Big Potential Is Hard to Access

Strategies Changing

It's a given the oil and gas business is no place for the faint-at-heart.

There's never a lack of goings-on to keep most folks edgy; commodity prices rise or plummet based on tomorrow's weather forecast, al-Qaida updates, peak oil is at hand (or past), etc., etc.

But despite the abundance of threatening issues, there are studies by noted experts based on science and fact that negate the opinion of some that the end is nigh -- or even near, for that matter -- when it comes to hydrocarbon reserves.

During the 10-year period of 1994-03, commercial oil reserves discovered by the international oil companies (IOC) topped out at 60 billion barrels of oil equivalent (Bboe), according to information compiled at Wood Mackenzie, adviser to energy, life sciences and financial services industries.

Commercial gas reserves discovered tallied 200-plus trillion cubic feet (Tcf). Technical reserves discovered were 56 Bboe.

A look at the leading 28 companies during the period between 1995-04 revealed total exploration investment peaked in 1998, the advisory firm concluded. Still, production tallied five billion barrels at the start of the decade versus nine billion barrels at the end.

"The production was coming from new business development, revisions, enhanced recovery from all the discoveries, as well as the new field discoveries," said AAPG member Andrew Latham, vice president of energy consulting at Wood Mackenzie, Edinburgh, Scotland.

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It's a given the oil and gas business is no place for the faint-at-heart.

There's never a lack of goings-on to keep most folks edgy; commodity prices rise or plummet based on tomorrow's weather forecast, al-Qaida updates, peak oil is at hand (or past), etc., etc.

But despite the abundance of threatening issues, there are studies by noted experts based on science and fact that negate the opinion of some that the end is nigh -- or even near, for that matter -- when it comes to hydrocarbon reserves.

During the 10-year period of 1994-03, commercial oil reserves discovered by the international oil companies (IOC) topped out at 60 billion barrels of oil equivalent (Bboe), according to information compiled at Wood Mackenzie, adviser to energy, life sciences and financial services industries.

Commercial gas reserves discovered tallied 200-plus trillion cubic feet (Tcf). Technical reserves discovered were 56 Bboe.

A look at the leading 28 companies during the period between 1995-04 revealed total exploration investment peaked in 1998, the advisory firm concluded. Still, production tallied five billion barrels at the start of the decade versus nine billion barrels at the end.

"The production was coming from new business development, revisions, enhanced recovery from all the discoveries, as well as the new field discoveries," said AAPG member Andrew Latham, vice president of energy consulting at Wood Mackenzie, Edinburgh, Scotland.

"If you look at the reserves replacement ratio from new fields over the 10-year period, Kashagan (discovered in Kazakhstan in 2000 with a projected yield of 13 billion barrels) is a big spike," he noted. "But aside from that, there's a fairly clear downward trend from typically over 100 percent in the early part of the period to well under 100 percent since 2001."

New Plays, New Challenges

Clearly, new plays will be important to the industry, but they come with their own set of challenges.

The search for new plays, for instance, is considerably more difficult than exploring in proven plays because it's tough to get a high level, qualitative analysis of the area.

The leading 28 companies studied by Wood Mackenzie explored in more than 100 countries since 1995. Of the 100, 24 had no material oil or gas production.

"The exploration in those 24 was essentially a hunt for new plays, and more than $3 billion was spent on this exploration," Latham said. "The commercial returns were much less than in more established countries.

"Hunting for new plays overall is associated with low returns," Latham noted. "When it works it's very good and can often be a ‘company maker.' But there's a lot of disappointment for a lot of other companies."

Identifying and capturing new opportunities relies heavily on the basics, i.e., good basic geoscience and basin analysis work. In terms of exploration, it's a matter of high-grading before access.

For example, in the case of successful finds like the Chinguetti Field off Mauritania and Mboundi in Congo, the companies acquired acreage in relatively frontier basins and picked the right block immediately.

"The strategy was to high-grade before access," Latham noted. "The strategy deployed in those, in terms of when first set in motion, likely was several years."

Does that strategy still work?

"With so many new competitors, the companies around relative to the numbers of new licenses being offered is so much higher," Latham said. "So the companies have to think in terms of high-grading after access.

"They can't wait to carefully analyze and hope to choose the best block, because then the opportunity is past," Latham said. "So that's a change in exploration strategy, which reflects the much more competitive environment we're in now."

Adapting

The IOCs collectively produce about 10 billion barrels annually, so exploration replacement for that production will take considerable time.

"The point is, remaining exploration potential is very large compared to current production for the companies," Latham said. "Yet the companies are complaining they can't access sufficient exploration opportunities, so that's quite a paradox. There's huge remaining potential to find reserves, but it is all very challenging in terms of cost or of accessibility.

"Future strategies will include getting more comfortable with much higher exploration costs, and as long as prices are high this is okay," Latham said. "The companies are positioning now for long lead time access issues of getting into politically or technologically difficult areas of the world."

More and more of the large exploration budgets will be directed to some politically and technically difficult areas, Latham predicts.

Many of the big companies are looking at the Arctic -- including the Siberian Arctic -- as the site for new plays, which will only be feasible if oil and gas prices are high like today.

Also, a change of sorts in the current corporate mindset might be in order.

"We do see the companies are now spending 10 times as much on share buybacks as exploration," Latham noted. "In years gone by, a lot of the free cash was reinvested in exploration, but now it's being returned to shareholders."

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