How ultra-deepwater is revitalising oil and gas exploration

Exploring for new oil and gas fields gets a bad rap. Public opinion is negative, investors indifferent and some governments have ceased to issue new permits. As a result, the once-mighty exploration sector has shrunk to a hard core of the biggest of Big Oil. The ‘believers’ who stuck with it through the tough times are now in a prime position to create value from the industry’s exciting new theme.

High-impact exploration in ultra-deepwater basins is the focus of our latest Horizons. Dr Andrew Latham and Simran Bandal from our Subsurface team helped me understand why it’s transforming exploration strategies.

Does the world still need to explore?

New discoveries can play an important role in the future, delivering affordable energy and bolstering energy security. The energy transition is moving more slowly than is ideal, and the global economy will rely on oil and gas for decades. Producing fields will decline while new projects are needed to maintain supply at current levels, or perhaps even higher for several years.

There are huge volumes of discovered resource scattered around the world that are yet to be developed. These are either high cost or carbon-intensive, or both. Successful high-impact exploration has the potential to deliver the lower-cost, low-carbon-intensive barrels that can help fill the future supply gap.

What’s the value proposition for explorers?

Exploration has had a reset since the oil price crash of 2014. With capital discipline the guiding light for boards, exploration budgets remain on a tight leash. Fewer companies are active nowadays – it’s almost entirely an exclusive group of the Majors and national oil companies, including Qatar Energy and Petronas, which have the access to capital and risk appetite for high-impact exploration. In this constrained financial framework, fewer wells are being drilled.

Yet exploration is thriving and making money. Since 2015, new field discoveries have created over US$160 billion of value after all costs, based on our analysis and assuming an industry planning price of US$65/bbl Brent long term. Full-cycle returns have been consistently in double digits every year since 2015, averaging 15%.

Exploring is also cheaper than buying resource. Over the past five years, we have calculated industry-average breakeven prices for exploration at around US$45 per boe (Brent, NPV10%) versus US$65 per boe for M&A – a reasonable discount reflecting the comparative risks. The most successful explorers, though, will do even better and win hands down over M&A.

It would be no surprise if some companies that have wound down high-impact exploration exposure in recent years and are now looking to rejuvenate their upstream portfolios look to get back in.

What has made high-impact deepwater exploration attractive?

The industry has been pushing into ever-increasing water depths with success for decades, but ultra-deepwater plays (deeper than 1500 metres) looked to have geological challenges. For an oil and gas system to develop, a ‘kitchen’ deep in the sedimentary pile has to be hot enough to ‘cook’ a source rock rich in organic matter. The oil and gas molecules released can then migrate into reservoir traps in the layers above. Most geologists worried that the temperature gradient would be too cold if they stepped too far offshore – at the point where these source rocks sit above the transition between continental and oceanic crust – rendering ultra-deepwater plays duds.

Several years ago, drilling in places like Guyana and Uruguay found unexpectedly high heat flow, suggesting those all-important source kitchens could exist further offshore. The hunt was then on to find complete oil and gas systems where ultra-deepwater basins step out onto oceanic crust. ExxonMobil’s initial breakthrough in Guyana in 2015 has been followed by a series of giant new finds in the Orange basin in Namibia by TotalEnergies and Shell (2022) and GALP (2024). All lie in water depths exceeding 2000 metres, and hold low-cost, low-carbon-intensive barrels.

Where will explorers look next?

The discoveries in Namibia have sparked a frenzy of activity among exploration teams looking to repeat that success. Much of the initial focus is in and around Namibia. Chevron, Eni, BP and Woodside Energy are new entrants to the Orange basin, while Chevron is among those considering acreage in Namibia’s Walvis basin to the north. Shell and TotalEnergies are looking at the extension of the Orange basin to the south into South Africa.

But the net will now be cast far and wide for similar targets all around the margins of the southern Atlantic. On the West African side, Southern Angola, Sao Tome, Cote d’Ivoire and Liberia have all been brought into play. South American plays include the Pelotas basin, in the extreme south of Brazil, Uruguay and Argentina.

Will exploration ever again be seen as useful for society?

The ship has already sailed on wider public sentiment in many developed countries. But some consumers may eventually come to appreciate if explorers quietly succeed in delivering low-cost, low-emissions barrels to meet resilient demand in the coming years.

Governments, too, have a part to play in supporting the industry. Few will want to repeat New Zealand’s decision to abandon gas exploration only to find itself still importing coal to meet its energy needs.