Can you talk to us about the changes you have seen in the business over the last five years?
I suppose a good place to start would be about a year before the oil price fell, in 2013. We noticed at that time that the industry cost structure had become severely inflated.
Our ultra deepwater wildcats could cost $250 million gross and the industry was maxed-out in terms of activity and this was stretching global capacity and global capability.
As a consequence, the industry performance as a whole at the top of the last cycle wasn’t that good because of the over-reach and the very high cost structure. Then, of course, the killer blow came with the apparent success of the unconventional oil industry in the US, which precipitated the current oversupply in production. This led to a crash in the oil price when the market responded to this new disruptive entrant.
So from an oil price of over $100-a-barrel, we now live in a $50-to-$60 world. Everyone is talking about a situation of “lower for longer” as the new normal in this sector.
While we did not anticipate the oil price crash, we did notice something was wrong and we decided to reset our business. We are really glad that we did because it means we were ahead of the curve when the oil price dropped.
In early 2014 we began a number of strategic initiatives and massive reductions to our G&A [general and administrative expenses]. We adapted our portfolio, dropped some major gas projects and focused on high-value light oil.
On the exploration side, we shifted towards the less complex drilling environments and this was a really important move, as it meant we could reduce our maximum well exposure.
From the $250 million ultra deepwater wildcat cost range, we were able to get such well costs down to $100 million grossBy shifting our acreage position and moving from the high cost environment to the lower cost environment, coupled with sector depreciation, that $100 million well today is now a $40 million well.
Additionally, we have rationalised our development and production portfolio, so that it also has a low cost–of-supply. Today, our portfolio has a $20 - $40 cost-of-supply in a $50-to-$60 oil price world for conventional oil.
Are your costs to produce unusual for conventional oil?
Yes, certainly at the top of the cycle in 2012/2013. The industry had a higher cost-of-supply – the ultra-deepwater prospects would have been in a $60 - $80 range and are uneconomic today. We realised something had to change and realised we could change the way we exploit these resources, or we could exploit other resources.
In the end, we chose to do both of these things.
We shifted to the less complex plays, focused on conventional oil and reduced our operating cost and our G&A in order to have a portfolio which is low cost-of-supply today.
You said that you moved your operations and changed your focus to less complex environments, what would make up a less complex environment?
Well it is mostly on the engineering side and the well engineering side. So, moving away from ultra-deepwater, moving away from highly over-pressured rocks. Staying away from shale oil, moving away from low quality tight rocks and dispersed resources.
We are looking for high resource density, in simple drilling settings and good quality rocks. However, our challenge has been that those criteria mean that it is harder and harder to find that high quality reservoir, with that high quality type of oil.
At the top of the cycle, people were saying that there is no shortage of oil but there is a shortage of easy oil, namely oil that is easily recovered and easily produced.
That forced the industry to go for gas, and to pursue giant prospects in the ultra deepwater or make resource plays work in North America, in the tight oil and shale oil basins. They went for volume, for barrels of oil equivalent, and often used volume as a proxy for value.
We are, however, now seeing a shift by industry to move back to value instead of volume. While there may be sufficient volume-based oil out there, what is needed is the rare, high quality stuff. And that is all we are focused on in Tullow – finding the high quality oil.
How has that changed the way you operate generally?
While it is harder to find the high quality oil, when you find it, like we did in Ghana or Uganda or in Kenya, these markets tend to provide low cost-of-supply opportunities.
We believe its worth going for those ‘difficult to find, high quality light oil’ fields.
How is it that you have managed to be so successful in making these great discoveries?
We have a relentless focus on Africa and we are now extending the lessons learnt there across to South America.
We began our business in Africa, and while we continue with Africa as the core focus, we are extending our reach to try and replicate our success through an Atlantic twin-approach. The twin basins to Ghana are across the ocean in Guyana/Suriname. Our wildcatting campaign there is already encountering liquid hydrocarbons and we feel we are on the cusp of making commercial discoveries within the next couple of years.
What opportunities have opened for you that perhaps a different strategy would not have?
By keeping a steady helm during the oil price crash and focusing, rationalising and resetting our portfolio, we have been able to participate in African and South American opportunities whilst a number of our competitors have focused elsewhere.
How long do you think the ‘current normal’ is going to be the norm within this sector?
Oh, I really do not know. That is a tough one.
What we have been doing is planning based on the ‘lower for longer’ scenario, and we are not going to take any risks with the balance sheet. We will look after our shareholders and plan on the lower for longer basis, just to be prudent. Many of us individually believe that the sector will rebound and that longer term there will be a shortage in the supply of low cost light oil. The first part of the sector that will rebound, will be the one with the highest value and most coveted commodity – and the most valued and coveted commodity is light oil.
It is that light oil that will fill the growing demand in the future. The higher cost oil and the gas have roles to play in the future but there are vast inventories of barrel of oil equivalent which may see little or no return. Our product, the crude that we have in our fields, is able to respond quickly to any rise in oil price.
Angus McCoss will be presenting on the E&P Panel on day 2 at World Oil & Gas Week, 4-5 December, London.
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