WoodMac study shows reserves not replaced

High oil prices make exploration profitable, but few companies manage to fully replace production.

A new study* from Wood Mackenzie, of 28 leading oil companies, found that many oil companies no longer replace reserves through their discoveries. Exploration investment has reduced in response to growing technical risks and uncertain oil prices.


Author Andrew Latham, upstream VP with WoodMac, said, ‘Not only is exploration more expensive now, but it has become more difficult to achieve success, as the more accessible fields have been discovered.’ Inflationary pressures, increased competition for exploration areas and capacity constraints are continuing to drive up finding costs for new reserves. In this climate, only the top performers have been able to both replace reserves and create value through exploration.


Although the supermajors remain the top performers with high exploration success, their share of exploration spend peaked in 1998 and is 33% down—translating to an overall 50% decline in reserves replacement. But the bad news on reserves replacement is counterbalanced by the fact that improved margins mean that all companies now create value through exploration, especially top performers BP, Petrobras, Apache and Chevron. The latter is a ‘turnaround success’, moving from relatively mediocre performance in the late 1990s to top class value creation since the ChevronTexaco merger.


The study categorizes companies into categories of hunters, gatherers, grazers and foragers. Only the 25% in the hunter category managed to fully replace production through new field exploration. Half fell in the ‘forager’ category, achieving neither high returns nor full reserve replacement.

* ‘Exploration Strategy and Performance.’ Wood Mackenzie, 2005. More from woodmac.com.

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