The positive full-cycle value of exploration success in deepwater is clearly evident. Exploratory drilling is expensive, but the wells have discovered huge reserves and average finding costs are still small. However, there is now some evidence that success rates in conventional deepwater (< 1,500 metres) have peaked. Faced with this situation, explorers can opt either to chase smaller prospects within the main plays, or to seek new plays elsewhere around the world, or to move out into the ultra deepwater. Most of the leading deepwater companies seem to prefer the latter option. High hopes for exploration in waters deeper than 1,500 metres have made this the fastest growing area since 1998.
Only a small fraction of deepwater fields have been quickly developed. Companies need to balance their pressures to accelerate projects against the likely benefits of waiting for and contributing to technological advances. Nevertheless, capital investment in deepwater fields continues on an upward trend, both globally and individually within each of the major deepwater arenas. Many of the large deepwater projects require capital budgets exceeding two billion dollars. Economies of scale mean that such costs are usually not excessive on a per barrel basis. The future emphasis in deepwater is increasingly towards field development and production.
Deepwater Deepwater exploration and production has generally offered a highly attractive balance of risk and Rewards Justify The Risks reward for investors. Wood Mackenzie has examined the full cycle returns that are being achieved in the world's leading deepwater provinces. Figure 1 shows compound full cycle IRR for deepwater E & P by country and average deepwater project IRR by country. The full cycle IRR includes licence signature costs and exploration and appraisal costs. We calculate that IRRs achieved since 1990 have averaged some 19%. These IRRs are much higher than typical returns achieved from upstream activity overall during this period which would generally be in the range of 10–12%.
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60% 50% Full Cycle IRR Project IRR 40% 30% IRR (%) 20% 10% 0% UK Italy Brazil Egypt Angola Nigeria Congo Brunei Ireland US GoM Norway Eq. Guinea Mauritania Philippines Indonesia Australia Cote d'Ivoire Figure 1: Full Cycle and Average Project IRR by Country Exploration Trends Exploratory drilling in deepwater is expensive relative to shelf and onshore areas. However, deepwater wells have added high reserve volumes by comparison with exploration wells elsewhere. Hence unit finding costs to date have generally been small. Exploration activity has increased sharply in recent years (Fig. 2). This activity, in terms of number of exploration we
