[00:00:00] Speaker A: There's really a lot of differentiators that you can now do in terms of your exploration. I would say that for any company that is not leveraging AI today, know that your peers and others are.
[00:00:13] Speaker B: Welcome to the Next Imperative, a podcast hosted by AM Energy leaders tackling key issues and trends in the industry.
[00:00:23] Speaker C: Hello, and welcome back to the Next Imperative. Although exploration has been the lifeblood of the industry since the beginning, in recent years we've seen a decline in performance across the board. Joining me today for a discussion on how we got where we are, what's going on, and how to turn things around are Alvarez and Marsal energy thought leaders John Norton and Andy Zagorin. Gentlemen, thank you for joining us and welcome to the Next Imperative.
[00:00:46] Speaker A: Thank you.
[00:00:46] Speaker B: Thank you.
[00:00:47] Speaker C: Let's get started. John, can you share your thoughts and observations of what's kind of gone on with exploration, what the current state is?
[00:00:54] Speaker A: Yeah, absolutely. And I think we can just start with the fact that the industry is not finding as much oil and gas as we have historically.
And if you look at the 1P reserves or proven reserves globally, over the last 15 years, the amount of proven reserves globally has actually declined by 35%.
Yeah. And so if we, if we look at that and say, you know, where are we with proven reserves versus current consumption?
We have about 10 years of proven reserves based on current consumption.
Now, not to be alarmist, because there's obviously other reserves out there and there's other reserves that are being progressed, but it's a topic that I don't think that the industry is paying enough attention to. It's something that I think it's worth having a discussion about.
[00:01:44] Speaker C: Fantastic. Andy, what are you seeing? What are the problems? What's driving the performance problems?
[00:01:50] Speaker B: Yeah. And I think if you look at exploration as a whole, across all geographies, all asset classes, you kind of see the same problem overall that John's talking about, that we're just not replacing reserves as fast, as fast as we're consuming them.
You know, if you look at kind of asset class by asset class, shale and type, for example, has been this huge revolution in the US across the shale industry, which is great, but at the same time, only 22% of reserves that we've actually consumed over the last 15 years out of shale oil have been replaced. That's a huge delta there that we just have not replaced. And then you ask the question, where's that replacement going to come from? Naturally, you have to look offshore. Well, offshore has had their challenges too, and they haven't been able to replace anywhere near as fast as a rate as we're consuming it.
When you broaden outside of just asset classes, think geographies, for example, what are we getting out of OPEC versus the rest of the world? Well, OPEC has had its challenges. It's replacing better than the rest of the world, but at the same time, it's still only replaced about two thirds of the reserves that we've consumed coming from those countries as well.
[00:02:54] Speaker C: So the old days of companies being rated based on their ability to replace 100% of production clearly have gone by the wayside by the investor community. And it's coming to be an issue.
[00:03:03] Speaker A: Yeah, absolutely.
[00:03:05] Speaker C: So on that note, the industry, led by its investors, has really focused on production in recent years, and the shales have enabled them to do that very easily. What's the impetus or the driver to really start thinking about exploration again today?
[00:03:17] Speaker A: Yeah, well, let me first start by saying just I don't think that the emphasis on production or cash flow was wrong.
It was something that was necessary for the industry and a correction that was appropriate. I think the reality, though, is that we probably swung the pendulum a little bit too far, especially in the terms of investment in exploration.
And if you go back five years ago, I think the consensus in the industry, certainly outside of the industry, is that we didn't have to worry about where we were with reserves on oil and gas, that we were in a world that had largely reached peak demand for oil and gas, or at least the peak for demand was within sight.
But I think what's happened is we've realized that transition is not going to happen as quickly as we thought. It's a lot more difficult than what people expected it was going to be.
And as a result, we're going to need oil and gas for a lot longer than had been anticipated.
You know, in 2025, where we are today, still 60% of the consumption of energy worldwide comes from oil and gas.
And the demand for oil and gas is only growing. And so the need for oil and gas is going to be around for a long time into the future.
[00:04:35] Speaker C: Andy, I think you mentioned to me the other day that the demand is still growing.
[00:04:40] Speaker B: Yeah. And if you look at the last 10 years John touched on, we thought there's always been this period of time in history where everyone keeps saying we're at peak oil, we're at peak oil, this time we mean it. And 10 years ago plenty of people were saying that, and yet demand still grew another 10% over the last five years. Really so when you start digging into that, where we've been, where we've come from to today. Yeah. Demand continues to grow. And then when you start looking forward, you know, there's tons of forecasts out there from everything, you know, kind of high oil and growth. Let's double down on that to the climate change scenarios where there's tons of regulation investment that's poured into renewables and alternative energy sources. And so there's a wide array of forecasts. But largely, though, I'll say over the next 10 years, there's at least flat to moderate growth of hydrocarbon demand.
Beyond that is where they'll start to part ways and go in different directions. But even by 2050, we're still talking about, in most forecasts, flat demand to where we are today.
[00:05:41] Speaker A: Yeah, the transition is just a lot harder than what people thought it was going to be.
And the relative advantages of hydrocarbons, given their energy density, the fact that they're relatively easy to transport in either the liquid or gas form, and the fact that we have so much infrastructure in place so that they're readily available, essentially available on demand, are really advantages that are difficult to overcome and lead to the fact that we're going to need oil and gas for the foreseeable future.
[00:06:12] Speaker C: The peak oil conversation is the first time I heard it was in the 70s, and then it was peak supply and then peak demand, and reality is.
[00:06:18] Speaker A: We still haven't found it. That's right, absolutely.
[00:06:23] Speaker C: Let's talk about how we got here, Andy. What have you seen the industry doing or not doing to get us in this situation?
[00:06:28] Speaker B: Yeah. You know, I think if you look at the 2015 price crash, that really is an inflection point in what happened with the exploration part of the industry as a whole. Prior to that, if you look at five years prior to the price crash, the industry as a whole spent over $130 billion a year in exploration alone. Immediately following that price crash in 2015, that cuts in half. You're now just around $60 billion. And it ebbs and flows year to year, slightly starting to slightly edge up a little bit. But generally you're looking at half the spend of what we used to have invested here. And so you have that, and then you start looking in different asset classes. Well, it's been further exacerbated in offshore, where the cuts were even deeper, so there's been a bit more spend on the onshore side. But offshore, especially in deepwater, that's where the budgets got slashed particularly hard, with good reason. Getting Back to living within cash flow and other things we were talking about earlier.
You look at those cuts and those offshore projects, high risk, high reward. But the amount of investment that you have to throw at it to go after that value proposition is huge.
[00:07:33] Speaker C: It's very expensive. Dry hole, if you get a dry hole.
[00:07:35] Speaker A: Yeah.
One thing that I find really interesting is that although we have cut back significantly in investment, you might think that that would have led to increased success rates just pursuing those highest probability opportunities.
The reality is that we've actually seen the opposite of that even as we've pulled back pretty dramatically in spending, particularly in offshore. As Andy mentioned, over the last multiple years, the success rate in finding has actually gone down about 30 to 40% from where we were when we hit the peaks in the early 2010s.
Now we saw a little bit of a blip of improved performance kind of in the 2019-2021 time period when there was a lot of emphasis on short cycle opportunities, taking advantage of tie ins and infrastructure plays within the Gulf of Americas and North Sea.
But since then we've really seen that exploration success drop off pretty dramatically. And going forward there's going to be real challenges because you look at those primary plays areas where we've had a lot of historical success, including the Gulf of America's and North Sea, that they've largely played out. And we're going to have to look to more frontier and deeper opportunities in addition to looking to other opportunities in South America, west and East Africa, Southeast Asia and the Arctic.
[00:09:01] Speaker C: So it sounds like a combination of needing to look in different places and maybe step up our game from an expertise or learning perspective.
[00:09:12] Speaker B: Yeah, I think when you start looking at, over the last 15 years there's been an emphasis on production and that's where the focus on the industry as a whole been. And the US Shale revolution went from this growth phase to let's manufacture and just drill, baby, drill. Let's get all of the oil we can out of the ground. Then they converted to that cash flow model. But the emphasis through all of that period has been on production, not necessarily where, where the, where's the next barrel going to come from once this reservoir is depleted. And so when you look at the bigger picture, overall exploration tends to be in, you know, frontier regions where you don't have the infrastructure.
You do have some ability, as John mentioned, to kind of do tiebacks where it's possible. Gulf of America is a great example where that's, that's kind of at the forefront of the activity. But in frontier regions, you don't have the ability to leverage economies of scale or, or stable supply chains or anything else, stable infrastructure to really give you that cost advantage as you go into these regions. So you just have high costs on high risk projects.
[00:10:23] Speaker A: Yeah. And the lack of investment in some ways has led to a little bit of a doom loop within the industry itself. So if you think about this, lack of investment has led to some of the skills and our best people leaving the industry, whether that was retirement or seeking other opportunities. It's also meant that we haven't developed the next generation of people with the key exploration skills that are needed.
As some of that skill is atrophied, our success rates have gone down.
Success rates going down means that every barrel that you're finding is costing more.
And then companies look at that and say, do we want to continue to invest there? And there's a little bit of this doom loop that we've created by ourselves.
And ironically, given kind of the current price signals that we're seeing right now as an industry, we're really going to have to invest to get out of this. And that seems a bit challenging right now where we see where prices are. But to get back to a point where we have those skills and we're actually finding at the rate that we need to, there's going to need to be significant investment in the industry.
Now. That investment is going to have to change. It can't be the same way that we did it in the, in the 1990s and so forth. We need to get better, but we certainly do need to get back on a path where we're investing in exploration.
[00:11:42] Speaker B: Right.
[00:11:42] Speaker C: And investing in the science and investing in the education and the new tools. Right. I mean, with all the new advances, there's got to be better ways to do. As you said, we can't do it, you know, in the, in the old ways. Is anyone getting it right? And if so, kind of what are they doing? What are some examples of good here?
[00:12:00] Speaker B: Yeah. So there's a good handful of companies getting right. And to throw out a couple examples, I think it's very easy to pick on ExxonMobil and Hess with the Guiana asset that they've been working on for a number of years now.
Been in the headlines, certainly with the Chevron Hess acquisition. And I think Chevron hasn't shied away from saying publicly that one of the assets of that acquisition isn't just Guiana, but it's also Hess's exploration team that has been active and played a Huge role in what they found down there.
I think that's one piece of it. Then you can also look at the smaller companies, say Cosmos, where their strategy is very much focused on, I'll say, infrastructure led type projects and exploration. They're leveraging existing infrastructure in the Gulf Americas and stepping out, exploring and then tying back into that. So it's very cost efficient for them to do it. And they've had great success. They've also looked in Africa and had, I'll say, mixed results.
Ghana, they've certainly had great success there. But other parts of Africa they're still trying to figure out.
But as a whole, you know, they've kind of got their bread and butter in the Gulf here and then they've stepped out and tried to unlock exploration in other areas of the world.
[00:13:10] Speaker C: They're taking that expertise to other parts of the world and maybe less explored and more opportunity available.
Great. John, what are you saying?
[00:13:20] Speaker A: Well, yeah, I just echo what Andy said is that there are some that have been pretty successful, but if you look at the vast majority, whether they're majors, super majors, independents, NOCs, if you look at their performance, the performance is declining. If you look at their cost per finding, cost per finding has been increasing by 2x the rate of inflation. And that's over a long period of time. And so it's become more and more challenging.
And not only is it challenging, it's obviously time consuming and the process has a lot to be improved upon.
And so I think there's a lot that the industry can do to change the way that we're doing exploration. There's a lot of opportunity there.
[00:14:05] Speaker C: Great, great.
On that note, what are you recommending to your clients? How they begin to, you know, those who've recognized I've got an issue, I've got to turn this performance around and reaching out for help.
What do you recommend?
[00:14:18] Speaker A: Yeah, and so I've worked with a number of clients on this topic and it's one that they feel very challenged in right now. I've worked with nlcs majors and super majors on this and I think there's three things that pretty consistently they need to focus on in order to get this right.
The first is developing a strategy.
What right do they have to win? What are they particularly good at? And developing a specific strategy for their exploration.
The second is updating the stage gate process.
We're largely as an industry using a stage gate process that's been in place since the late 80s 90s, and that's a stage gate process that in many Cases has unclear accountabilities is obviously taking a long time, it's very costly.
Then the third one is leveraging technology and particularly AI.
Now it's not that we haven't been using technology using advanced analytics and big data. That certainly has been something that we've been using in exploration for many years now. But with the advancements in generative AI, there's really a lot of differentiators that you can now do in terms of your exploration. And I would say that for any company that is not leveraging AI today, know that your peers and others are right.
[00:15:45] Speaker C: Andy, what have you seen?
[00:15:47] Speaker B: You know, I think John touched on a lot of good points. The other thing is companies need to decide how they want to participate in exploration. Ultimately, many of them will tell you we have a strategy about what we want to do, we're going to explore in these three regions of the world and we think, here's why. But they don't necessarily actually follow that up with action and what they actually do from an operations standpoint. So I think first and foremost is how do you want to participate in the industry? Do you want to be a frontier leading explorer? Do you want to be kind of that more passive partner? And you've got a team of people that are trying to learn so you can build that capability internally?
There's a pretty wide spectrum there.
And some of that may depend on what your risk appetite is too as well financially and what capabilities you have in house to be able to kind of step into that and take those big swings. So outside of that, there's a couple of good examples of companies leveraging capabilities. They have to then step out and explore. And I'll pick on two US shale onshore companies in EOG and Continental who are. They're very much known for what they've done in the continental U.S. they're both stepping out and partnering with different countries internationally to then explore onshore and shale in different regions. EoG in the UAE and then continental in Turkey.
[00:17:02] Speaker C: That's great. Taking their expertise on the road and leveraging it.
[00:17:05] Speaker A: Yeah, absolutely. And getting that strategy right is absolutely key. Right. Being able to clearly articulate where you want to play and how you're going to win is one of the keys in order to be successful.
I mentioned earlier the process and the process, the stage gate process that we have is largely broken in exploration.
And one thing that I found interesting is looking outside of the industry to try and find are there analogous industries, are there analogous stage gate processes out there that the industry could learn Something from one of the industries that I found interesting that is somewhat analogous is the pharmaceutical industry.
The stage gate process that they go through for developing new drugs is fairly similar to what we go through in terms of exploration.
The similarities start with the fact that they're both fairly time consuming in terms of being measured in years or decades. They're both very costly, and there's actually a fair amount of risk associated with the process in both cases. Now in the pharmaceutical industry, they've gone through and redeveloped what their stage gate process looks like.
The first thing that they did was recognizing that in order for us to be able to find more drugs that were commercial, that had commercial potential, they needed to open the aperture. And so they're actually opening the aperture on the front end of the stage gate to look at more opportunities.
But in addition to that, they're leveraging technology, particularly AI, to identify which molecules or which particles have the greatest potential to become commercial. And they're killing lots of opportunities really early on in the process.
[00:18:54] Speaker C: So AI is doing a lot of the analytical work for them, enabling them to expand the funnel.
[00:18:59] Speaker A: Exactly. Allowing them to look at a lot more opportunities a lot quicker and a lot more efficiently, both in terms of cost, in terms of time.
The second part is that they have put a much, much greater emphasis on commerciality.
Does this drug have commercial potential?
As part of their stage gate process? They involve cross functional teams much earlier in the process. They're looking at marketing, they're looking at manufacturing, they're looking at what is the potential of this drug to actually make money.
As a result, when they're doing their cross functional reviews and stage gate process, a lot more opportunities get killed earlier in the process.
Always thinking about, you know, is this a commercial opportunity as opposed to is this a potential molecule that could have some medicinal properties associated with this? So if you think about oil and gas, right, a lot of times the emphasis in are there hydrocarbons there? We spend a lot of time, are there hydrocarbons there?
And not until we get later on in the process do we think about is there really an opportunity to be able to produce these economically? Is there a market for them?
How are we going to actually make money off of this?
[00:20:16] Speaker C: So maybe a shift in mentality to it's not a win until it's a commercial find instead of just a technical find?
[00:20:22] Speaker A: Yeah, absolutely. And then the third thing that they're doing is adaptive trials. So similar to the stage gate process for oil and gas, the vast majority of the cost actually comes much later in the Stage gate process when they're doing their clinical trials. So think about when we're doing exploration wells. Right, right. They've become much more adaptive in terms of their trials. So they will look at the results very early on, will either kill or adapt something very quickly. And that's another opportunity in oil gas where we could be thinking about how can we be a little bit more adaptive in that exploration process, particularly as we're looking at drilling wells and putting in some of the bigger costs there, being more adaptive to what are the opportunity, what are we learning and what are the real opportunities associated with this.
[00:21:10] Speaker C: Yeah, and I've seen that even in the shales where people just kept progressing on the type curve and turned out the type curve was incorrect and it took them way too long to figure that out. Same kind of thing. I love it.
Great thoughts.
[00:21:22] Speaker B: Yeah, I think the pharma analogy is a really good one and one of the really great comparisons there is just how big their funnel has to be early in that process of what they're looking at as their opportunity set.
And something that pharma has done really well recently is they figured out how to automate a lot of the analysis that gets done early on that funnel. So you take some of the, I'll say the human interaction, the human emotion out of making the yes, no, adopt, kill this project very early on.
Oil and gas can learn from that. And some companies have been doing this for a while, but others are just learning to do this now where up front there's no shortage of data in this industry on what's out there. Some of the challenge is finding it. Some of the challenges, it may be in someone else's shop, so you have to go pay for it, which can be expensive as well. But once that data is collected, we're talking seismic, geologic data, well logs, anything like that.
There are AI technologies that can basically be the filter for you. Instead of having to spend expensive technical talents time doing that initial upfront screening that should be automated. And you can have AI technology basically running that screen for you, identifying the opportunities. Now there is the human element that comes in and applies the expertise after that. But the initial screen, that can certainly be automated. That's just one of the examples of how you can speed up that funnel.
[00:22:45] Speaker C: Yeah, computers can run 24,7 and people get involved when they need to, not expedites it, not just in cost, but cycle time.
[00:22:52] Speaker B: Yep.
[00:22:53] Speaker C: John, Andy, thanks for sharing your thoughts and observations of what's going on in the exploration space.
I'm excited that we do have some solutions available and hope companies will look to adopt them to our audience. Thank you for joining us. We hope you enjoyed this conversation and we look forward to seeing you again on a future episode.
[00:23:10] Speaker B: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode. Also, visit our
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