Discoveries Just Part of the Story

Recovery Expands Reserves

There are plenty of bears running about, predicting a downturn in oil and gas prices.

Then there also are lots of bulls still proclaiming this time it really is different.

The lingering impact of a trio of events that caught the E&P industry and many others by surprise between early 2004 and September 2005 continues to energize the bulls.

First came the soaring demand in China, which essentially took on a life of its own.

"The demand crunch early in ‘04 was only the second time in history that any single country's demand for oil or liquids increased more than one million barrels a day in a single year," said Pete Stark, vice president of industry relations at IHS Energy.

"Then at the end of the year a corresponding surprise was that 2004 new field discoveries of liquids was the lowest for any year since the end of World War II," Stark added. "So we had soaring demand and the immediate dichotomy of low discovery rates.

"Then in the fall of ‘05, the (Gulf of Mexico) hurricanes made indelible the risk the world's oil and gas supply situation is in due to the tight supply chain," he added.

Based on the countries where there are clean (transparent) data available, it's known that giant fields (>500 million barrels of oil equivalent, or MMboe) continue to deliver the giant share of production flows, Stark noted.

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There are plenty of bears running about, predicting a downturn in oil and gas prices.

Then there also are lots of bulls still proclaiming this time it really is different.

The lingering impact of a trio of events that caught the E&P industry and many others by surprise between early 2004 and September 2005 continues to energize the bulls.

First came the soaring demand in China, which essentially took on a life of its own.

"The demand crunch early in ‘04 was only the second time in history that any single country's demand for oil or liquids increased more than one million barrels a day in a single year," said Pete Stark, vice president of industry relations at IHS Energy.

"Then at the end of the year a corresponding surprise was that 2004 new field discoveries of liquids was the lowest for any year since the end of World War II," Stark added. "So we had soaring demand and the immediate dichotomy of low discovery rates.

"Then in the fall of ‘05, the (Gulf of Mexico) hurricanes made indelible the risk the world's oil and gas supply situation is in due to the tight supply chain," he added.

Based on the countries where there are clean (transparent) data available, it's known that giant fields (>500 million barrels of oil equivalent, or MMboe) continue to deliver the giant share of production flows, Stark noted.

The Down Side

Now, the bad news: The number of both large and giant discoveries has declined significantly, along with the average discovery size.

In fact, the number of discoveries peaked between 1980 and 1985, when more than 3,000 discoveries occurred, according to Sandy Rushworth, global senior data specialist at IHS. The average discovery size between 1980 and 2004 ranged between 49 and 80 MMboe, considerably less than the average high of 800 to 900 MMboe that occurred from 1925-55.

"If you look at all the discoveries between 2000 and 2005, they accounted for a total 120 billion barrels," Rushworth said. "Out of the more than 2,400 discoveries during that time, 237 were greater than 100 (MMboe) and 39 were giant with greater than 500 (MMboe).

"During that five-year period, there were only 11 discoveries greater than one billion barrels," Rushworth said, "and most of these are in the Middle East."

Does this mean the gauge on the global tank is heading toward empty?

Rushworth doesn't think so.

"We're very good at finding oil," she noted, "and we're getting better at increasing recovery rates in fields. We have data that shows more resources have been located in place since 1995 than found in the last 10 years."

Pre-1995 world liquids resources growth was 457 billion barrels. Discoveries since 1994 tallied 144 billion barrels, which replaced 61 percent of consumption, according to Stark. He noted field growth, mostly in giant historic fields, and increased recoveries in Canadian and Venezuelan oil sands added between 175 and 190 billion barrels of liquids.

Since 1994, giant fields represent only two percent of the discoveries -- but almost half of the resources added.

"Over the past decade, by new information, classic technology and field growth, the combination of new discoveries -- which is less than consumption -- plus the addition of reserves to older fields, by whatever means, greatly exceeds consumption," Stark noted.

Needed: More Exploration

Even though worldwide the industry is more than replacing consumption, Stark emphasized it is not doing so through exploration.

He cited an example of a super-major going into Russia thinking it was purchasing six billion barrels. After examining the data with a more Western mindset focused on new technology, enhanced recovery and more, the company began to understand the potential might be as much as 30 billion barrels.

"That type of thing is happening, and it's the giant fields that are critical to that," Stark said. "Many giant fields are producing, but only a small part of the potential is being produced. The potential to grow, exploit and develop exists with many of these fields."

Based on the combination of field discoveries and changes to reserves estimates in historic fields, Stark expressed confidence there is plenty of liquids production capacity growth coming in over the balance of this decade and early into the next decade.

But it's tough to be certain of anything in this uncertain world.

"If you draw a circle around the Middle East, there are policies, terrorists or other reasons restricting access of some type or scope to more than 600 billion barrels of oil reserves, which are not being fully produced, developed or exploited," Stark said.

"Unless there are changes in political and policy issues to get access to those giant resources," he added, "we'll continue to have difficulty to expand capacity to meet demand on into the 2020 period."

The Top Ten -- and Deepwater

It is noteworthy that the top 10 fields of all time based on expected ultimate recoverable proven plus probable reserves are located in Saudi Arabia, Iran, Russia, Qatar, Kuwait and Venezuela, according to Rushworth. Four of the top five are in the Middle East.

Besides access, a critical factor for sustaining future production growth is technology.

A five percent increase in recovery factor could add about 220 billion barrels of oil from Western Hemisphere oil sands, according to Stark. Proposed GTL (gas-to-liquids) technology, principally targeting fallow giant gas resources in the Middle East and Asia could add 1.5 MMb/d of liquids production by 2020.

Accordingly, Stark predicted giant hydrocarbon accumulations will continue to dominate future liquids supplies.

Given the relatively recent surge in deepwater drilling action, it is worthwhile to look at what's expected in these environs.

An IHS global oil production forecast spanning the 2004-09 interval depicts deepwater production of 2.9 million barrels/day in 2004 will increase to 7.1 million barrels/day by 2009.

The largest components will come from Brazil, the Gulf of Mexico, Angola and Nigeria, in that order, as well as some from Indonesia.

"These are projects that will be coming on, but it takes longer to bring these discoveries to market," Rushworth said. "We have the technology, but contracts take longer, and now (because of the hurricanes) we have the deepwater rig availability problem."

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