Industry Trend Analysis - Majors Returning To Frontier Regions - JAN 2018

BMI View : With the sector slowly recovering and production from mature fields in decline , oil majors will be looking for new frontier targets. Despite potential risks, we will see an increasing interest in more frontier regions , with exploration activities concentrated in Africa and South America's deepwater basins .

Although deepwater activity is likely to remain limited relative to pre-price crash levels, we will see oil majors returning to frontier exploration in the coming years. This, in part, is an indication of more bullish sentiment and the sector's continued, if slow, recovery. Within the deepwater sub-sector, sub-Saharan African and South America are moving to the forefront.

Although investment in unexplored areas is often a risky gamble, countries with no or limited production tend to offer more attractive fiscal terms to attract broader interest. Illustratively, a production sharing agreement between Guyana's government and ExxonMobil stipulates that the oil major would be able to utilise 75% of production as its cost recovery and the remaining 25% will be split equally between the country and the company. Moreover, the government will be earning a 2% royalty on gross earnings from production. To offer a reference point, a production sharing contract signed in 2013 by Brazil's Petrobras and a Shell-led consortium for exploration of the Libra field, stipulated that foreign oil companies would need to pay an unusually high signature bonus of approximately USD7bn. Moreover, the consortium was offered a relatively low cost recovery of up to 50% in the first two years and dropping to 30% thereafter. The royalty rate stood at 15% with the government's share varying with the level of oil prices.

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