Wood Mackenzie says higher oil prices are offsetting the greater challenges faced by companies who explore for oil and gas - but only just. In analysis recently completed as part of Wood Mackenzie's Exploration Service, the average return on exploration for conventional hydrocarbons in the past three years was just under 15% - assuming that oil prices remain at US$70 per barrel in real terms.

A similar analysis completed by Wood Mackenzie in 2005 showed that this level of return could be achieved with an oil price assumption of US$30 per barrel in real terms.


Andrew Latham, Vice President of Exploration Service for Wood Mackenzie explains: "We have seen a fundamental shift in the economics of wildcat exploration in the last two years. There are a number of factors which are reducing full cycle returns from exploration - some have already had an effect on explorers, whilst the full impact of others has not yet shown up in economic returns."

Latham continues: "The most significant impact on returns in the last three years has been the increase in the expected cost of developing new discoveries - particularly in the offshore sector. Rising global demand has driven drilling, subsea and production facilities costs steeply upwards. A number of high profile re-forecasts of development costs in recent years have thrown this into sharp relief."