Why is There a 70 Year Low in Oil Discoveries?

New data released by London-based global information provider IHS Markit suggests that the past three years have marked the lowest figures seen in seven decades for conventional oil discoveries. The report warns "a significant rebound is not expected" and predicts the trend will continue into 2020 and beyond.

IHS Markit claims that conventional exploration, which refers to traditional methods used to drill for raw crude oil, natural gas and petroleum, has been on a downward trend since the global financial crisis hit in 2008. Coupled with the advent of horizontal drilling and hydraulic fracturing practices in lucrative North American shale basins, conventional discoveries were sent on a downward trajectory.

The aftermath of the 2014 surplus

The trend was partly triggered by OPEC's reluctance to cut production in the face of rapidly growing surplus in 2014. This sparked a sharp drop in oil prices, which continued for the next 18 months. In early 2016, WTI prices dropped to less than US$30 per barrel. While prices rebounded in 2017, the multi-year downturn had a lasting impact on conventional exploration.

The volatility prompted companies to cut spending and minimise risks, instead turning to short-cycle shale drilling which offered faster turnaround times and instant profits. Unsurprisingly, this led to a spike in US shale output and a downturn in conventional exploration.

“One of the main drivers here is the shift of investment by US independents from international exploration to shale opportunities in the United States - shorter cycle-time projects - with greater flexibility to respond to changing market conditions," explains Keith King, author of the report and senior advisor at IHS Markit. “These operators can quickly turn an unconventional project off and stop or postpone drilling next month if oil prices fall.”

A shift towards low risk, mature regions

King also cites a shift from high risk "frontier" areas to mature regions with proven reserves as a driving force in the oil discovery slump. Rather than hedge their bets with deepwater drilling projects, companies are showing a preference for shallow water drilling and onshore exploration. As a result, conventional discoveries have taken a hit.

In the long term, King says the market could swing either way. "Lacklustre financial returns from unconventional production onshore in North America may drive more operators back to conventional exploration in the longer-term," he says.

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