Oil giants dig deep as earnings trump climate concerns Ship’s crew

Reuters

By Ron Bousso and Nerijus Adomaitis

LONDON, July 3 (Reuters) – Oil and gas companies have intensified the hunt for new reserves in a long-term bet on demand as they reinvest some of record profits from Ukraine war-induced soar in fossil fuel prices, sources said in the statement Data and Industry Managers.

The revival in exploration — particularly from European majors — reflects a renewed commitment to oil and gas after Shell and BP slowed plans to divest from their legacy businesses and invest in renewables as part of the energy transition.

It responds to pressure from the majority of investors to maximize their oil and gas profits rather than invest in lower-margin renewable energy companies.

It also defies protests by a minority of activist investors who want oil companies to get more involved in the global effort to mitigate climate change.

BP’s renewed appetite for oil and gas reserves and production is a particularly big turnaround that has been on the horizon most employees from its exploration unit three years ago.

Exploration is a long-term and high-risk business. The development of large offshore projects typically takes five years from discovery and at least another ten years to recoup the initial investment.

But as a source of profit, it has proven to be more reliable for the energy companies than the completely different business model of production renewable energy.

Upstream oil and gas has historically returned about 15% to 20%, while most renewable energy projects have returned up to 8%.

An oil LCOc1 and gas price rally fueled by energy producer Russia’s invasion of Ukraine resulted in record profits for energy majors.

This has boosted confidence in the most costly and risky offshore exploration that can also yield the highest returns.

“Offshore is experiencing a renaissance,” said Olivier Le Peuch, CEO of oilfield services company SLB called at 21th of June.

Leading industry data providers and consultancies support this view.

The number of offshore drillships used to explore for and produce oil and gas recovered to pre-pandemic levels in May, up 45% from the October 2020 low, according to data analysis by oil services company Baker Hughes.

Analysts at Wood Mackenzie are forecasting a further surge in activity, forecasting that offshore exploration and drilling activity will increase by 20% through 2025.

The surge in drilling has already helped push daily rates for rig leasing to their highest levels since the 2014 downturn when commodity markets collapsed.

“Higher oil prices, a focus on energy security, and the carbon benefits of the deep sea have fueled deep sea development and, to some extent, spurred exploration,” said Wood Mackenzie analyst Leslie Cook.

The potential size of offshore deposits can ensure economies of scale, meaning less energy is used to produce each barrel, thereby limiting emissions.

The International Energy Agency forecasts that global upstream investment in oil and gas will increase by around 11% to US$528 billion in 2023, the highest level since 2015.

Barclays expects the number of offshore projects approved this year to reach its highest level in 10 years.

Wood Mackenzie, meanwhile, predicts it will commit up to $185 billion to develop 27 billion barrels of oil reserves, with international oil companies focusing on the more expensive and higher-yielding deepwater developments.

It is also projected that the so-called Golden Triangle – the Gulf of Mexico, South America and West Africa – and part of the Mediterranean Sea will account for 75% of global demand for floating rigs by 2027.

FROM NAMIBIA TO FAR EASTERN CANADA

Activity extends beyond this core prospect.

Namibia, which is yet to produce oil and gas, has sparked major interest after Shell and TotalEnergies made discoveries off the South African country’s coast.

Shell’s upstream chief Zoë Yujnovich said on June 14 that the results of drill testing so far are encouraging.

Together with its partners QatarEnergy and Namibia’s national oil company, Shell plans to drill two more wells in Namibia by the third quarter of this year, according to a Reuters document.

Shell has also applied for a license to drill an additional 10 exploration and appraisal wells, the document said.

TotalEnergies made an oil discovery in the Venus well in Namibia’s Petroleum Exploration License (PEL) 56 in February 2022, which Barclays analysts estimate contains 3 billion barrels of oil equivalent (boe).

Shell reported discoveries in the Graff, La Rona and Jonker drill holes in PEL 39, which Barclays said collectively contain an estimated 1.7 billion boe.

To reverse the decline in oil and gas production following the switch to renewable energy, BP has turned to the Gulf of Mexico and the far east coast of Canada, where the company is based boot up Oil exploration activities in frontier regions.

(Reporting by Ron Bousso; Editing by Barbara Lewis)

(c) Copyright Thomson Reuters 2023.

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