For
today's exploration industry, gain is the name of the game.
The buzzword
is "value creation," which is the value of those discoveries versus
the dollars spent to make them.
Strong
oil and gas prices have focused industry attention once again on
exploration opportunities. But exploration is no longer simply a
matter of playing the odds by throwing money at prospects and ultimately
finding substantial reserves.
Today's
oil and gas firms must devise exploration plans tailored to their
individual company philosophies and exercise strict discipline in
implementing those plans.
That was
the message that came through loud and clear recently at the AAPG
Annual Meeting in Dallas — especially in a forum titled "Delivering
On Our Promises: Managing E&P in the 21st Century."
For example,
Andrew Latham, vice president of energy consulting with Wood Mackenzie,
presented a paper titled "Value Creation Through Exploration," and
discussed how the top 25 companies have fared in the last seven
years in creating value through exploration.
His discussion
highlighted what works — and what doesn't.
Here's
some good news in his talk: The overall results of the 25 companies
working in 80 different countries are positive, according to Latham.
The firms spent $50 billion on exploration and created $23 billion
in value (while discovering 45 billion barrels of oil equivalent
of commercial reserves). That equaled an 11 percent return on their
investment.
Performance
was varied for the group of companies, however. Only 16 of the 25
created value, and nine companies failed to replace production through
exploration, leaving 13 companies that both created value and replaced
reserves.
Some of
the companies that have done a good job replacing reserves and creating
value, according to Latham, are British Gas, Phillips Petroleum,
Eni, Statoil, Petrobras, TotalFinaElf and BP.
Deepwater
Another
interesting recent indicator is that major oil companies have continued
to constrain exploration expenditures, closing the gap with mid-sized
oil companies. Those mid-sized firms are investing in exploration
at twice the relative rate of the majors, he said.
Exploration
is not the only means for creating value, and Latham outlined how
acquisitions by the 25 companies fared:
- The firms spent $140
billion on nearly 170 international mergers and acquisitions from
1996 through 2002 and created $23 billion in value for a 12 percent
return on their acquisition investment.
- 16 companies created
value.
- 20 companies replaced
production from acquisitions.
- 12 companies created
both value and replaced reserves.
While acquisitions
certainly factor into every company's overall business plan, Latham's
talk focused primarily on exploration. He noted that — not surprisingly
— value creation by country also varied.
Some data:
- The U.S. deepwater
Gulf of Mexico ranks first with value creation of $11 billion
from $11 billion spent on exploration.
- Kazakhstan, by far,
created the most value, almost $7.5 billion, on the least amount
of exploration expenditures.
- Angola was third
in value creation at about $6 billion.
- The United Kingdom
performed the worst, with $11 billion in exploration investment,
but value destruction of $2 billion.
Not surprisingly,
these numbers indicate that deepwater regions and the Caspian Sea
region were the premier exploration targets while exploration in
onshore and shelf regions overall resulted in value destruction.
Global
exploration success is now mostly from deepwater regions, he said.
Deepwater accounted for 65 percent of all oil and gas discovered
in 2002 and 2003, a huge jump from about 35 percent in 2001. Deepwater
reserves discovered per well from 1996 through 2003 have averaged
50 million barrels of oil equivalent compared to just 15 million
barrels of oil equivalent for non-deepwater exploration wells.
The good
news, he added, is there appears to be plenty of life remaining
in deepwater exploration regions.
According
to Wood Mackenzie, six billion barrels of oil and two billion barrels
of oil equivalent of gas have already been produced from deepwater
plays, and 44 billion barrels of oil and 26 billion barrels of oil
equivalent of gas remain to be produced. Those figures are dwarfed
by the estimated 114 billion barrels of oil and 68 billion barrels
of oil equivalent of gas yet to find in the deepwater plays around
the world.
However,
the value of deepwater reserves has declined since the mid-1990s
due to several factors, including moves to higher tax regions, stranded
gas, longer lead times and fewer giant oil fields.
As a result,
the quality of new deepwater reserves will be a real challenge for
companies.
Delivering
The outlook
for exploration appears to be strong within oil companies.
A recent
Wood Mackenzie survey indicated that about 60 percent of respondents
said exploration can contribute to strong organic growth for the
firm over the next five years, and over 60 percent said their exploration
budget would be higher over the next five years.
About 55
percent of the respondents, however, said they have too few exploration
opportunities in their existing portfolio.
Robert
Ryan, general manager of global exploration for ChevronTexaco, used
his paper ("Delivering on Our Promises: Improving the Value Proposition")
to build on Latham's theme, saying that since the mid-1990s wildcat
success has held steady at about 30 percent. Excluding a few giants,
the average discovery size has been around 50 million barrels of
oil equivalent.
The majors
performed well in 1999 and 2000, but not as well as before and even
less since 2000, he said. The bad news is that the average value
of discoveries has fallen and overall oil discoveries from new fields
have replaced only 40 percent of production.
According
to Ryan, companies who seek to improve value creation:
- Must be more efficient
in execution, stewardship and technology.
- Must have improvement
in the consistency and accuracy of prospect selection.
- Prediction is essential.
- Exploration prospect
generation must be consistent, technically driven, repeatable
and measurable.
The approach
to a basin, lease and then prospect must start with a technical
assessment, Ryan continued, and then move through a series of steps,
including:
- Portfolio initial
risk-reserves.
- Validating risk and
volumes.
- Economic evaluation.
- Peer review.
- Decision review.
- Plan endorsement.
During
this workflow, Ryan said it is essential to focus on the basics.
"All of
this is easier said than done," he said, "but in general we must
take a global view of the opportunities. People and capital resources
must be deployed in the right places on the right projects, the
appropriate technology must be integrated into the exploration program,
there must be a strong focus on the fundamentals and everyone from
the technical teams to the executive suite must be part of the process."
This rigorous
approach allows companies to align predicted and actual results,
thus managing exploration appropriately, Ryan said. He noted, for
example, that in 2002-03 ChevronTexaco was able to align its volumetric
results, achieving 104 percent of expected gross resources and 93
percent of expected net resources.
In 2002
ChevronTexaco had a best-in-class exploration year, discovering
over 800 million barrels of oil equivalent, he said.
Discipline
Of course,
the approach to exploration varies dramatically from a major oil
company to a mid-sized independent, as was noted in the paper presented
by Henry Pettingill, director, exploration portfolio, with Noble
Energy ("The View from the Middle: Risk Management of an Independent's
Exploration Portfolio").
Pettingill
said exploration risk analysis is critical for smaller companies
because numerous studies have highlighted the challenges faced by
the exploration and production industry in meeting expectations.
He pinpointed
several keys to overcoming those challenges, which include:
- Calibrate and compensate
pre-drill and post drill expectations.
- Select the best of
the best. Companies have a large enough portfolio of prospects
to be selective about what gets drilled.
- Seek and capture
project flexibility.
- Fund project maturation.
This allows the best targets to rise to the top.
- Manage and communicate
timeframes. A company must be willing to roll the dice repeatedly,
he said.
- Diversification with
focus, not dilution. Generally a mid-sized company's portfolio
needs to meet several different financial goals. For Noble, this
is achieved by incorporating a mix of higher risk-higher reward
projects, modest growth projects and short-term production replacement
projects in its overall exploration portfolio, he said.
- Good geology, geophysics
and engineering.
Pettingill
said a practitioner of risk analysis is like a reformed alcoholic:
"You can conquer your weakness, but you are never cured and always
one drink from relapse," he said.
"For an
independent, discipline is required every day. We will not meet
annual expectations with a come-and-go approach."