* 2013 weakest for oil exploration in over a decade
* Firms may pull back from Arctic, West Africa
* Brazil, Gulf of Mexico exploration seen unaffected
* Explorer shares discounted
By Gwladys Fouche and Balazs Koranyi
OSLO, Feb 17 (Reuters) - Global oil firms, hit by one of theworst years for discovery in two decades, are about to cutexploration spending, pulling back from frontier areas andjeopardising their future reserves, industry insiders say.
Notable exploration failures in high-profile places such asAfrica's west coast, from Angola all the way up to Sierra Leone,have pushed down valuations for exploration-focused firms andare now forcing oil majors to change tack.
"It is becoming increasingly difficult to find new oil andgas, and in particular new oil," says Tim Dodson, theexploration chief of Statoil, the world's topconventional explorer last year.
"The discoveries tend to be somewhat smaller, more complex,more remote, so it is very difficult to see a reversal of thattrend," Dodson told Reuters. "The industry at large willprobably struggle going forward with reserve replacement."
Although final numbers are not yet available, Dodson said2013 may have been the industry's worst year for oil explorationsince 1995.
As a result, exploration will probably be cut, especially inthe newest areas, said Lysle Brinker, the director of energyequity research at consultancy firm IHS.
"They'll be scaling back on some exploration, like theArctic or the deepest waters with limited infrastructure ... Soplaces like the Gulf of Mexico and Brazil will continue to see alot of activity, but frontier regions will see some scalingback," he said.
Oil majors, which have a large resource base to maintain,are suffering the most, as the world is running out of verylarge conventional oil fields, and access to acreage,particularly in the Middle East, is limited.
That is leaving them with an increasing number of gasprojects.
"When you look at the mix of oil and gas of the majors, itis definitely moving towards gas - simply because they can'taccess conventional oil, which ultimately I believe will have animpact on oil prices," said Ashley Heppenstall, the CEO ofSweden's Lundin Petroleum, which co-discovered JohanSverdrup, the biggest North Sea oil field in decades.
PRICES DOWN THEN UP
Before oil prices rise from a lack of exploration,they are first expected to fall, squeezing margins and forcingfurther investment cutbacks.
The International Energy Agency sees oil prices down at $102per barrel next year from the current $108 as several producersramp up output.
"Oil prices need to remain at elevated levels because thereis a risk that a fall in oil prices or a cutback in investmentsby companies will mean that production growth slows," saidVirendra Chauhan, an oil analyst at consultancy Energy Aspects.
Although world oil reserves increased by 1 percent in 2012,they equalled just 52.9 years of global consumption, down from54.2 in 2011, energy firm BP has said previously. BP seesconsumption up by 19 million barrels a day by 2035, which wouldrepresent a 21 percent increase on th U.S. Energy InformationAdministration's (EIA) estimate for 2011.
Energy firms have already been shifting capital fromconventional to shale production, and this trend could continueas the exploration risk is smaller, the lag from investment tocash-flow is shorter, and project sizes are more manageable.
This is weighing negatively on the shares ofexploration-focused companies.
"Explorer stocks are trading at discovery value or adiscount to it, so from an equity market perspective, there's nointerest in owning exploration stories. People are losing faithin exploration," said Anish Kapadia, a research analyst atconsultancy Tudor, Pickering, Holt & Co. International.
Shares in Europe's explorers fell 20 percent over the pastyear, underperforming a 2-percent rise by the European oil index.
Tullow is down 39 percent in a year, while peersCairn and Cobalt are down 33 percent, and OGX is down 92 percent.
The spending cutback also cut mergers and acquisitionsactivity by half last year, IHS data showed, and plans to boostshareholder returns could shift focus to cooperation rather thanfully fledged takeovers.
"You will probably see more activity at the asset level morethan at the corporate level ... More joint ventures, swappingassets, buying and selling of assets,' said Jeremy Bentham,Shell's vice-president for business environment.
Insiders believe the cuts may not be reversed until capitaltied up in projects like Chevron's $54 billion GorgonLNG or Conoco's $25 billion Australia Pacific LNG startproducing cash flow and return.
"There will be less investor pressure, then companies canget activity back up, so this may be a pause of a couple ofyears where companies scale back," Brinker said.
