Exploration: Hot Spots...
Saturday, July 14, 2012
Perhaps more than any other sector of the oil and gas business, exploration encourages rumour and anecdotes, with much important information being traded by ‘networking’. For example, sitting at lunch at a recent Finding Petroleum event, I learned more about the reported 2.5 billion barrel Johan Sverdrup oil discovery in Norway than I could attending a year’s worth of formal presentations!
By David Bamford, OilEdge
I seize on anything that is factual and so I was very pleased to get in my hands a copy of Richmond Energy Partners’ report on the exploration performance of 32 mid-cap and 8 large-cap E & P companies (outside North America) over the 4 years 2008 – 2011.
I found a couple of their results especially compelling – before saying what they are, I need to take a little segway into some terminology:
The Exploration “Life Cycle”
The Exploration “Life Cycle” of exploration plays (and, occasionally, whole basins) illustrates the essential discussion about “Where shall we explore?”
A cartoon representation of the “Life Cycle” of exploration plays (David Bamford)
The status of any play can be considered in terms of its position in this Cycle. To illustrate, the movement of the UKCS North Sea Brent (oil) province can be positioned over its 45+ year history: Frontier - in the 1960’s: Prolific – in the early 1970’s: Mature – in the late 1970’s and in the 1980’s: “Red” – today.
Explorers are often accused of being only concerned with Volumes but of course this Cycle has profound implications for Value.
In the early, Frontier, phase, of course there is only expenditure with as yet no production of even significant discoveries.
In the Prolific phase, value creation is at a maximum, as discoveries are large (typically, “Giant” accumulations of >250mm boe gross), and therefore F&D costs are spread over a large number of barrels.
In the Mature phase, value creation can still be good but technology application and cost reduction become important in order to enhance economics.
In the “Red” phase, value destruction is probable, occasionally inevitable, as success rates plunge, the very few discoveries are small, and costs escalate. Of course, it remains possible for a company to “win” during this phase but the number of “winners” is small, the number of “losers” very high!
The following sketch illustrates the evolution of discovered resources, value, costs and a notion of ‘reward’, through these cycles of exploration from Frontier to “Red”.
Exploration “Life Cycle”: Value Generation (David Bamford)
It is important to emphasize that the right level of analysis is the play level. It would be absurd to pretend that a whole region lies in the “Red” zone for example; indeed the Johan Sverdrup discovery demonstrates the power of ‘new play’ thinking even in a basin with a long exploration history.
Three takeaways from the Richmond report
- There is a significantly higher probability of making a 100 mm barrel discovery in a Frontier play than a Mature play (in fact it is about 7.5 times more likely!)
- Overall, Frontier Exploration has been successful, with the 5 ‘big play breakers’ all in Deep Water. For 2012, there is a huge focus on exploration drilling in the South Atlantic and East Africa (onshore and offshore).
- In Frontier Exploration, there has been relatively little effort, and no discoveries, in stratigraphy older than the Cretaceous, whereas in Mature provinces, effort and discoveries reach down to the Devonian and older.
The first of these conclusions is obviously not a surprise, although the degree of difference may be to some.
The second and third points speak to Hot Spots and Hot Rocks respectively – I’ll examine them in more detail in an article later this week.
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