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Oil & Gas NewsThursday, 10 July 2008 Russian Oil ExplorationIn a previous article, I have alluded to the fact that bold Russian geophysical companies may find opportunities on the global stage. In this article, I consider how global opportunities may also be available for bold Russian explorers! Firstly, a small piece of exploration history: on May 26th 2008 it was exactly one hundred years since oil was struck at Masjid-i-Suleiman in Persia. Seven years had passed since the Shah of Persia had signed the concession agreement, there had been numerous disappointments, the financier William Knox D Arcys money had almost run out, and indeed a letter (dated 14th May) from London arrived some weeks after the discovery ordering the drilling engineer (George Reynolds) to wind down operations - Masjid-i-Suleiman had indeed been the last throw of the dice. The company that made this discovery was tiny; the company that grew from this discovery became known as Anglo-Persian, then Anglo-Iranian and, finally, BP. A couple of months ago, I had the opportunity to fly the length of the Zagros mountain range, from Kurdistan (and the Kirkuk field) in the north to Abadan (and the Ahwaz field) in the south. From 13,000m I was struck by a thought and a question: My thought was that much of the exploration Yet-to-Find of the Middle East almost certainly lies in this fantastic fold-belt. My question was, who is going to explore for it? One thing that does seem to be clear is that the notion that a financier and his drilling engineer can arrive in a far-off country, win a prime Frontier concession and proceed to drill has been left behind in the early part of the last century. In my opinion, what it takes to succeed nowadays includes: 1. Know How: the ability of integrated, multi-disciplinary, large teams to work from the global scale of plate tectonics to drill-bit, via regional geology, 3D seismic, direct-hydrocarbon-detection, in particular able to deploy advanced geophysics in an a la carte selection from high resolution gravity / magnetics, electro-magnetics, specialist seismic, and lithology & fluid prediction from seismic (AVO for lithologies, perhaps fluids; direct-hydrocarbon-detection - flat-spots etc; rock physics - including stress, pressure prediction). 2. Relationships of Mutual Advantage between NOCs and IOCs, within which the NOCs own the resources and the IOCs bring their Know How and financial muscle. With the risk of huge generalisations, the western IOC situation today can be summarised as: The Majors have the Know How and the teams to manage below ground risk and have the financial muscle to explore, develop and produce. However, one has the impression that they are increasingly run by engineers and accountants, and have Boards and auditors who dont understand Frontiers - the Gulf of Mexico and the rest of North America is so much more comfortable! At the opposite end of the size range, small companies may not have the Know How, the teams or the financial muscle but may be more entrepreneurial and willing to take above ground risks. They may have a British Airways Gold Card, but not win the best concessions as the best endowed NOCs may not be too happy to see their prime opportunities being taken by very small companies and therefore insist on some fairly tough pre-qualification criteria such as requiring a company to be producing more than, say, 30,000boed. Now lets review some positives. Explorers continue to view the world through New Eyes, innovation is alive and well and there are many below ground examples to chose from: In the Deep Water Gulf of Mexico, there is a focus on older, deeper geology, in particular the Lower Tertiary/Palaeogene/Wilcox (where a new reservoir deposition paradigm has emerged). Breakthroughs in seismic technology have opened up the sub-salt, especially Depth Imaging and Multi-Azimuth acquisition. Meanwhile drilling and completions engineers are breaking all sorts of records at 30,000. The Majors (Chevron, BP) and the bigger Independents (Devon) lead here. Along the West Africa Transform Margin (Ghana especially) theres a similar focus on older geology, the Cretaceous (with stratigraphic trapping as a key). 3D seismic technology, and amplitudes/AVO, has delivered the insights here: the key players are Kosmos Energy, Tullow Oil and Anadarko Petroleum. Likewise in the West Siberia basin, theres a focus on older, deeper geology, building a new regional geological framework and the use of 3D seismic technology and attributes. TNK-BP is a leading player here. Onshore Rifts have provided success in the Balmer basin, Rajasthan, India and the Albertine Rift, Uganda, for Cairn Energy and Tullow Oil respectively. A new frontier that should be high-lighted is that of Sub-Salt: Salt is critical to some big provinces as it may control deposition, drive structuration and provide a seal: examples include Gulf of Mexico, Angola, Brasil (Santos basin), Gabon. Major prospects can be either partially or totally obscured by salt but seismic technology can now crack this problem via Multi- or Wide-Azimuth acquisition and Depth Imaging. The Majors lead but others can follow by smart use of seismic contractors.The allegedly multi-billion barrel discoveries (Tupi, Jupiter) recently announced by Petrobras in the Santos basin, offshore Brasil, have given Sub-Salt a dramatic profile. These Santos discoveries have also illustrated a more negative aspect of recent years as host governments and NOCs have begun to interfere and meddle and to mis-judge whats needed in our industry: the Brasilian government withdrew Santos basin acreage from a recent, supposedly open, license round as soon as they realised what they had on their hands. But this is just one example from many: In Trinidad, in early 2007, terms too tough for a risky deep water license round.In Atlantic Ireland, in late 2007, terms too tough for a risky, hostile environment, Porcupine Basin round.In the UK & Alaska, taxation remains inappropriate for late-life, mature provinces, with the April 2006 budget marking a significant backward step. And in the FSU and parts of South America for example, IOCs are asking What exactly are the Rules of Engagement? And more: Governments seem to forget that there is always somewhere friendlier to go. One place that is distinctly friendlier is North America and one can see companies spending large amounts of $s there. An October 2007 Federal sale of offshore oil and natural gas leases in the Central Gulf of Mexico attracted $2.90bn in high bids, the second highest total of high bids in U.S. leasing history. The sum of all bids received by the USs MMS - losing as well as winning bids - was $5.25bn. There were 84 companies participating in this sale. The March 2008 sale was even more successful. And in February 2008, the MMS announced that a sale of oil & gas leases in the U.S. waters of the Chuckhi Sea, off the NW coast of Alaska, has brought in a record $2.66bn, compared with the MMSs estimate that it would receive only $67m for the acreage. Twenty-five years ago, high costs ruled out Chuckhi developments even though oil had been found to be present: not any more, it seems, companies are no longer walking on by. Furthermore, over the last 12 months, Royal Dutch Shell, BP and Marathon have all announced multi-billion dollar investments in Canadian oil sands. Something extraordinary is happening and one might glean from all this that there is another factor at play other than the geological and technological transformation of below ground risks and the transformation of economics by high oil prices. My own guess is that conversations about above ground risk have become less relaxed in the Majors boardrooms, perhaps North America feels like a comfortable place for the corporate governors who have their hands on the steering wheels! So lets consider a couple of the true exploration frontiers and who might explore in them. The exploration Yet-to-Find of the Middle East is often quoted as being around 100bn barrels but its actually quite difficult to figure out where this might be found. Saudi Arabia, Kuwait, Oman and the Emirates have been explored reasonably fully and its hard to see huge volumes remaining in Iran, which leaves Iraq in general and Kurdistan in particular. Of course, the security issues in Iraq are paramount in the mind of any company that is thinking of investing there; in Kurdistan, there is also the issue of who has the right to award licenses, the regional government of Kurdistan or the central government in Baghdad? And then theres the Arctic. Again, around 100bn barrels Yet-to-Find and more is often quoted, much of it is prognosed to be in Russian waters although theres a worrying hint that these regions might all be rather gassy. The previously mentioned Chuckhi Sea sale tells you that companies are not scared of such hostile areas, at least in North America where the politics are clear, and perhaps the next step might be a real assault on the politically benign area offshore Greenland, especially to the west. The region is almost completely unexplored, six offshore wells having been drilled in Greenland, one in 2000, the rest in the 1970s. But back to my question, who is going to explore here? One hears about the Majors: Shell, BP, ExxonMobil chasing concessions in Iraq but these turn out to be technical service contracts in the south of the country, mainly for discovered and developed fields; these seem to be the sort of low return contracts that Majors turned their noses up about in Iran, at least in part because the associated reserves could not be booked to the Majors accounts. The prime exploration acreage in Kurdistan seems to be attracting relatively small companies such as DNO, Sterling Energy and PA Resources. Likewise in Greenland, the Majors appear to be absent, despite recent license rounds. Those active in Greenland include EnCana, Capricorn (Cairn Energys exploration arm) and Husky Oil. Do we see the emergence anywhere in the western IOCs of bold new strategic directions or, as OPECs secretary-general Abdalla el Badri suggested in January this year, are they as a whole the real dinosaurs of the oil and gas industry! Its my opinion that the boldness of spirit shown by the explorers of a hundred years ago has gone absent-without-leave or, at best, is suppressed by the corporate governance descendants of those who sent George Reynolds the May 14th letter in 1908! Perhaps this provides an opportunity for the bigger Russian IOCs, bolder than their western peers, to take up the reins of global exploration?  
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