A good FT article here about how oil and gas discoveries have recently fallen to their lowest levels ever. I’m with Spencer Dale and the shale crowd… it’s the marginal production expansion reserve of choice… but I’m also with offshore… I just think the next boom will be somewhat different and probably less of a boom.
However I also think the focus on Reserve Replacement Ratio (RRR) will also diminish somewhat and E&P companies will be more focused on other issues beyond discovery levels. RRR is a good concept when you are reaching the frontier of oil production, and certainly no one cared about it more than Exxon Mobil, but its a measure of interest really only when the entry and CAPEX costs of increased production are so high. Its not even a measure of exploration efficiency because companies that cut back offshore CAPEX clearly are not seeking to replace reserves 100%. RRR is a relic of bygone era when you couldn’t drop a few billion and buy some decent shale acreage or a small Swedish start-up didn’t strike it big in the Barents.
Large E&P companies have shown in the downturn that they are committed to constant dividend payments, regardless of underlying cash flow generation where possible, and I think it likely reserves will go the same way: some years there will be a bumper increase and other years a decrease, the trend and stability more than the absolute limit will become important.
I mention this in the context of offshore because not only has shale changed the production economics (as I have discussed before) but also because it is likely to make a recovery from this offshore exploration trough slower than people would like. I do believe in offshore long-term… just the new offshore economics not the old.