What is an Exploratory Well
An exploratory well is a deep test hole drilled by oil and gas exploration companies to locate proven reserves of recoverable gas and oil, both onshore and offshore. Areas that might contain oil or gas reserves are first identified using seismic data before exploratory wells are used to gather more detailed geological data on rock and fluid properties, initial reservoir pressure, reservoir productivity, etc. If oil or gas is discovered, a development well will be eventually be drilled to extract the oil.
BREAKING DOWN Exploratory Well
The global energy sector has slashed exploration in recent years, because of a structural shift in the industry toward unconventional resources like U.S. shale oil and gas, and as a response to the collapse in oil and gas prices in 2014. The number of exploratory or new field wildcat wells fell from 2,500 in the 1980s to 430 in 2016. As a result, new oil and gas discoveries fell to their lowest level for 60 years in 2017.
Most frontier exploration is now offshore, where a single exploratory well can cost $150 million, and the success rate is about one in five. It typically takes several years before an exploratory well can be brought into production. Commercial success rates for onshore exploratory wells rose to 53% in 2017, from 30% in 2016.
Because proven reserves are almost as valuable as oil itself, exploration companies are becoming increasingly high tech and are investing heavily in data analytics and the Internet of Things. Drilling companies are gathering digital data directly from their wells.
Some exploration companies use the “full cost” accounting approach, and capitalize all their operating expenses, regardless of whether they found any commercially viable oil and gas reserves or not. This inflates the balance sheet by treating expenses as assets and makes the company look more profitable than it really is. This compares to the “successful efforts” oil and gas accounting method, which is more conservative because it only allows those expenses associated with successfully locating new oil and natural gas reserves to be capitalized.