July 7, 2015 / 1:22 PM / 3 years ago

Tullow Oil finds ways to explore despite withered budget

LONDON (Reuters) - Africa-focused Tullow Oil is turning to low-cost technology in its search for new oil reserves after the collapse in the price of crude and a poor run of discoveries forced the company to slash its exploration budget by 80 percent.

Energy companies worldwide, from wildcatters to international behemoths, cut spending in an effort to keep their books balanced after the near-halving of oil prices since last June as a result of sharp growth in global supplies.

British-based Tullow slashed its exploration budget for this year to $200 million from a target of $1 billion in 2014. Its reduced program includes wells in Gabon, Kenya, the Netherlands, Suriname and Pakistan.

“We can stay busy without drilling at the moment,” Angus McCoss, Tullow Oil’s exploration director, told Reuters.

Independent exploration and production companies have suffered a dramatic drop in stock prices over the past year. Tullow’s shares have sunk by more than 60 percent, compared with the FTSE Oil and Gas index’s 24 percent decline.

But while drilling is placed on the back burner, Tullow is pushing ahead with the less complex and costly aspects of exploration such as seismic surveys of geological rock formations to locate areas of potential reserves.

“We have seismic data to generate new prospects for the years ahead. This is the kind of time where you ease back from the drilling expenditure, which is the lion’s share, 60-70 percent, of exploration budgets,” McCoss said.

“You can halve your drilling but stay in seismic interpretation and getting extensions on existing acreage.”

The company, which produces around 75,000 barrels per day of oil equivalent, mostly in West Africa, wrote off in January $2.3 billion as a result of the low oil price and after hitting a string of non-commercial wells.

Tullow now focuses on its producing assets and the TEN project in Ghana, which is expected to start in mid-2016.

DECLINE

The global number of exploration wells drilled or planned to be drilled in 2015 has fallen by around 26 percent from a year earlier to 1,004, according to Mangesh Hirve, analyst at 1Derrick consultancy.

Exploration has historically been a high-risk, high-cost and high-reward business. But recent years have seen a rise in exploration costs and a decline in the size and number of finds, which forced many companies to rethink their exploration strategies even before the fall in oil prices.

According to McCoss, the increase in exploration costs and the later stage of production costs led to a tripling of the size of reserves needed to be discovered in order to make a field commercially viable - to 300 million barrels - between the mid-2000s and 2014.

The sharp slowdown in exploration activity has led to an equally large drop in costs for oil rigs and exploration services.

“Now we are in a different world, we are going through a reset and costs are coming down. We are seeing quite a dramatic shift in the cost structure for the industry,” McCoss said.

“We are seeing 20 percent deflation in some parts but we have still got some ways to go.”

Complex and expensive exploration through deepwater drilling thousands of meters below the ocean surface was sharply reduced over the past year, particularly in Africa and Asia, according to 1Derrick data.

A rare exception in the current environment is Royal Dutch Shell’s plan to resume this summer its exploration of the Alaskan arctic sea after the campaign was suspended in 2012 when a rig ran aground.

“There is some momentum still among super majors around deep water,” McCoss said.

“There are certainly going to be big volumes out there, but once you start drilling beyond 2.5 kilometers of water in high-pressure deepwater sediment you are talking about $150-$200 million each (well), and that is where some of the differentiation is taking place in the industry.”

Editing by Dale Hudson

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