Low Oil Prices Prompt Industry Discipline
AOP spoke with Tracey Henderson, Vice President of Exploration, Business Execution and Geophysics for Kosmos Energy, about the impact low oil prices are having on exploration projects in Africa, including some of the challenges to operating and the evolution in fundraising methods in this price environment.
As a result of lower-for-longer prices, what are some of the advantages and challenges for oil and gas companies?
The price drop and lower-for-longer reality has brought greater discipline to the industry which is a good thing. The adjustment has been challenging, however, as companies have cut exploration budgets and focused capital on mature basins and unconventionals to reduce their overall risk. This will negatively impact the number of exploration discoveries in the coming years and inhibit growth.
One advantage of the re-trenching by the industry is that there are more opportunities and a less competitive playing field. Service costs are down and there is reduced competition for acreage in many places in Africa, the key is finding opportunities that make sense if a $50 world.
How have you seen the funding for African oil and gas exploration projects change in the last two years? What further evolution in fund-raising methods do you expect?
The investment community has been burned by the industry downturn, and there are many projects where huge investments have been made that are not economic at $50. Thus, most investors have been exiting or are dramatically reducing investment in the E & P sector. Securing funding for projects that will only be economic above $50 is going to be challenging as it unclear how long the shale glut will keep a cap on oil prices.
However, there is funding available for high quality projects that are economic in today’s environment. Investors are being highly selective, so the key is to ensure the quality of the investment. The best projects, whether in shale or deepwater, will get funded.
What’s your outlook on Africa’s exploration frontiers in terms of market conditions, emerging plays and important players in the market?
The dramatic speed in which the price crashed occurred was a shock to the industry, but the business will re-balance over time. Prices will adjust to a point where companies can get back to exploring. Twelve years ago, oil prices were at $50 and the industry was doing business as usual. I’m still very optimistic about the future of exploration in Africa, and I view Africa as an under-explored part of the world. There are a handful of companies who, like Kosmos, are still active in the deep water and are taking advantage of lower costs and new opportunities, these will be the companies to watch over the next several years.