All that money, but nobody’s finding much oil these days

‘Oil is first found in the mind,” said Wallace Pratt, the American geologist, writing in 1952. It takes special skills to divine correctly where petroleum may be found, before a well is ever drilled. But either today’s geologists are looking in the wrong places, or company management is flawed.

Despite record spending levels, soaring from US$20 billion in 2004 to more than $90bn last year, and the application of technologies undreamed of in the 1950s, the results have been disappointing. With the world consuming almost 34 billion barrels of oil each year, only between 6 billion and 7 billion barrels of oil were found annually from 2012 to last year, and only about 2 billion barrels so far this year, although that will be boosted by end-of-year reports.

This poor performance is not entirely the industry’s fault. There is little exploration in promising areas such as Iran, Iraq and Russia. Between 2006 and 2013, Brazil’s “pre-salt” area contributed mega-billion barrel discoveries, but political and contractual wrangles have slowed down new exploration. Most new discoveries are in deep-water areas, large but expensive to drill and develop. And many companies are replacing their crude reserves with shale oil rather than new conventional finds.

Some new frontiers prove that success is not impossible: the Kurdish region of Iraq, the extension of Brazil’s pre-salt to West Africa, the Falkland Islands, Kenya and Newfoundland have paid off.

Gas has been a much brighter spot. Kosmos Energy, which began by finding oil in Ghana in 2007, has followed up with reportedly large gas discoveries in Mauritania, including Marsouin announced last week. Among the oil majors, Eni, which unearthed Egypt’s giant gasfield Zohr in August, as well as big fields in Mozambique, has done best. But gas, of which there is a global glut, takes longer to develop and is less valuable than oil.

A recent study by the Boston Consulting Group on the dismal record of exploration for minerals and metals reveals uncanny similarities: a tenfold increase in spending from 2002 to 2012 yielded no increase in the number of discoveries. Their interviews with a number of mining legends suggest some key lessons for oil explorers too.

The winners pursued districts with clear signs of minerals (or oil and gas) – not "moose pasture", in industry vernacular. But they did not simply drill timidly near existing discoveries, a strategy that eventually runs into diminishing returns. They were prepared to venture out into greenfield, frontier areas.

They committed to “boots and hammer” – getting in the field to understand the geology. That might be most applicable in areas such as the Kurdish region, where oil literally oozes from the ground. But in any area, there is no substitute for hands-on knowledge of the rocks – even though now that is combined with the most sophisticated computer power, remote sensing and geophysical data.

Having identified attractive areas, they were not afraid to drill. “I’ve found a deposit for the wrong reason. Everybody has – if they are being honest,” said Andy Wallace, who made a string of notable gold finds in Nevada.

The best explorers developed their people, realising that the in-depth knowledge required to extend proven trends is different from the broad expertise of finding new frontiers.

And they won full commitment from their management and board. Mineral and petroleum explorers these days are badly squeezed for funding, and it takes courage from company leadership to keep spending after a string of failures. But this has to be balanced with avoiding obstinate persistence in unpromising areas, or drilling in difficult environments where even large discoveries will simply not be economic to develop.

There are still mineral-rich areas out there, but the similarly poor performance of explorers for oil and metals suggest common failings. Companies need to get their strategies right, assemble the best teams, and bet on their brains instead of gambling on geology.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.

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