Plenty To Do for Today's Industry

Glory days still to come?

Brian Maxted, one of his generation’s most successful oil finders, probed the past and future of exploration during his Michel T. Halbouty Lecture at this year’s AAPG Annual Meeting in Dallas.

He opened his remarks by first lauding the petroleum industry on its achievements:

"We should be proud to be part of this profession and this industry. As a result of our achievements and those of our predecessors, petroleum has provided the impetus for the economic, social, technological and political development of the planet," Maxted told the large crowd gathered to hear his remarks.

But while many feel the industry’s glory days are in the past, Maxted said plenty of work remains for companies and professionals willing to take on the challenges of exploration.

Total discovered global liquid reserves are estimated at 1.9 trillion barrels, and today petroleum accounts for about 60 percent of the earth’s energy needs, a trend that will continue through about 2050, he said, when natural gas and associated liquids will increasingly be the fuels of choice.

"World oil yet to be found is estimated at 600 billion barrels, suggesting an ultimate potential resource base of 2.5 trillion barrels," he said. "On this basis, 25 percent of our worldwide oil endowment is still to be found — this is a lot of oil. Thus, the industry still has a significant future, with the next several decades being particularly important."

Of the total oil discovered, about 850 billion barrels or 48 percent have been produced. Production increased about 2 percent per year through the 1990s to 28 billion barrels a year in 2000. By the end of the last millennium, conventional oil reserves had declined to approximately 1.05 trillion barrels, at a rate of 3 percent per year.

Extrapolating this trend suggests global oil production will peak between 2020 and 2030, he noted.

"Two paradigms are important here," he said:

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Brian Maxted, one of his generation’s most successful oil finders, probed the past and future of exploration during his Michel T. Halbouty Lecture at this year’s AAPG Annual Meeting in Dallas.

He opened his remarks by first lauding the petroleum industry on its achievements:

"We should be proud to be part of this profession and this industry. As a result of our achievements and those of our predecessors, petroleum has provided the impetus for the economic, social, technological and political development of the planet," Maxted told the large crowd gathered to hear his remarks.

But while many feel the industry’s glory days are in the past, Maxted said plenty of work remains for companies and professionals willing to take on the challenges of exploration.

Total discovered global liquid reserves are estimated at 1.9 trillion barrels, and today petroleum accounts for about 60 percent of the earth’s energy needs, a trend that will continue through about 2050, he said, when natural gas and associated liquids will increasingly be the fuels of choice.

"World oil yet to be found is estimated at 600 billion barrels, suggesting an ultimate potential resource base of 2.5 trillion barrels," he said. "On this basis, 25 percent of our worldwide oil endowment is still to be found — this is a lot of oil. Thus, the industry still has a significant future, with the next several decades being particularly important."

Of the total oil discovered, about 850 billion barrels or 48 percent have been produced. Production increased about 2 percent per year through the 1990s to 28 billion barrels a year in 2000. By the end of the last millennium, conventional oil reserves had declined to approximately 1.05 trillion barrels, at a rate of 3 percent per year.

Extrapolating this trend suggests global oil production will peak between 2020 and 2030, he noted.

"Two paradigms are important here," he said:

  • While a lot of oil has not yet been found, "we have already entered the mature phase of our industry," he said. "Our challenge will be to find this oil in order to defer and minimize the inevitable decline in production capacity, which is caused by demand outpacing new discovery."
  • Supply may be expected to tighten and there will be a sustained higher commodity price going forward — "and commodity price is the overarching driver of the upstream petroleum industry," he said.

Riding the Cycles

Maxted looked back at the two principal price cycles since 1973 to gain historical perspective on the future of the petroleum industry.

"From an exploration perspective, there is a direct relationship between price and the level of worldwide activity," he said. "The phase of rising oil price during the late 1970s and early 1980s resulted in a rapid expansion of global exploration and significant value destruction."

The oil price drop in the mid-1980s caused an immediate and precipitous reduction in exploration activity, which characterized the subsequent period of low oil price through the 1990s.

"However, the price-versus-activity relationship has diverged since 2000," he said. "The recent commodity price increases have not yet been followed by an increase in the level of exploration."

Lower commodity prices and cash flows through the 1990s caused the industry to focus on reducing costs — "the factor primarily responsible for reduced exploration activity," he noted.

The situation was compounded by lower stock prices and company assets being undervalued.

"But those companies with strong balance sheets found it cheaper and easier to acquire new reserves and production inorganically through cash and/or stock transactions rather than find them organically with the drill bit," he said.

It is during this period that the so-called mega-mergers and super-independents evolved, he pointed out.

During this merger and acquisition period of the late 1990s, acquisition budgets increased at the expense of development and exploration budgets. Following this period, spending increased with price, and companies shifted to an organic strategy of exploitation with development budgets increasing at the expense of acquisition budgets.

The only common denominator in both phases was depressed exploration budgets, which have remained at about 15 percent over the last five years, he said.

"We have all been impacted by this retrenchment from exploration by the industry," he said.

In addition to minimizing exploration, the practices of the mid-1980s has had critical long-term consequences. Namely, the companies and people in the E&P business have declined dramatically.

"This estimate shows that over 30 percent of the upstream petroleum industry population has been lost during the last decade alone," he said.

Given these numbers, its not surprising that geologists and geophysicists have been severely affected.

"The demographics for the exploration population have changed," Maxted said. "There is a relative lack of new explorers entering our industry — and we, the experienced geoscientists, are quickly growing older!"

Knowing the Trends

Exploration trends in the 1990s hold a harbinger of future exploration," Maxted said.

Total petroleum found in giant fields of greater than 500 million barrels of oil equivalent through the 1990s was 156 billion barrels of oil equivalent in 77 fields. Three times more gas than oil was found, and 60 percent of the new fields were in the Middle East.

Also, 40 percent of the giant fields discovered during the decade were in deep water, and 30 percent of new oil was found in Africa.

Global oil and gas discoveries in the 1990s may be rationalized into four "business opening" themes, he said. These include:

  • New technology — including 3-D seismic and advances in drilling and production, which allowed the global exploration of the Tertiary deepwater delta systems.
  • New geography, which provided ideological change — particularly the opening of the former Soviet-bloc countries and the advent of international participation in OPEC countries.
  • Increasing oil prices — this could lead to the reopening of former exploration areas as well as new ones, including those in remote interior basins of continents or offshore rift/passive margins in high latitude regions.
  • Emerging gas/LNG markets — which has stimulated worldwide exploration for gas.

Also, new geology may through secondary exploration develop new plays and fairways in established petroleum provinces or open new areas, he added.

"Two other perspectives are important to recognize about exploration in the 1990s," he said:

  • The oil found in new giant fields during the decade was only approximately one-third of the total discovered in the 1980s. "This continued a prevailing trend that was established in the 1970s," he said. "The 1960s was the peak decade for giant new discoveries … by the 1990s the new giant oil fields represented only 25 percent of the total production."
  • The increasing importance of fields with a stratigraphic component to their traps. During the past 50 years, new finds with stratigraphic traps have increased from 10 percent to almost 40 percent.

‘A New Era’

So, what does the future of exploration hold?

Maxted believes "we may have entered a new era with different characteristics relative to previous phases."

  • Strengthening oil prices in the late 1990s will likely continue, and the industry should plan its business on the assumption of strong, long-term commodity prices.
  • Second, there has been a change in the relationship of oil prices, the stock market and E&P company share prices — E&P sector stock prices are not rising in line with recent oil prices increases, he said.

"A disconnect is evident. I believe there are concerns about the potential for profitability due to cost pressures and continued anticipation of a price pull-back and company growth due to opportunity constraints and reinvestment ratios.

"So, should commodity prices remain high, and should the industry be able to manage costs, then its future will hinge on the ability to invest in new opportunities for reserves and production growth," he said. "If we successfully achieve this, then E&P stocks should be robust.

That scenario will not be easy to achieve, he added. From a growth perspective, reserves and production for a large number of U.S. companies have been generally flat over the last five years and neither is expected to increase dramatically going forward — in fact, companies will continue to face the challenge of simply replacing reserves and production.

In the last six years, industry production costs have risen by more than 30 percent from an average of $10.65 per barrel of oil equivalent to $13.95, despite a major focus on reducing costs.

"Costs of current production may be expected to continue to rise," he said. "New, cheaper sources of reserves and production are required to dilute these average total unit costs."

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