Global hunt for oil set to slip by $4 billion

Oil companies are keeping a lid on risky oil exploration even as prices climb to US$68 a barrel. Picture / Getty Images

The global hunt for new sources of oil will slow by around US$3 billion ($4.2b) this year even as oil prices climb to fresh highs not seen in over two years.

The oil price is now more than two and a half times higher than the historic lows endured by oil companies two years ago, but they are still keeping a lid on risky oil exploration even as prices climb to US$68 a barrel.

Oil prices have rallied in recent days in line with growing fears that political unrest in Iran, the third largest oil producer with the Organisation of Petroleum Exporting Countries (Opec), could lead to supply disruptions.

Andrew Latham, a researcher with Wood MacKenzie, said most companies are likely to remain "highly cautious" about investing in exploring for fresh oil reserves.

"Global investment in conventional exploration and appraisal will be around US$37 billion in 2018. This will be 7 per cent less than 2017's spend of US$40 billion, and more than 60 per cent below its 2014 peak," he said.

The downcast outlook emerged as oil prices edged above US$68 a barrel for the first time since the market hit 12-year lows in early 2016. In the wake of the downturn, companies were forced to slash spending, and many smaller players remain wracked by debilitating debts.

The research revealed that the brunt of the slowdown will be among independent oil companies, while oil majors are expected to trim spending by only 4 per cent from last year.

"Competition for the best opportunities will be fierce. Industry investment and well counts will remain stubbornly low," he added.

Many cash-strapped oil companies have opted to merge with rivals or snap up fields that are already producing oil in order to leap-frog the eye-watering expenses of the exploration and development phases.

Those that are willing to plough cash into searching for new reserves are targeting only the lowest cost opportunities, leaving a narrow range of offshore oil basins to choose from.

"This raises the spectre of sharper competition eroding margins - a threat not seen since 2014," Latham added.

The "deepwater sweet spots", which offer rich reserves at a breakeven price of US$50 a barrel, are mainly found along the edges of the Atlantic.

"Basins are a mix of the proven - such as Guyana, Mauritania, and the US Gulf of Mexico - and unproven frontiers, including Nova Scotia, South —-Africa, and Namibia," Latham said.