seapex, singapore, april 2019 · oil. later, as ranger focused on west africa, he became project...

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Exploration outlook: higher profits and fiscal change

SEAPEX, Singapore, April 2019

Dr Andrew Latham

1. Exploration back in the money

2. Changing fiscal terms

3. Outlook for 2019 and beyond

Exploration and fiscal terms update

Exploration is now back in the black

Reduced costs and quicker commercialisation of discoveries are now creating value

Source: Wood Mackenzie Exploration Service . Value creation and returns at US$65/bbl Brent.

Exploration industry value creation Exploration industry returns

-35

-30

-25

-20

-15

-10

-5

0

5

10

2009 2011 2013 2015 2017

Va

lue

cre

atio

n (

US

$B

n)

0%

2%

4%

6%

8%

10%

12%

14%

16%

2009 2011 2013 2015 2017

IRR

(%

)

Progress on many fronts is driving exploration recovery

Source: Wood Mackenzie

“How exploration can fix its broken economics” (published 2016)

Reduce exploration

costs by >50%

Reduce development

costs by >25%

+Refocus

portfolios to avoid

complexity

+Avoid tough fiscal terms

+Reload acreage at low cost

+ Exploration returns up=

0%

2%

4%

6%

8%

10%

12%

14%

2008 2010 2012 2014 2016

Co

nve

nti

on

al

ex

plo

rati

on

IR

R (

%)

Exploration’s return to profitability from 2017


New discoveries add 11+ billion barrels of oil and 6+ billion boe gas

Blocks A6/A7Gorgon Snoek

Zama

Horseshoe

Eridu

Halifax

Yakaar

Neptune

C. Olginskoye-1

Whale

Ballymore

Ruby

Legend

2017 gas discovery

2017 oil discovery

Bozhong 19-6

More success in 2018, including many high value discoveries


Ivela-1

Stony Hill-16604/5-1

Dover

MC 612 #1BP1

(G33166)

Ranger-1

Pacora-1

Longtail-1

Hammerhead-1

Pluma-1

Boudji-1

Calypso-1

Pilipili-1

6506/11-10

Epu

Kalimba-1

Dorado-1

Guanxuma-1

Glendronach

Discoveries > 50 mmboe

2018 gas discovery

2018 oil discovery

North Obskoye

Nyakhartinskoye

Triton

Timi-1

What drives exploration investment?

Most Important

Least Important

Prospectivity

Value CreationPotential

Cost of Entry

Returns on Investment

Fiscal Terms

Payback Time

Ease of Entry

Above Ground Risk

Repeatability

Wood Mackenzie’s 2018 exploration survey


Fiscal terms should reflect prospectivity

1

2

3

4

5

1 2 3 4 5

Pro

spe

ctiv

ity

in

de

x

Fiscal attractiveness indexSource: Wood Mackenzie, Upstream Competitiveness Index (1Q 2019)

High prospectivity / high fiscal attractiveness

Low prospectivity / high fiscal attractiveness

Low prospectivity / low fiscal attractiveness

High prospectivity / low fiscal attractiveness

Investment deterred?

Investment most attractive

Source: Wood Mackenzie Fiscal Service – Upstream Competitiveness Index (UCI)

1

2

3

4

5

1 2 3 4 5

Pro

spectivi

tyin

dex

Fiscal attractiveness index

South-EastAsia

Australasia

India Sub-Continent

Eastern Asia

Harsh terms in Southeast Asia may shift explorers to Australasia

Source: Wood Mackenzie Fiscal Service – Upstream Competitiveness Index (UCI)

High prospectivity / high fiscal attractiveness

Low prospectivity / high fiscal attractiveness

Low prospectivity / low fiscal attractiveness

High prospectivity / low fiscal attractiveness

0

2

4

6

8

10

12

14

16

18

2013 2014 2015 2016 2017 2018(est.)

Exp

lora

tio

n s

pe

nd

(U

S$

bill

ion

)

Others PNG Myanmar Pakistan Vietnam China India Malaysia Indonesia Australia Acreage awarded

0

100

200

300

400

500

600

700

800

0

20

40

60

80

100

120

140

160

2013 2014 2015 2016 2017 2018

Acre

age

aw

ard

ed

('0

00

km

2)

Exp

lora

tio

n li

ce

nce

s a

wa

rde

d

Exploration licence awards in the region

Asia Pacific exploration and licensing yet to recover

Some countries have introduced new fiscal systems or improved licensing systems

Source: Wood Mackenzie Exploration Service, Upstream Data Tool

Exploration investment in the region

-66%

India OALP I round

Pakistan2012 round

ChinaIndirect tax exemption extended five years

Resource tax on shale reduced

ThailandNew PSC for contract

extensions

Papua New GuineaAPT reintroduced

for all projects

IndonesiaIndirect tax exemption (exploration)

IndonesiaNew gross split PSC legislated,

adjusted and new tax rules

IndiaRevenue-sharing contractRevenue-sharing bid caps

Incentives for unexplored areas

IndiaStreamlining of pre-NELP PSC;

EOR incentives

Fiscal change is on the agenda for almost all countries in the region

Source: Wood Mackenzie Fiscal Service

India, Indonesia and Thailand introduced new terms

MalaysiaNew deepwater PSC

terms

Fiscal Evolution

Fiscal Disruption

Better for investors

Worse for investors

0

10

20

30

40

50

60

70

80

90

1995 2000 2005 2010 2015 2020

US

$/b

oe

Cash margin

Tax

Opex

Capex

Exploration

Revenue

Upstream cash margins looking strong

But a cautious exploration industry is set to hold its budgets flat in real terms


Majors’ upstream Cash Flow per boe produced Global upstream capex

100

200

300

400

500

600

700

800

2014 2015 2016 2017 2018 2019 2020 2021

US

$ b

illio

n

Exploration

US Onshore

Probable

Under Development

Onstream

0

Fiscal changes to look for in 2019

Speculative fiscal change

Underway/higher chance fiscal change

Better for investors

Worse for investors

Canada (Federal)Lower CIT

US (GoM)Lower royalty rate for the deepwater

ColombiaNew terms for unconventional and deepwater assets

Trinidad and TobagoOil SPT review

PeruRoyalty incentives

NorwayReview of tax rates, ST uplift and CIT depreciation

NetherlandsTax incentives for offshore fields

RomaniaReview of royalty rates and APT deductions

RussiaMore targeted incentives or gradual switch to APT?

EgyptRevenue sharing mechanism to replace PSC

AlgeriaNew fiscal terms

NigeriaPIFB and licence extensions

GabonNew fiscal terms

Myanmar and BangladeshNew fiscal terms

IndiaImproved terms for exploration and incremental production

PhilippinesCIT reduction

AustraliaPRRT review

Papua New GuineaPapua LNG termsrevision

Timor-Leste/AustraliaRatificiation of bordertreaty/new PSC terms

CambodiaOverlapping claims arearesolution

Sri LankaNew fiscal terms

Source: Wood Mackenzie Fiscal Service


Planned Drill

Drilling / results awaited

Primary hydrocarbon phase - Gas

Primary hydrocarbon phase - Oil

Selected 2019 wildcats to watch – more deepwater and frontiers

Jethro

Venus-1

Block 48-1

Peroba-1

Brulpadda-1RE

Cholula-1

VinstraBlackrock

Glaucus-1

Khan Khubrat-1

Nour-1

Mailu-1Etzil-1

KBD-2X

Kingsholm-1

Hazri-3

Alto Cabo Frio O

Kekra-1

Mondi

Agogo

Boyuy-2

Key exploration themes

A smaller, more profitable industry

1. Majors continue to dominate

2. Little sign of inflation

3. Continuing fiscal change

4. Most budgets stay cautious, but will

some break ranks?

5. Latin and North American deepwater

and frontier basins drive success

6. Average full cycle returns well above

10%

Dr Andrew Latham

Vice President, Global Exploration

Biography Connect with Andrew

Andrew has over 25 years experience assisting majors and independents in the development of their exploration strategy and currently works on Wood Mackenzie’s Exploration Research. He provides analysis of exploration economics, strategies and industry trends.

Andrew previously led the Exploration Strategy offering within the Upstream Consulting business. He worked with clients to help optimize their investments in petroleum exploration and advised on strategy, process, opportunity characterization and evaluation. As part of this offering, Andrew directed Wood Mackenzie’s series of multi-client projects on exploration, deepwater and Arctic themes.

Andrew has been with Wood Mackenzie’s energy team since 1995. Until the end of 2001, he managed the team responsible for Sub-Saharan Africa research products and consultancy, undertaking a range of market analysis and regional strategy projects.

He started his career in 1990 as an international new ventures geologist with Ranger Oil. Later, as Ranger focused on West Africa, he became project geologist for Angola.

Andrew graduated from Imperial College, London, with a BSc Honours degree in Geology, and holds a PhD in Geology from University College, Cardiff.

+44 131 243 4408

@AndrewLatham_WM

[email protected]

19

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seapex, singapore, april 2019 · oil. later, as ranger focused on west africa, he became project...

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