Dry hole.
Two of the worst words in offshore exploration.
When per-well costs offshore can reach into the hundreds of millions of dollars, no one wants to drill a duster.
So are dry holes nothing but failures?
“Not if they provide information that sets up the next discovery,” said AAPG member John Snedden, senior research scientist and director of the Gulf Basin Depositional Synthesis Project at the University of Texas-Austin.
Snedden gave the example of Texaco Inc., Royal Dutch Shell PLC, Amoco Corp. and Mobil Corp. coming together in the late 1990s to drill an exploration well in the deepwater Gulf of Mexico.
They held leases on a large and promising undrilled structure, but little was known about it. It was far offshore in the Alaminos Canyon area. And it was in deeper water than anyone was used to drilling.
Plus, they didn’t know what to call the prospect.
Each company had its own prospect name, leading to a combination of Brachiosaurus, Alpha Centauri, HI-C and Anaconda.
In the end, they compromised and called it BAHA.
“It took a while to drill the well, and BAHA 1 didn’t reach its objective. Then BAHA 2 finally reached objective,” Snedden said.
At that point, the exploration consortium had one failed attempt and one costly dry hole on its hands. But it also had gained compelling evidence of a thick column of sandstone that no one knew existed.
“Everybody was astounded. Where did all this sand come from?” Snedden recalled.
“Most people consider that to be the play opener for the Paleocene play in the Gulf of Mexico, the Lower Tertiary play. Now we’re up to billions and billions of barrels of oil from that play,” he said.
Snatching Production From The Jaws of Dry Holes
Experts say dry holes can be labeled successes when they uncover information that leads to discoveries, or when they have sufficient impact on future exploration.
“To most people, a ‘dry hole’ is one that doesn’t result in economic production. It can still be a technical success,” said AAPG member Bob Fryklund, chief upstream strategist for IHS in Houston.
Since the 1990s, explorers have greatly increased their odds of success in drilling deepwater offshore prospects. But based on the industry’s overall success rate today, a truly exploratory offshore well is more likely to be a dry hole than not.
“On a global basis, we’re still running around 40 percent. The high-impact wells are somewhat less,” Fryklund said. “A high-impact well is one that opens a new play in a new basin, or the same thing in a producing basin.”
The threshold for labeling a well “high-impact” has come down over time, he noted.
At one time, a well was considered high-impact if it found at least 250 million barrels of oil equivalent (boe), he said. Now, a well that discovers a 100 million boe accumulation could be called high-impact.
The type of prospect also matters. A frontier play-opener well or a well in an unconventional reservoir might not have to meet even that standard, Fryklund said.
“What’s advanced that further is the tight rock convention. We’ve learned to look more closely at the rock in the reservoir,” he explained.
Snedden said wells that discover hydrocarbons in less-than-economic amounts are not true dry holes when they’ve been evaluated as potential producers.
“If it’s not commercial, it’s a dry hole. Essentially you’re walking away. You’re plugging and abandoning the well,” he said.
“Anything that’s even considered for development I would consider ‘discovered undeveloped.’ That’s not a dry hole. Those are different categories, especially if you keep the lease,” he added.
Those undiscovered undeveloped wells can provide crucial information, especially for independents who follow up with further work and their own evaluations, and sometimes drill meaningful discoveries on the same prospects.
“The inventory of discovered undeveloped is pretty large. That’s how a lot of these independents get started,” Fryklund noted.
In today’s price environment, the oil and gas industry faces a challenge in making large investments offshore. Drilling too many dry holes is no doubt a bad thing. Drilling too few might be a bad thing, also.
“Going forward the question is, ‘How much damage will the price reset do?’ Exploration is the first thing to get whacked,” Fryklund said. “It’s going to take a couple of years for things to get reset.”
Notable Dry Holes
One dry hole that led to major production more than 20 years later was the Baccalieu 1-78 offshore Canada, Snedden said.
Esso PAREX and partners drilled the North Atlantic exploratory well in 1985 in the Flemish Pass Basin, about 300 miles northeast of St. John’s, Newfoundland.
“It was a dry hole but it discovered a really high-quality Kimmeridgian age source rock, up to about 4 percent (total organic carbon),” Snedden noted.
“Baccalieu set up the big Bay du Nord discovery more than 20 years later. That’s the Statoil discovery. With its partner Husky Oil it had drilled the Harpoon and Mizzen wells in the Flemish Pass,” he said.
Snedden himself took part in a groundbreaking dry hole effort in what became the Makassar Strait Production Sharing Contract in the Mahakam Delta area, offshore East Kalimantan, Indonesia.
“One that I know very well, because I worked on the well, was the Perintis,” he recalled.
“Mobil drilled a well called Perintis-1 back in the ‘90s. It was the first well drilled in the deepwater Kutei Basin. And it found a source rock,” he said.
Although the well encountered a noncommercial accumulation of natural gas, it uncovered both a source rock and a viable petroleum system.
“With this Type III petroleum system, our big question was, ‘Could you get source rock into the slope and basin?’” Snedden said.
The One Thing Dry Holes Should Always Produce
Dry holes have been around about as long as oil production.
Edwin Drake drilled the first commercial oil well in the United States near Titusville, Pa., hitting total depth at 69.5 feet on Aug. 27, 1859. According to the American Oil and Gas Historical Society, the first dry hole happened just four days later.
John Livingston Grandin was so inspired by the Drake success that he decided to drill in an area of oil seeps near Tidioute, Pa., about 20 miles away. Grandin and a partner leased 30 acres at $10 an acre, built a 20-foot derrick and used a discarded tram axle to make a reamer.
The well reached an astonishing 134 feet of depth before the axle drill got stuck. Blasting powder failed to dislodge the equipment. Thus the first failed well following the Drake discovery was on the books.
One thing all dry holes produce is information. Any time a company drills a well “you should leave that well with lessons learned. Every company does a post-mortem on a dry hole,” Snedden noted.
“The logs themselves are the most important piece because they give you information about lithologies, the seals, the source rock. There may be pressure information,” he said.
Because companies are able to keep well data and other information proprietary for a time, they are in a position to trade with other operators for information that can de-risk future drilling, according to Snedden.
“If you spend $100 million drilling a well and what you have is the logs, you can trade that for other information. It has trade value,” he said. “That’s why companies endeavor to keep that information private for 18 months.”
The ability to de-risk an exploration project is often the difference between proceeding or backing away.
“Based on my experience as an exploration manager, in most companies the rule of thumb is you only buy something where additional information can reduce risk,” Fryklund said.
Earlier this year, Faroe Petroleum PLC announced that the Wintershall-operated Kvalross exploration well in the Norwegian sector of the Barents Sea was a dry hole. Faroe and Wintershall Norge each held 40 percent of the 9,570-foot test.
Graham Stewart, Faroe chief executive, sounded almost chipper in commenting on the well.
“Whilst the results for the Barents Sea Kvalross well are disappointing, we are pleased that the well has been drilled significantly below budget and to have encountered hydrocarbon shows which will add to the large data bank we now hold over this prospective frontier area,” he said.
That type of discovered data is what can make a dry hole more than just a dry hole.
“It’s a data point. In the project I lead here, we use well data,” Snedden said. “Most of the data points are dry holes.”