Russia-Ukraine War: A Big Boost for Oil Exploration
Profits of all the E & P companies soared to a record high during year 2022 due to big volatility in the energy market as a result of Russia-Ukraine war. The profit of for 2022 of all the major Western energy companies was highest in more than a decade. Many governments have imposed a windfall tax on the unprecedented profit.
As a result of rising crude oil prices and extra surplus money from record profits by fuel price surge driven by the Ukraine war for fresh investment, Oil and gas companies have intensified the hunt for new deposits in a long-term bet on demand.
Shell and BP have decided for exploration revival again after slowed down plans to shift away from their legacy business and invest in renewables as part of the energy transition. This reflects a renewed commitment to oil and gas. Majority of investors are looking to maximise their oil and gas profits rather than invest in lower margin renewable energy businesses. The renewed interest in oil and gas exploration and production is a big turnaround for BP, which got rid of most staff from its exploration unit three years ago.
Exploration is a long-term, high-risk business. Big-ticket offshore projects requiring big capital investments, typically take five to seven years to develop from discovery and at least another 10 years to return the initial investment. But it has proved more reliable for the energy majors as a source of profit, than producing renewable energy.
historically upstream oil and gas companies have average returns of around 15%-to-20%, while renewables projects have not delivered profit more than 8%.
That has increased confidence in the most costly, high-risk offshore exploration that can also deliver the highest rewards.
The number of offshore drilling vessels engaged for exploration and production of oil and gas are back to a pre-pandemic levels, rising by 45% from October 2020 lows.
the rise in drilling activities has resulted in daily rates for leasing drilling rigs already rose to the highest levels since a 2014 downturn when commodity markets crashed.
"Higher oil prices, the focus on energy security and deep water's emissions advantages have supported deep water development have boosted hydrocarbon exploration to some extent.
The significant size of deepwater offshore deposits ensure environment friendly and better economics as less energy is used to extract each barrel, limiting emissions.
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The International Energy Agency forecasts global upstream oil and gas investments are set to increase by around 11% to $528 billion in 2023, the highest level since 2015.
It is expected that commitment of up to $185 billion to develop 27 billion barrels of oil reserves is coming up by international oil companies, focused on the higher-cost, higher-return deepwater developments.
The major investment, as usual, is going to come up in Gulf of Mexico, South America, West Africa and in part of the Mediterranean through 2027.
Nambia, which has yet to produce any oil and gas, has attracted strong interest after Shell and Total made discoveries in offshore. Shell plans to drill two further wells in Namibia. Shell has also applied for a licence to drill another 10 exploration and appraisal wells. Total made an oil discovery in the Venus well in Nambia's which is estimated to holds 3 billion barrels of oil equivalent.
BP, trying to reverse the decline in oil and gas output after it shifted to renewables, it has turned to the Gulf of Mexico and far off the eastern coast of Canada, where it is ramping up?oil exploration activities in frontier areas. Deepwater offshore Guyana and Suriname is also becoming new exploration hub after a series of big discoveries reported recently.