleum activities.

 

Elements not included in the analysis

  • Exploration in 2015 has not been included because resource figures for the new discoveries are uncertain. Resource growth from the 16 new finds made in that year is in the order of eight to 20 million scm of oil and 14-40 billion scm of recoverable gas and condensate. These finds are all small and close to existing fields. No estimate has been made of their value. NOK 25-30 billion was spent on exploration in 2015.
  • Wildcats provide information on the type, properties and age of the rocks. In areas with few wells, data from each well will be worth a lot in terms of geological information. That value has not been quantified in this analysis.
  • Where future field developments are concerned, the analysis has not taken account of the substantial reduction in costs over the past year. The cost estimates applied in the analysis could therefore be somewhat too high.
  • Most of the discoveries are expected to be developed as satellites to existing fields. A tie-back to existing infrastructure is cost-effective in many cases, and the only commercial solution for small discoveries. Without this opportunity, many of the latter could not be developed or would have been significantly less profitable. Such tie-backs could help to extend the economic life of the host field, and thereby allow it to continue profitable production and to improve recovery. This additional value can be substantial, but has not been quantified in the analysis.
  • Extending the commercial life of infrastructure provides incentives for further near-field exploration because more discoveries can be produced while the facilities are in place and on stream. Such positive external effects have not been valued in the analysis.
  • Relatively little infrastructure has been developed in the Barents Sea, which creates great uncertainty over both the value of the resources and the choice of development solution. That applies particularly to the gas resources. Establishing coordinated development and transport solutions could cut costs and/or increase resource recovery from a development, and thereby increase the value of the discoveries. Such coordination gains have only been included to a very limited extent in this analysis.
  • Activity on the NCS creates big spin-offs for other parts of the economy. Such effects are also likely to be substantial with the development of discoveries made in 2000-14. These spin-offs and possible socio-economic value have not been quantified in the analysis.

 

Exploration activity and resource growth in the period

A total of 583 exploration wells were drilled in 2000-14, breaking down as 407 wildcats and 176 for appraisal. Most of the wildcats were drilled in the North Sea (figure 4.1), amounting to 63 per cent for the whole analysis period. The Barents Sea had the smallest number of wildcats – 52, or 13 per cent.

 

Figure 4.1 Wildcats spudded 2000-14 by region.

Figure 4.1 Wildcats spudded 2000-14 by region.

 

The 407 wildcats yielded 215 discoveries, giving a finding rate of 0.53 for the whole period.

Where certain discoveries are concerned, recoverable resources, reservoir complexity and/or location in relation to established infrastructure could mean that development has been assessed as unlikely even in the long term. Substantial changes in technology or price would be needed to make them commercial. Sixty-four discoveries fall into this category and are excluded from the profitability analysis. In addition, nine discoveries where the resources are included in existing fields – primarily because they are small – have also been excluded. Exploration costs for both types of discoveries have been incorporated in the analysis.

At 1 370 million scm oe, the overall resource estimate for the whole period breaks down as 378 million scm oe gas and 992 million scm oe liquid (figure 4.2).

 

Figure 4.2 Accumulated recoverable resources from discoveries in 2000-14 (million scm oe).

Figure 4.2 Accumulated recoverable resources from discoveries in 2000-14
(million scm oe).

 

The biggest discoveries made during the period are Johan Sverdrup, Johan Castberg (7220/8-1 and 7220/7-1), Goliat and 7220/11-1 (Alta). Although several large finds have been made, most are smaller than 10 million scm oe (figure 4.3).

 

Figure 4.3 Overview of recoverable resources per discovery in 2000-15, ranked by size excluding Johan Sverdrup.

Figure 4.3 Overview of recoverable resources per discovery in 2000-15, ranked by size excluding Johan Sverdrup.

 

Methodology and assumptions

All phases of the business, from exploration to cessation and removal, are covered by the analysis (figure 4.4). The full-cycle profitability of exploration is defined as revenues from discoveries in the period less costs incurred in every phase from exploration to cessation. Revenue and cost flows are discounted to the same year.

 

Figure 4.4 Illustration of the various elements included in the full-cycle analysis.

Figure 4.4 Illustration of the various elements included in the full-cycle analysis.

 

Production and cost estimates reported by the operators have been utilised for virtually all the discoveries. The NPD has used its own calculations for a few finds which had not been evaluated at 31 December 2014. Dates for coming on stream coincide with the assumptions for the forecast in the 2015 revised national budget.

The analysis has been produced at a time of great uncertainty over price developments. Following an assessment of various forecasts, the oil price trend applied has been adjusted downwards from three of the four scenarios in the IEA’s World Energy Outlook for 2015. The NPD analysis assumes a gradual rise in oil prices from the present level until 2020, when they are expected to remain at USD 90 per barrel measured in fixed 2014 prices. A similar approach has been taken for the natural gas price. The estimate for the latter in 2020 is NOK 2 per scm in fixed 2014 prices. Profitability is calculated using discount rates of four and seven per cent.

Estimated costs for 2016 and beyond reflect the 2014 level. As with product price trends, and not unaffected by these, substantial uncertainty prevails about how the level of costs will develop. It has been assumed that the level of costs reflected in the forecast will roughly accord with an oil price of about USD 90 per barrel. Where future field developments are concerned, the analysis has not taken account of the substantial reduction in costs over the past year. The cost estimates applied in the analysis could therefore be somewhat too high.

The estimates for full-cycle profitability of exploration are uncertain. This partly reflects uncertainties in resource estimates, developments in product prices and the level of costs. Development decisions have yet to be taken for a substantial proportion of the discoveries made in 2000-14. How far these have progressed through the planning process varies, which means that estimates for production and costs vary in quality. When developments will come on stream is very uncertain, too, which will also have a substantial effect on the present value.

Calculated profitability Total net cash flow from discoveries in the period is estimated at about NOK 2 000 billion after deducting exploration costs. The net present value is roughly NOK 1 000 billion and almost NOK 600 million at discount rates of four and seven per cent respectively (figure 4.5).

 

Figure 4.5 Value creation at various discount rates.

Figure 4.5 Value creation at various discount rates.

 

These estimates show that exploration activity has been profitable in all parts of the NCS (figure 4.6). Its value has clearly been greatest in the North Sea. Total net cash flow from discoveries in this region during the period is estimated at some NOK 1 400 billion after deducting exploration costs. The net present value is roughly NOK 800 billion and almost NOK 500 million at discount rates of four and seven per cent respectively.

Exploration activity in the Norwegian and Barents Sea has also created substantial value, with a combined net cash flow of around NOK 500 billion.

 

Figure 4.6 Estimated net present value of exploration in 2000-14 by various parts of the NCS.

Figure 4.6 Estimated net present value of exploration in 2000-14 by various parts of the NCS.