BMI's 2014 Exploration Hotspots

BMI View: We believe the Gulf of Mexico, New Zealand, Morocco, the US' Tuscaloosa Marine Shale play and Russia's Bazhenov shale play will all see a noticeable uptick in drilling and exploration over 2014. These plays - our picks for the top five 'global exploration hotspots' for 2014 - will be unlocked by new technological innovations and attractive regulatory environments.

Our research suggests that capital investment in the upstream sector will decline in 2014, as a number of the supermajors and larger independents seek to consolidate gains from the ramp-up in investment ( see 'E&P Capex Tapering Amidst Shifting Fundamentals', January 6). Nevertheless, despite the downshifting project cycle, there are a number of countries and regions in the upstream space that will buck this trend and are likely to see a substantial uptick in new investment and drilling activity in the year ahead. A mix of emerging and re-emerging oil plays, we believe that these 'global hotspots' are well positioned to benefit from a unique combination of favourable regulatory environments and/or high below-ground prospectivity - set to be unlocked by new technology.

Below are our top five picks for 2014 global exploration hotspots, broken up into three categories: re-emerging plays (the Gulf of Mexico), nascent opportunities ready to emerge onto the global radar (New Zealand, Morocco and the Tuscaloosa Marine Shale play), and lastly Russia's Bazhenov shale play, which we see as promising though we remain concerned about the above-ground environment. Just missing out, but still a favourite is Argentina.

Heading Up After A Long Fall
US - Gulf of Mexico Rig Count

BMI View: We believe the Gulf of Mexico, New Zealand, Morocco, the US' Tuscaloosa Marine Shale play and Russia's Bazhenov shale play will all see a noticeable uptick in drilling and exploration over 2014. These plays - our picks for the top five 'global exploration hotspots' for 2014 - will be unlocked by new technological innovations and attractive regulatory environments.

Our research suggests that capital investment in the upstream sector will decline in 2014, as a number of the supermajors and larger independents seek to consolidate gains from the ramp-up in investment ( see 'E&P Capex Tapering Amidst Shifting Fundamentals', January 6). Nevertheless, despite the downshifting project cycle, there are a number of countries and regions in the upstream space that will buck this trend and are likely to see a substantial uptick in new investment and drilling activity in the year ahead. A mix of emerging and re-emerging oil plays, we believe that these 'global hotspots' are well positioned to benefit from a unique combination of favourable regulatory environments and/or high below-ground prospectivity - set to be unlocked by new technology.

Below are our top five picks for 2014 global exploration hotspots, broken up into three categories: re-emerging plays (the Gulf of Mexico), nascent opportunities ready to emerge onto the global radar (New Zealand, Morocco and the Tuscaloosa Marine Shale play), and lastly Russia's Bazhenov shale play, which we see as promising though we remain concerned about the above-ground environment. Just missing out, but still a favourite is Argentina.

Re-Emerging: Proven Play Making Good (Again)

Gulf Of Mexico: After some had begun to write off the Gulf of Mexico as 'tapped out', new technology has led a revival of interest in the region's deepwater acreage, a trend we believe will continue in the coming year. On the US side, after a decade long decline throughout the 2000s, the number of drilling rigs operating in the Gulf has rebounded considerably (see chart), as new technology and high oil prices support more favourable project economics. Recent discoveries have only further de-risked ultra-deepwater activity in the region ( see 'Gila Bolstering Optimism Toward GoM & BP', January 8).

Heading Up After A Long Fall
US - Gulf of Mexico Rig Count

Moreover we note that this is a play with staying power, as recent landmark energy reform in Mexico looks set to encourage a massive uptick in private sector involvement, opening the Mexican side of the Gulf to a surge of new activity in the coming years ( see 'Landmark Energy Reform To Reverse O&G Sector's Fortunes', December 13). While somewhat outside the scope of this piece given that the Mexican government has indicated new licenses will not be issued until 2015, combined with the recently signed Transboundary Hydrocarbon Agreement, we believe that this will drive a substantial and sustained uptick in activity on the underexplored Mexican side of the Gulf.

Emerging: Plays To Watch

New Zealand: Limited domestic market opportunities, high costs and harsh offshore conditions had long kept major oil and gas companies away from New Zealand's upstream sector. However, the advent of improved offshore technology has begun to see a number of major players stand up and take notice of New Zealand's excellent regulatory environment and strong prospectivity, with as many as 18 underexplored basins. Most notably, recent block offers have attracted interest from international players such as Royal Dutch Shell, Anadarko Petroleum and OMV, and successful bids by Statoil and Woodside saw the two companies enter New Zealand's upstream for the first time..

Company Basin Well
TAG Oil Taranaki Cheal North - 5 wells
TAG Oil Taranaki Cheal South - 3 wells
TAG Oil Taranaki Southern Cross
TAG Oil Taranaki Cardiff-3
TAG Oil Taranaki Heatseeker-1
TAG Oil Taranaki Hellfire-1 (dependent on Cardiff + Heatseeker success)
TAG Oil East Coast Punawai-1 (Unconventional)
TAG Oil East Coast Mangahei-1 (Unconventional)
Shell Taranaki Ruru-2
Shell Taranaki Maui-8
Shell Great South Yet to be confirmed, planned 2014/2015
OMV Taranaki Matuku-1 (+ possible follow up)
Anadarko Taranaki Romney
Anadarko Canterbury Caravel
AWE Taranaki Oi-1
AWE Taranaki Panteke-4H
NZOG Taranaki Kokako-1 (dependent on farm-in partner)
NZOG Taranaki Karoro-1 (dependent on farm-in partner)
Source: BMI, Company Data

Moreover, the summer drilling season, which is currently underway, is likely to be among the busiest in New Zealand's history. The focus of most companies' efforts is on the proven (shallow water and onshore) areas of the Taranaki Basin where there is a higher certainty of discoveries, though volumes will be smaller. That said, Anadarko and Shell are targeting large structures in the deepwater Taranaki and Canterbury Basins that do not yet have proven petroleum systems. If initial results are favourable, we anticipate this will spur greater interest in New Zealand's potential over a multi-year time frame.

Frontier Galore
Major Sedimentary Basins In New Zealand

Morocco: We also see Morocco as a play that looks set to heat up in the coming quarters. While it has no proven reserves as of yet, we have seen increasing interest by a wide variety of players due to an attractive above-ground environment and its geological potential. Specifically, we note that the country's attractive fiscal framework - more favourable than neighbouring Algeria's burdensome tax requirements - as well as the country's relative economic and political stability is likely to be a driver bolstering drilling activity. Similarly, the success seen on Morocco's conjugate geological margin - with oil and gas already being produced on the opposing margin of Canada's east coast - is also likely to buoy hopes for Morocco's below ground potential. Oil shale is also an area of growing interest with San Leon Energy looking at exploration in the Tarfaya and Timahdit oil shales. Indeed, aside from steady efforts by companies like Fasnet Oil & Gas and San Leon Energy, we have also seen supermajors Chevron and BP moving into the country's offshore territory in the past year.

New Blocks, New Opportunities
Morocco - Tarhazoute, Essaouira And Assaka Blocks

Tuscaloosa Marine Shale (TMS): TMS, spreading through Louisiana and Mississippi, is currently still at a nascent stage of development, but looks set to see a significant upswing in exploration in the coming year. Despite a favourable tax regime in Louisiana, low lease rates, proximity to takeaway infrastructure and considerable liquids reserve potential (holding up to 7bn bbl of recoverable oil resources), a technically challenging below-ground picture has long stymied efforts at unlocking the play's potential. However, it has begun to attract a lot of interest in recent months as new technology will allow companies to begin more effectively drilling the play and reducing costs. Houston-based independent Sanchez Energy has indicated that it intends to sink its first well into TMS in the coming year, while Goodrich Petroleum, one of the more exposed companies to the play, indicates that it expects between 45 and 60 wells to be drilled though 2014 - a noticeable uptick compared to 15 last year. Perhaps most notably, TMS is also part of the larger firm Encana's strategy to bolster its liquids potential, with the company having targeted investment of US$125-150mn to complete 9-12 wells. As with the plays above, if these initial attempts result in successful commercially viable resources, we would expect a further uptick in drilling in the play.

Above-Ground Concerns Still Dim Potential: From Russia, With Regulatory Risks

Bazhenov Shale Oil: A final play that we think will emerge in the coming year, resulting in a significant amount of activity, will be Russia's Bazhenov shale oil formation. The hugely prospective play, currently being tested by a joint venture between Shell and Gazprom Neft, is thought to hold up to 360bn bbl of recoverable oil according to subsoil agency Rosendra (the EIA estimates a more conservative but still massive 74.6bn bbl). Rosneft and ExxonMobil also have a large drilling campaign planned from 2013 to 2015 to study the formation's commercial potential.

Too Much Potential To Not Top The Charts
Central & Eastern Europe - Upstream Risk/Rewards Ratings, Out of 100

We caution that in contrast to the rest of the plays noted above, Russia has a less appealing regulatory environment. There is a far higher level of state influence, and the industry has welcomed relatively few foreign partners. Indeed, regulation limits the production of large hydrocarbon deposits to state-owned firms. This is reflected in our Central and Eastern Europe Upstream/Risk Rewards rating, wherein Russia, despite its huge hydrocarbon resources, fails to clinch the top spot - a significant red flag. As such, while we see significant below-ground potential in the Bazhenov play, and some firms, especially services companies could benefit, such that this is still one of our global hotspots, we include this on our list with some caveats.

Who Missed Out:

While just failing to make the 'top 5', Argentina is also a favourite, and likely to see a significant uptick in interest over the coming quarters. Despite its substantial below-ground potential, including the second largest technically recoverable shale gas resources in the world, we had previously held a cautious view on Argentina given above-ground risks. However, in recent quarters we have seen a number of moves in the right direction, including improved fiscal incentives as well as indications that in the medium term, policy is likely to veer toward more moderate and orthodox stance given the blow dealt to President Cristina Fernández de Kirchner's ruling Frente Para la Victoria (FPV) in the midterm election. Perhaps most importantly, an initial compensation deal with Spanish firm Repsol over the Latin American country's 2012 expropriation of YPF is likely to go a long way toward de-risking the Argentine oil and gas sector ( see 'Repsol Deal Could De-Risk Investment', November 26, 2013). These incidents have seen a steady and growing stream of investment flowing into Argentina, suggesting that 2014 will be a good year for the country.

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This article is tagged to:
Sector: Oil & Gas
Geography: Global, Morocco, New Zealand, Russia, United States
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