Gas Reserve Numbers Growing

Except for North America

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 investment decisions?

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.

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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 investment decisions?

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 replacement ratio."

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 fields.

"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 strategies.

♦  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 situation."

♦  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 the past.

"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 strategy."

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."

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