* 2013 weakest for oil exploration in over a decade
* Firms may pull back from Arctic, West Africa
* Brazil, Gulf of Mexico exploration seen unaffected
* Explorer shares discounted
By Gwladys Fouche and Balazs Koranyi
OSLO, Feb 17 Global oil firms, hit by one of the
worst years for discovery in two decades, are about to cut
exploration spending, pulling back from frontier areas and
jeopardising their future reserves, industry insiders say.
Notable exploration failures in high-profile places such as
Africa's west coast, from Angola all the way up to Sierra Leone,
have pushed down valuations for exploration-focused firms and
are now forcing oil majors to change tack.
"It is becoming increasingly difficult to find new oil and
gas, and in particular new oil," says Tim Dodson, the
exploration chief of Statoil, the world's top
conventional explorer last year.
"The discoveries tend to be somewhat smaller, more complex,
more remote, so it is very difficult to see a reversal of that
trend," Dodson told Reuters. "The industry at large will
probably struggle going forward with reserve replacement."
Although final numbers are not yet available, Dodson said
2013 may have been the industry's worst year for oil exploration
As a result, exploration will probably be cut, especially in
the newest areas, said Lysle Brinker, the director of energy
equity research at consultancy firm IHS.
"They'll be scaling back on some exploration, like the
Arctic or the deepest waters with limited infrastructure ... So
places like the Gulf of Mexico and Brazil will continue to see a
lot of activity, but frontier regions will see some scaling
back," he said.
Oil majors, which have a large resource base to maintain,
are suffering the most, as the world is running out of very
large conventional oil fields, and access to acreage,
particularly in the Middle East, is limited.
That is leaving them with an increasing number of gas
"When you look at the mix of oil and gas of the majors, it
is definitely moving towards gas - simply because they can't
access conventional oil, which ultimately I believe will have an
impact on oil prices," said Ashley Heppenstall, the CEO of
Sweden's Lundin Petroleum, which co-discovered Johan
Sverdrup, the biggest North Sea oil field in decades.
PRICES DOWN THEN UP
Before oil prices rise from a lack of exploration,
they are first expected to fall, squeezing margins and forcing
further investment cutbacks.
The International Energy Agency sees oil prices down at $102
per barrel next year from the current $108 as several producers
ramp up output.
"Oil prices need to remain at elevated levels because there
is a risk that a fall in oil prices or a cutback in investments
by companies will mean that production growth slows," said
Virendra Chauhan, an oil analyst at consultancy Energy Aspects.
Although world oil reserves increased by 1 percent in 2012,
they equalled just 52.9 years of global consumption, down from
54.2 in 2011, energy firm BP has said previously. BP sees
consumption up by 19 million barrels a day by 2035, which would
represent a 21 percent increase on th U.S. Energy Information
Administration's (EIA) estimate for 2011.
Energy firms have already been shifting capital from
conventional to shale production, and this trend could continue
as the exploration risk is smaller, the lag from investment to
cash-flow is shorter, and project sizes are more manageable.
This is weighing negatively on the shares of
"Explorer stocks are trading at discovery value or a
discount to it, so from an equity market perspective, there's no
interest in owning exploration stories. People are losing faith
in exploration," said Anish Kapadia, a research analyst at
consultancy Tudor, Pickering, Holt & Co. International.
Shares in Europe's explorers fell 20 percent over the past
year, underperforming a 2-percent rise by the European oil index
Tullow is down 39 percent in a year, while peers
Cairn and Cobalt are down 33 percent, and OGX
is down 92 percent.
The spending cutback also cut mergers and acquisitions
activity by half last year, IHS data showed, and plans to boost
shareholder returns could shift focus to cooperation rather than
fully fledged takeovers.
"You will probably see more activity at the asset level more
than at the corporate level ... More joint ventures, swapping
assets, buying and selling of assets,' said Jeremy Bentham,
Shell's vice-president for business environment.
Insiders believe the cuts may not be reversed until capital
tied up in projects like Chevron's $54 billion Gorgon
LNG or Conoco's $25 billion Australia Pacific LNG start
producing cash flow and return.
"There will be less investor pressure, then companies can
get activity back up, so this may be a pause of a couple of
years where companies scale back," Brinker said.