Five Pillars of Exploration Success
What makes a good explorer?
A Perspective from Wood Mackenzie Consulting
Strategy with substance
Introduction
Basin choice is one of the primary determinants of exploration success. Optimal timing of basin entry is another. But
how do the best explorers manage to consistently make better choices than their competitors?
In our dialogue with the industry on the fundamental drivers of exploration outperformance, five broad themes arise
that are seen as the pillars of consistently strong results:
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Culture – the best explorers thrive on innovation and risk tolerance. They reward creativity, deal with subsurface and
above-ground ambiguity, and nurture talent with the ability to originate new play concepts.
Technical excellence – investment in technology innovation and skilful application of the best new technologies.
Data and information – with organisational memory drawing on decades of exploration experience.
Process and capital allocation – adopting sufficient rigour whilst neither stifling innovation nor introducing delay.
Strategy – the best explorers have clarity of vision and goals, which are clearly articulated throughout the business.
The most important of these five pillars is exploration culture. The manner in which an exploration organisation manages
its people, skills and softer issues is the most difficult to get right. This means it is usually the key differentiator between
exploration businesses.
What makes a good explorer?
The promise of higher returns than
are typically achieved from other
growth options attracts companies to
invest in exploration. These superior
returns – which have averaged 18%
over the past ten years – are reward
for those willing to accept and
successfully manage the greater risks
involved. For smaller companies, the
possibility that success will also lead
to transformational growth can make
exploration even more compelling.
Of course, there can be no
guarantees. Exploration performance
is amongst the most highly
differentiated of upstream activities,
with results varying widely from one
company to the next. Each explorer
takes the risk that its returns could
be much lower than the attractive
industry averages, or that its hopedfor growth fails to materialise.
The emergence of unconventional
plays has transformed the range
of opportunities available. This
greater complexity has presented
new challenges to explorers as they
work towards an integrated organic
growth approach, and has triggered a
re-assessment of exploration strategy
for many.
Much of our dialogue with
exploration clients focusses on how
the winners consistently achieve
their stronger returns. Best practice
in exploration can seem like healthy
living, in the sense that much of it is
obvious yet few adhere to all of the
principles all of the time. Whilst there
are no simple or universal rules, five
general themes are apparent. The
keys to exploration success usually lie
within culture, technical excellence,
access to information, process and
capital allocation, and strategy.
Figure 1 – Five pillars of exploration success
Exploration
strategy
Process
& capital
allocation
Technical
excellence
Data &
information
Exploration culture
Innovation & risk tolerance are the foundations of exploration success
January, 2013 | 2
Good explorers have a culture
that embraces risk, innovation
and creativity
The best explorers have innovation
and tolerance of risk at the heart of
their organisations. They achieve
this through the development of
an exploration culture, which is
quite different from other divisions.
The challenge can be to sustain
this distinctive culture whilst also
remaining integrated and aligned
with the broader company. Here,
the buy-in and enthusiasm of the
CEO and Board for exploration are
critical to defining and nurturing the
corporate culture.
Risk tolerance has many facets.
The key skills are dealing with
ambiguity and seeing uncertainty
as opportunity – balanced with
a rational understanding of the
likelihood of success and the
cost of failure. The best explorers
are comfortable with subsurface
uncertainty, knowing that obvious
prospects are often far too
competitive. They tolerate aboveground risks when the geology is
compelling. Part of their boldness
is the willingness to take a chance,
technically and politically, and to
be wrong. Learning from failures is
embedded in their culture.
Innovation is the lifeblood of the best
explorers. Management provides
support for incubating new ideas.
It is prepared to listen to weak
signals and avoids accepting lowestcommon-denominator thinking.
Many top explorers earmark part of
their exploration budget for testing
new concepts. Such creativity is
encouraged and rewarded.
An open-minded environment
supports this culture. Individuals at
all levels are comfortable to raise
untested concepts, do not fear to
be contrarian, and are encouraged
3 | January, 2013
with the sharing of ideas. The
company is willing to entertain
opportunities in basins where senior
management may have experienced
disappointment in previous decades.
Equally, this willingness to listen
to weak signals can also include
rewarding those who spot problems
in superficially attractive or popular
opportunities.
The requirement to identify and
nurture individuals with a particular
talent for innovation is a recurring
theme. Perhaps less than one in ten
geoscientists are the true innovators
with the ability to originate new play
concepts. The best explorers ensure
that such people are in the right roles
and are sufficiently empowered. Two
issues commonly arise:
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The technical success of top
innovators leads to their
promotion into management roles.
Many companies are adopting staff
grade structures that allow parallel
progress in technical roles to avoid
this issue.
Top innovators may be
uncomfortable with process.
Ideally, the most creative
geoscientists are linked with
experienced people to help let
them out of the process when
appropriate.
One tactic for dealing with the natural
tension between innovation and
process is to buddy proven innovators
with process ‘translators’. In this
model, the innovator works closely
with his or her process buddy, who
then ensures that the idea is properly
processed through the wider system.
Good explorers are technically
uncompromising
The best explorers place great
emphasis on subsurface geoscience
and engineering excellence. This
is a necessity given the increasing
difficulty of discovering resources
in ever more challenging reservoirs
and environments. In this context,
technology is an enabler, bringing
invaluable tools but still requiring
skilful application and knowledge to
provide answers.
Resource holders expect explorers to
deploy the best technology available
as part of their value proposition.
This is true even though much of
the best exploration technology is
sourced from service providers rather
than being developed internally. This
non-proprietary technology may be
regarded as commoditised. It is the
appropriate application of technology
that is the key differentiator.
New technology can offer the
chance to both open up new areas
and to re-visit old ideas with a fresh
perspective. Good explorers keep a
particularly watchful eye on progress
in development and production
technologies. Any advances that
might commercialise resources that
were previously too difficult to exploit
are of utmost interest. The lesson of
ultra-deepwater was that much of
the best exploration acreage was
captured years before the production
technology was ready. The same may
now be true in many emerging lowpermeability plays, or in parts of the
Arctic.
Access to information and
data is key
Subsurface analysis is only as robust
as the data and information upon
which it is based. The best explorers
invest substantially in their access
to data and associated data and
knowledge management systems.
Many of the most experienced
individuals are deployed in new
ventures roles to draw on their wide
previous experience. Collectively, this
organisational memory represents
Process and capital allocation
– without stifling innovation
or agility
Exploration capital allocation
depends upon process. The best
explorers combine solid play analysis
and rigorous prospect evaluation
to bring discipline to their highgrading effort. Decision makers are
armed with a view of opportunity
size and risks that is standardised
across their whole conventional and
unconventional portfolio.
Good explorers use process to
balance their persistence with a play
with knowing when to quit. They
regard the understanding of dry holes
as an important exercise, and see
learning the reasons for each failure
as an integral part of exploration.
These processes are subject to regular
review. Figures 2 and 3 illustrate post-
often-repeated lesson is to avoid over
use of commercial filters too early
in the process, taking time to build
adequate understanding of above
ground challenges.
Exploration processes are different
from development processes.
Technical rigour is required, but
levels of uncertainty may be very
high, making accurate assessment
of risk difficult. In this context, one
Process in itself cannot deliver success
and has downside risks if used
inappropriately. Process overkill can
bring an exploration programme to
its knees, with opportunities lost to
Figure 2 – Example of dry hole failure analysis
Seal/Retention
Risk Factor
Scale
Timing/Charge
0.4
Structure
Effective Reservoir
0.6
Migration
Source Rock
0.8
Reservoir Type
A
B
C
D
E
Pre-drill risk assessment
Pre-drill risk assessment and well failure reason
Well failure reason not identified pre-drill
Well
F
G
H
I
0.95
Cause of failure identified as largest pre-drill
risk in 67% of dry holes (6 out of 9)
Cause of well failure identified as significant
secondary risk in a further 11% of dry holes
Source: Wood Mackenzie
This figure shows a generic example of the comparison of post-well failure analysis with
pre-drill risk factors.
Figure 3 – Example of post-well chance of success audit
0.16
1.0
0.9
Probability
0.14
Cum Probability
0.12
0.10
Actual discoveries = 55
Suggests P91 performance
0.8
0.7
0.6
0.08
0.5
0.06
0.4
0.3
0.04
Cumulative Probability
Much of the focus on information
access relates to technical data.
But the best explorers also pay
close attention to above-ground
information. They recognise the
need to avoid deploying their
all-too-scarce geoscience talent
investigating geologically-interesting
but commercially unattractive rocks.
At the same time, these explorers are
alert to changes in above-ground
factors, and any risks that they can
mitigate, which potentially open up
new opportunities.
well audits of dry hole failure analysis
and chance of success risking that
potentially identify systemic bias to
be addressed.
Probability
an invaluable source of knowledge
that can be a genuine differentiator
if leveraged correctly. The alternative
is a form of ‘corporate amnesia’ that
can lead to expensive repetition
of past mistakes. Good explorers
anticipate that they will benefit in the
future from accurate recall of today’s
learning, and capture and socialise
their knowledge accordingly. The
aging demographic profile of much of
the industry reinforces this need.
0.2
0.02
0.1
0.00
0.0
0
5
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
Number of Discoveries
Source: Wood Mackenzie
This figure shows a generic example of the comparison of pre-drill probability of success
estimates with well results. In this example, the company’s exploration programme
has delivered more discoveries than forecast, suggesting its risking process may be too
conservative.
January, 2013 | 4
quicker competitors. Another danger
is diminished personal responsibility.
Individuals may feel that process
constrains their freedom to try new
ideas, causing frustration and lack of
ownership in acreage and prospect
decisions.
Mindful of the above, good explorers
recognise the importance of process,
whilst also retaining flexibility and
nimbleness for quick decision making
when required. They make careful
judgements if competitive pressures
necessitate a compromise between
process short-cuts and declining an
opportunity because of insufficient
time for full evaluation.
This agility gives the best explorers
the knack of adopting sufficient
rigour whilst neither stifling
innovation nor introducing delay.
They use process to stop mistakes
by drawing on corporate wisdom
and ensuring sufficient scrutiny of
important decisions. Flexibility is
their key, protecting creativity whilst
managing their portfolio of ideas.
An integrated approach
across all conventional and
unconventional plays
Increasingly, explorers need to
consider unconventional plays
alongside traditional conventional
exploration activity, using an
integrated process. Rather than
treating unconventionals as
discovered resources to capture and
exploit, they are recognising that
these plays carry risk and should be
assessed and derisked accordingly.
Mapping the conventional life cycle
and risk concepts to unconventionals
allows the consistent characterisation
of all opportunities, and can provide
a sound basis for efficient capital
allocation. Wood Mackenzie defines
Concept, Pilot, Ramp-up and Exploit
5 | January, 2013
life cycle stages for unconventionals,
which broadly map to conventional
assets as illustrated in Figure 4.
Strategy – the best explorers
have clarity of vision and
clear goals
An exploration business must
understand its purpose and how this
contributes to the wider enterprise.
The best explorers can clearly
articulate this vision, with leadership
communicating specific goals for
exploration to both the organisation
and to investors.
The commitment and buy-in of the
Board and Chief Executive Officer
are crucial. The best explorers enjoy
corporate and investor understanding
of the time and commitment that
successful exploration requires.
Critical to this is tolerance of
exploration risk and the knowledge
that failure is an unavoidable part
of the process. A company must
be able to take a longer term
outlook, backed with consistency
of exploration funding over several
years at least. Without such vision and
support, spending may be regarded
as discretionary or dependent on
short-term results, and exploration
is unlikely to thrive. With top-level
support, explorers can commit to
the multi-year drilling programmes
required in the world’s best basins,
and can be confident of approval
for campaigns to de-risk new play
concepts.
Clear goals inform explorers how
their performance will be measured.
Specific volume, cost or value targets
can help set individual opportunities
or prospects in context. These
targets may be quite different from
broader corporate metrics such
as total shareholder return. These
goals provide the basis for defining
exploration strategy, illustrated by
Figure 5.
Good exploration strategy reflects
any competitive advantages the
particular company may have. These
might be legacy positions in certain
geographies, access to infrastructure,
strategic partnerships, proprietary
data and knowledge, or distinctive
technical competencies. The best
explorers leverage any such strengths
that are their genuine differentiators.
Alignment with the wider business
is essential. Explorers create more
value if they discover resources that
fit with the overall business objectives
and its strengths. Examples could be
Figure 4 – Unconventional and conventional asset life cycles
Conventional Asset Life Cycle
Exploration
Appraisal
Development
Production
Unconventional Asset Life Cycle
Concept
Pilot
Ramp-Up
Exploit
Source: Wood Mackenzie Perspective, “Shale vs. Big Exploration – what sort of risks are
you taking?”, August 2012. Concept includes identification and leasing of prospective
unconventional resource targets. Pilot includes de-risking with a drilling programme to
establish repeatable, economically profitable results. Ramp-Up sees financing secured, rig
fleets and completion crews contracted, leases drilled to hold, and midstream built-out.
Exploit reflects development drilling to maintain production.
large gas finds in the portfolio of an
LNG player, or near-field discoveries
capable of rapid development to
address a short-term production need.
Portfolio management is usually an
important element of exploration
strategy. The best exploration
businesses know the ideal
characteristics of the discoveries
that they seek, and recognise that
not every find will fit with portfolio
ambitions. A willingness to divest
such assets becomes a key part of the
strategy.
Lastly, for all that strategy is
important, so too is a little bit of luck.
The Board and investors might agree
to a long-term exploration plan, but
they often need some early results
or indicators that the strategy is on
the right track. The good fortune to
have a quick success helps sustain
their support, even if many such early
wells are on acreage captured before
any new strategy was put in place. In
this context, it is tactical for explorers
to diversify. Drilling sufficient wells
across a diversified portfolio of
opportunities in multiple plays helps
ensure success.
Oil is found in the minds
of man*
We conclude that the key to
exploration excellence is people.
The best explorers have a core of
energised oil and gas finders with an
empowered attitude. They form part
of an integrated multi-disciplinary
subsurface team that emphasises
strong regional geoscience and
fundamentals. Creativity is enhanced
by greater diversity of backgrounds
and cultures in the team.
In this context, exploration culture is
of paramount importance. Strategy,
technical excellence, access to
information, process and capital
allocation are all necessary, but
without the right culture are unlikely
to deliver consistent exploration
outperformance. It is ultimately the
ability to encourage and harness
the creativity of the most innovative
explorers that is the key differentiator.
Figure 5 – Example of exploration strategy bars used to understand and
communicate changes desired
High - impact
Near - field
Frontier
Proven
Diverse
Focused
Volume
Value
Early entrant
Late entrant
Operator
Partner
High working interest
Low working interest
Today
Aspiration
Strategic change desired
Core regions
Core competencies
Oil
Gas
Long term
Near term
High AGR
Low AGR
Conventional
Unconventional
High subsurface risk
Low subsurface risk
Technically attractive
Commercially attractive
Today
Aspiration
Strategic change desired
Source: Wood Mackenzie
These show a generic example of exploration strategy bars highlighting aspired position
versus current reality for a range of strategic themes.
*After the pioneering petroleum geologist Wallace Pratt from his celebrated paper Towards a philosophy of oil finding (AAPG Bulletin, 1952): “Where oil is first found, in the
final analysis, is in the minds of men.”
January, 2013 | 6
Wood Mackenzie, through both its
continued dialogue with the industry on
the fundamental drivers of exploration
outperformance and its research and
consulting offerings advising clients
on how to maximise value creation
through exploration, looks forward
to continued debate on best practice
around these five pillars as companies
grow both their conventional and
unconventional portfolios.
Wood Mackenzie’s consultants
provide strategic advice based on
real substance to clients in the global
energy, metals and mining industries.
We have been helping clients
understand the energy and natural
resource industries for four decades
with industry leading research and are
now leveraging that knowledge to offer
advisory services across the energy
value chain. With established presence
in the Americas, Europe, Asia/Pacific
and the Middle East, our consultants
offer a truly global view for questions
that must be considered in a global
context.
Authors
Dr. Andrew Latham
Vice President
Exploration Service
T +44 (0)131 243 4408
E andrew.latham@woodmac.com
Dr. David Parkinson
Lead Exploration
Consultant
T +65 6518 0861
E david.parkinson@woodmac.com
www.woodmac.com/consulting
Perspective content subject to copyright, which can be found at: www.woodmac.com/disclaimer
7 | January, 2013
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