ABSTRACT: Value Creation through Exploration

Bulletin Vol. 88 (2004), No. 13 (Supplement)

AAPG Annual Meeting
Dallas, Texas
April 18-21, 2004

Black, David¹
(1) Wood Mackenzie, Edinburg, United Kingdom

Exploration is a key part of every upstream company’s business and companies need to replace the reserves that they produce. Reserves replacement has been a direct measure of a company’s exploration success and is a prerequisite for sustainable growth in production. However, there has been an emerging shift from volume towards value within the industry.
Who could replace reserves and create value? Wood Mackenzie has carried out extensive research about exploration strategies and performances. Recently, it benchmarked a key group of 25 companies, ranging from super-majors to smaller E&P companies, in terms of their exploration performance. On a country-by-country basis, each company was assessed on whether they had created or destroyed value through exploration. The key drivers behind their performance were also identified. In contrast to traditional performance measures – reserves’ replacement and finding costs -- two key metrics were used to measure performance: (1) absolute value creation through exploration; and (2) the exploration margin on a $/boe basis.
More than half of the companies analysed have created value through exploration; but others have made discoveries worth less than their exploration cost and/or failed to replace production with discoveries of commercial reserves.
What have been the strategies for success?
The ideal exploration program is to be able to discover sufficient reserves and to create value through exploration in doing so. Exploration is an enigma – but value creation seems to be based on the ability to (1) leverage skills; (2) legacy positions; and – not least – (3) an element of luck.