The Global APPEX A&D (acquisitions and divestitures) conference held annually in London in early March has just finished. Why is this significant? Because, as one of the major events in the global upstream deal-making calendar, there was clear evidence that the ‘green shoots’ of a new cycle may be around the corner. Hopefully after two steps backwards (as the saying goes), and two years of price uncertainty, the first stumbling step forward has perhaps now been taken in E&P recovery, hopefully with the second pending!
The mood was warily optimistic but the presentations cautious, with speakers not wanting to tempt providence by calling an upcycle too early, but the early evidence is positive. Investors are starting to be able to raise money again for international and near-term cash flow assets, which in turn will lead to a measure of associated upside exploration, this time hopefully balanced and appropriately risked as true upside and not the ‘raison d’être’! Gone are the days where listed companies will be dashing off to put all the money raised on the a 30/1 outsider in the first horse race of the day, as one might argue has been done all too often over the last decade. The evidence of this failed E&P formula is clear to see on pretty much every E&P company market around the world, save for a very precious few.
A ‘back to the future’ approach to E&P is perhaps a more appropriate formula, as E&P companies have done before. By measuring exploration risk against available cash flow, with low overheads and good quality technical G&G work, and with promoted exploration farmouts to minimize risk, companies should be able to extend their ability to achieve the quantum value leap. The evidence of this successful formula was evident at APPEX, attended by several Small Cap companies that have achieved this balance, and which, having successfully survived the low oil price, are now poised and ready for an upcycle.
The consensus of conference presentations and comment also suggested confidence that the oil price would likely oscillate between a floor and ceiling price of US$45–$65 bo over the next year or two as resource play thresholds and OPEC production maintained some equilibrium. Thereafter, some questions were voiced about conventional production decline, which has been significantly under-resourced during the downturn, and the ability of resource plays to fill the potential undersupply after 2020–23.
Although there are plenty of pundits predicting that oil will, in time, become the dirty fuel that coal is now considered to be, the big question is when alternative sources of energy will take over from hydrocarbons. This may be dependent on such things as battery technology and finding fuel sources that are able to fly 350 passengers from London to Sydney in 18 hours. If the alternatives are unlikely to be in service until after 2030 at the earliest, then large new sources of oil and gas need to be found. Although new technology will no doubt play its part, the dilemma is how such new reserves will be discovered with the huge gap in qualified and experienced technical people, particularly geologists and geophysicists, left by the last major crash between 1984 and 2003. There are simply not enough of them to replace the G&G experts who will retire in the next few years.
Maybe some answers to these questions will have become clearer by the time of the next regional APPEX, which will be held in Athens in September, 2017.