Oil and gas companies are intensifying their search for new deposits, embarking on a long-term bet on demand and reinvesting some of their unprecedented profits from the recent surge in fossil fuel prices driven by the Ukraine conflict, as indicated by industry executives and data.
The resurgence in exploration, particularly among European oil majors, signifies a renewed dedication to the oil and gas sector. This shift comes after Shell and BP abandoned their commitments to reduce production and invest in renewable energy as part of the global energy transition.
The companies have responded to pressure from a majority of investors who prioritize maximizing oil and gas profits over investing in renewable energy ventures with lower profit margins.
Despite facing opposition from a minority of activist investors advocating for greater alignment with global climate change mitigation efforts, oil companies are defying these protests and reviving their appetite for oil and gas reserves and production.
This renewed interest is a significant turnaround, especially for BP, which had downsized its exploration unit and laid off most of its staff three years ago.
Exploration is a high-risk, long-term endeavor. Typically, major offshore projects take around five years to develop from the point of discovery and require at least another 10 years to recoup the initial investment.
Nevertheless, it has been demonstrated that exploration consistently yields more reliable profits for energy majors compared to the distinct business model of renewable energy production. Historically, upstream oil and gas activities have generated returns of approximately 15% to 20%, whereas most renewable projects have yielded up to 8%.
The surge in oil and gas prices resulting from Russia’s invasion of Ukraine has contributed to the industry’s newfound confidence in costly and high-risk offshore exploration, which can also offer the highest rewards.
“Offshore is witnessing a rebirth,” remarked Olivier Le Peuch, CEO of oilfield services company SLB, on June 21.
Prominent industry data providers and consulting firms support this perspective. An analysis of data from oil services firm Baker Hughes reveals that the number of offshore drilling vessels employed for exploration and production has recovered to pre-pandemic levels, experiencing a 45% increase from the lows of October 2020.
Wood Mackenzie analysts predict a further upswing in activity, projecting a 20% growth in offshore exploration and drilling by 2025. The rise in drilling rates has already driven daily leasing rates for drilling rigs to their highest levels since the market downturn of 2014.
Leslie Cook, an analyst at Wood Mackenzie, explained, “Higher oil prices, the focus on energy security, and the emission advantages of deep-water operations have supported deep-water development and, to some extent, increased exploration.”
The potential size of offshore deposits allows for economies of scale, reducing the energy required to extract each barrel and limiting emissions. The International Energy Agency forecasts that global upstream oil and gas investments will increase by approximately 11% to $528 billion in 2023, reaching the highest level since 2015.
Barclays anticipates that the number of approved offshore projects this year will reach a 10-year peak. Additionally, Wood Mackenzie predicts investments of up to $185 billion to develop 27 billion barrels of oil reserves, with international oil companies focusing on higher-cost, higher-return deepwater developments.
The so-called “Golden Triangle” comprising the U.S. Gulf of Mexico, South America, West Africa, and parts of the Mediterranean are expected to account for 75% of the global demand for floating rigs through 2027.
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