National price spikes. California rolling
blackouts. Clearly, the issue of natural gas supply and demand commands
serious attention in the United States.
Globally, however, the story is different, because
in the past two decades the petroleum industry has added much more
gas than it's produced, resulting in a 300 percent replacement rate
in that time.
Indeed, on the worldwide market the natural gas reserves
are no longer considered a serious constraint in satisfying the
industry's needs. Some even question whether exploration for gas
is still needed.
How did this happen? What are the changes in technology,
gas reserves and strategies, and how did they affect natural gas
exploration risk management, economics and regional policies and
Bernard C. Duval, with the Institut Français du Petrole,
and co-author M.F. Chabrelie, with Cedigaz in Paris, provided some
answers during the AAPG annual meeting in Denver with their paper
on "Strategic Trends and Challenges in Gas Exploration."
In the arena of technology, for example, enormous
progress has been made in accessing vast quantities of increasingly
less expensive, high-quality data, which has resulted in a dramatic
rise in productivity at lower costs.
Industry-wide success rates -- driven by technology
-- have improved dramatically in recent years, sometimes reaching
nearly 100 percent in some areas like certain sectors of deep-water
offshore Africa and Egypt.
"The impact of technology on economics is best illustrated
by the evolution of finding and development costs per barrel of
oil equivalent," Duval said, which shows a downward trend from $20
in the early 1980s and flattening out around $4 during the last
two or three years.
Duval and Chabrelie analyzed regional gas reserves
and related gas policies around the world and found that the most
discoveries and re-evaluations since 1980 have taken place in the
two areas that contain the largest reserves -- the Middle East and
the Commonwealth of Independent States.
"Asia also has notably strengthened its reserve base
well beyond the cumulated production, with a four to one ratio,"
Duval said. High ratios also were observed in Africa and Latin America.
Even Western Europe has succeeded in increasing reserves, thanks
to a combination of discoveries and re-evaluations that represent
1.7 times production.
"North America is the only area where reserves have
gone down," Duval said, "and even there there's been a 90 percent
A Delicate Balance
While reserves have shown an upward trend, potential
market growth is another story.
There is more than enough gas to ensure the growth
of marketed production in the Middle East, but this isn't the case
in Europe -- and the situation is even worse in the United States
with only 10 years of reserves.
"Finding reserves inside or near a consuming region
offers a considerable economic advantage when compared to importing
gas from distant sources," Duval said. "In fact, and not withstanding
political considerations, the issue is to find a compromise between
high field cost resources close to markets -- like in the North
Sea -- and low cost gas far from markets like in the Middle East."
Duval said attitudes toward exploration will differ
notably from one country to the next. Replacement of declining reserves
is a must in North America, where the recent surge in U.S. gas prices
reflects, among other factors, tight gas supplies.
Although major discoveries have been made in the
Gulf of Mexico, the decreasing replacement rate of reserves demonstrates
that far distant gas will have to be brought into the market to
meet the anticipated growth in demand.
Besides imports, North America -- especially Canada
-- is likely to intensify exploration aimed at reassessing existing
"For the Europeans, exploration is a way to limit
their dependency," Duval said. "Although many hydrocarbon provinces
have reached a mature stage, exploration is still active with new
discoveries reported, particularly in Ireland and Norway."
In some regions the need to strengthen production
is linked to the expected growth of local demand. A case in point
is Thailand. For others, the political will to develop exports will
be dominant, like in North Africa, Southeast Asia and Australia.
"A striking example would be Egypt," Duval said,
"where gas reserves have increased 3.5 times between 1990 and 2000,
thanks to impressive exploration success, particularly in the offshore
area of the Nile Delta."
That evolution was facilitated by "a new policy allowing
companies direct access to gas," he added, "and encouraging both
domestic and export projects."
Political, Marketing Factors
In addition to regional incentives and constraints,
a new political and marketing environment impacts the industry's
♦ First, numerous countries are opening up their upstream sector.
In fact, all countries except Mexico and Saudi Arabia
have opened the upstream sector -- and even in Saudi Arabia discussions
concerning gas are in progress.
"One must keep in mind that the world reserves are
dominantly held by national companies, particularly in the Middle
East, Africa and some Asian countries," Duval said. "Their total
proven gas reserves account for 80 percent of the world's reserves.
Therefore, the opening of promising new areas to exploration and
production ventures -- outside those proposed by OECD countries
-- is always very seriously considered by industry, even in regions
made difficult by geology, the operating conditions or the marketing
♦ Second, the opening of the upstream sector in most countries now
includes the possibility of entering into production ventures with
national oil companies, which offers a wide variety of alternate
reserve addition opportunities.
♦ Third, more or less generalized deregulated markets induce companies
to consider integrated involvement at a much larger scale than in
"For instance," he said, "Gaz de France has made
the strategic decision to control 15 percent of the gas needed for
its mainstream, and has already concluded a number of significant
acquisitions in the North Sea where numerous asset rearrangements
have taken place within the industry."
The exploration expenditures of a company are also
determined by its specific reserve position.
"The three major companies, ExxonMobil, Shell and
BP Amoco, own reserves of the same magnitude as those held by countries
like Libya or the Netherlands," Duval said. "Other companies less
well endowed have two options to compete with the majors. One is
to carry out a suitable merger, which can provide an instantaneous
increase in reserves. Another option is to adopt an aggressive exploration
Both options can be combined, he added, like in the
case of the new company formed after merging TotalFina and Elf,
which now occupies a position as the fourth major with 500 billion
cubic meters of reserves.
Another driving force behind natural gas exploration
is the reduction of finding costs and the possibility of accessing
giant fields, Duval said.
"The size of the fields and the scale of operations
means high revenues and low operating unit costs, and such 'company
makers' are the dream objective of all operators," he said. "The
number of giant gas discoveries made in recent years bears witness
to the dream becoming reality. These factors explain why the discovery
of new reserves is the principal factor of reserve replacement for
companies, well ahead of reserve revision and acquisition."
Duval pointed to analyses of reserve additions over
the period 1993 to 1999 for 10 companies, which show that, on average,
60 percent of the increase is the result of new discoveries.
"The role of exploration," he said, "is essential
to ensure a company's future in the gas business."