LEARNING SERIES: MAJOR PHASES OF UPSTREAM OPERATIONS Exploration By Farouk Al-Kasim 1. Geophysical Surveys 2. Exploration Companies 3. Diversity in Approach 4. Speculation, Farm-ins, and Farm- outs 5. The Value of Exploration Data 6. Legal and Contractual Commitments 7. Monitoring Exploration 1 Geophysical Surveys 2 1 Exploration depends on sophisticated technology >> Visible surface features such as oil seeps and natural gas seeps provide basic evidence of hydrocarbon generation. >> However, most exploration depends on highly sophisticated technology to detect and determine hydrocarbon accumulations using exploration geophysics. 3 2 Methods of petroleum exploration >> The first step in exploration is perhaps a geological review or assessment. Its value lies in integrating all that is available on the petroleum potential in the area in order to outline the company’s programme. >> In new areas where little exploration has been carried out in the past couple of decades, the initial exploration may include the following: • Gravimetric surveys measure the strength of gravitational field across the area. It may be useful for mapping rock density or buried cavities. • Magnetic surveys use a magnetometer to assess and map the properties of rock formations or anomalies based on the response to magnetic field measurements and electrical resistivity. • As surface methods, gravity and magnetic surveys can map out large geologic anomalies such as faults and folds, salt domes, and anticlines. However, the problem with these methods is that they cannot produce detailed images of smaller and less inconspicuous features such as petroleum traps. Surface features can provide a visualisation of such features. In each case, the host country must monitor operations to ensure compliance with legislation and the terms of the contract. 4 3 Targets in petroleum exploration >> Geological and geophysical mapping starts with a regional theory as to what areas can be promising in the search for petroleum. The aim is to turn this theory into a realistic guideline to discoveries. The Lead • Potential accumulation is currently poorly defined and requires more data acquisition and/or evaluation in order to be classified as a prospect. Play • An area in which hydrocarbon accumulations or prospects of a given type occur: For example, the shale gas plays in North America include the Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, and Woodford, among many others. Prospect • This results when In each a the case, lead has host been more country fully evaluated. must monitor operations to ensure compliance with legislation and the terms of the contract. 5 4 Options for the timing of license rounds >> Areas considered favourable for hydrocarbons are initially subjected to a gravity survey, magnetic survey, and/or passive seismic or regional seismic reflection surveys to detect large-scale features of the subsurface geology. >> Features of interest (known as leads) are subjected to more detailed seismic surveys. These work on the principle of the time it takes for sound waves to travel down to rock layers of varying densities in the subsurface, and be reflected back to the surface. By using the time of reflection and the speed of sound, the depth of the reflecting layers can be calculated and mapped to create a profile of the substructure. 6 5 Drilling is the final proof • Finally, when a prospect has been identified and evaluated and it passes the oil company's selection criteria, an exploration well is drilled in an attempt to conclusively determine the presence or absence of oil or gas. • A typical shallow shelf well (e.g., North Sea) costs US$1–30 million, while deep wells can cost more than US$100 million. • Hundreds of smaller companies search for onshore hydrocarbon deposits worldwide. Some onshore wells can cost as little as US$100,000. 7 Exploration Companies 8 6 Exploration companies worldwide • There are hundreds of oil companies worldwide that are engaged in petroleum exploration. • The super-majors are normally huge international companies that are both vertically and horizontally integrated. To these companies, exploration is the first link to the rest of their value chain. • Very small oil companies with limited financial resources are primarily interested in speculative exploration. They acquire relatively high risk acreage and endeavour to improve its prospectivity through less costly seismic surveys or reinterpretation work. Once prospectivity is improved the company strives to sell or farm out the acreage at a much higher price. • Between the two extreme prototypes there are several variations of medium-sized oil companies of various degrees of integration. 9 7 Various types of oil companies • The supermajors • State-owned oil companies • State-run oil companies • Large companies in developing countries • Medium-sized independent companies • Small independent oil companies • Speculative oil companies • Oilfield service companies • Consultancies and independent consultants 10 Diversity in Approach 11 8 Obstacles to interpretation • Geological interpretation is not an exact science. • This is to some extent due to the enormous gap in our understanding of how nature operates. But it is also because the sediments we are trying to visualise are buried deep under thick sediments and cannot be inspected directly. • Moreover, the methods used to aid and guide geological interpretation are encumbered with many imperfections both in the acquisition and the processing stages. This makes visualisation of structures on the seismic record subject to uncertainty and risk. • The only way to know whether there is petroleum is by drilling. But the chances for drilling in the wrong place are very high. Worse still, the cost of drilling dry wells is overwhelming 12 9 Diversity of views in exploration • Individual talent and experience matter. Large companies may miss good prospects while medium and small companies can be smart enough to see them. • For the host country, the presence of several companies of varied experience and approach is a blessing for increasing discoveries. • Since the cost of exploration is paid by licensees, host countries normally leave the technical decisions to the licensees. • However, the legislation or the contract may be open to the following: o Approvals of the drilling programme o A dialogue on the location of the well, or the data to be acquired o Full reporting and delivery of data including samples • Vital information on safety may not be available to all licensees. That can make the regulator important in sharing vital information. 13 10 Diversity of views in exploration >> The presence of several licensees in one license helps in discussing different views on the desired methodology and data quality, e.g., those related to the prospects and horizons to be tested, the data and samples to be collected, and the tests to be carried out. >> If the country is itself a participant in the license, it will be able to argue for its views as a commercial partner who is willing to pay for the added cost arising from its views. >> The regulatory authority in the host country will benefit greatly from the exchange of views among the various oil companies in the same license group. Such diversified exposure enables the regulatory authority to form an enlightened opinion of what is practically possible and what it might consider optimal from its point of view. 14 Speculation, Farm-ins, and Farm-outs 15 11 Companies vary in approach • Competition between oil companies is an important basis for ensuring efficiency in petroleum operations. • Different oil companies will invariably arrive at divergent interpretations. • The sum of all interpretations from several oil companies will, therefore, provide a much broader basis for exploration drilling. That will in turn increase the chances of making discoveries. • Substantial discoveries have been made in acreage relinquished by previous licensees. Similarly, several successful discoveries have been made in blocks where the licensee was the only applicant. • Moreover, the different companies are often in different financial situations that affect their appetite for investment. • Diversity can be achieved by having different licensees in each block as well as by having several partners (consortia) in each individual blocks. 16 12 Relinquishment enhances discoveries • From the point of view of the host country, the list of licensees involved in the various blocks is constantly changing. • For a start, licensees may voluntarily relinquish part or all of a block if they had lost any hope of making a discovery, or at least hope of making a successful farm-out. • In any case, the relinquishment regulations in the host country usually force the licensees to surrender up to 50% of the block within a period of, say, six years. The exploration period expires after some nine years, which forces the licensee to either surrender or apply for an extension with commitment to a new work programme. • The government will be interested in licensing relinquished acreage in order to sustain the momentum of exploration and/or development. 17 The Value of Exploration Data 18 13 >> Many host countries require that the licensees submit to the authorities the following types of reports: • • • Data management Annual or quarterly reports on exploration operations Reports on seismic surveys Drilling progress reports • Final well report • Proposal for relinquishment • Report on discovery • Programme for delineation and evaluation of a discovery • Report on the evaluation of a discovery >> In addition, the licensee is required to submit samples, logs, measurements, and all other data from drilling and testing. >> In many countries, all data are the property of the state. >> For all the reasons above, the gathering, filing, interpretation, and dissemination of data (data management) is a very important function for the host country. 19 14 Data management • To facilitate learning from experience, the host country is interested in making the maximum amount data available to all stakeholders in exploration. • Similarly, the host country will benefit greatly from making data available to research and interpretation by academic as well as commercial entities. Such efforts will encourage a variety of views and may enrich the efficiency of exploration. • For the same reason, the host country should also be interested in making sure that the data collected are of high quality and of uniform format that lends itself to interpretation by others. • However, most countries allow oil companies to keep data confidential for a period (five years), allowing government to make only general statements based on the data. After this period, the data can be made available. 20 Legal and Contractual Commitments 21 15 The work programme >> The core issue in negotiating a license is what the oil company is prepared to commit itself to do as “the work programme� in order to test hydrocarbons presence. The work programme can consist of seismic surveys in kilometre, reinterpretation of previous data, and a commitment to drill a specified number of wells. >> In some cases, the commitment is divided into a firm one and a contingent one. The latter is dependent on the outcome of the firm commitment. >> Since exploration cost can be recovered by the licensee, the host country is normally interested in avoiding unjustified cost. The relinquishment provisions are intended to force the licensee to give up acreage that it is not interested in testing further. >> The host country must therefore develop plans for relinquished acreage as part of its licensing/exploration strategy. 22 16 Exploration period and relinquishment >> Petroleum legislation or the Model Contract specify the duration of the exploration period. In Ghana, the period is divided into the following: • Initial period • First extension period • Second extension period >> At the end of each period, the licensee may apply for extension, provided it has fulfilled its work obligation. The licensee shall relinquish the following: • At the end of initial period: 50% of exploration area • At the end of first extension period: 25% of the exploration area • At the end of the second extension period: The rest of the exploration area >> All data related to a relinquished area shall be handed over to the authorities at relinquishment. 23 Monitoring Exploration 24 17 Discovery, delineation, and commercial declaration • Licensees are required to report immediately after encountering a petroleum discovery. The minimum information required is usually described in the regulations or the contract. • The licensee is also required to submit a plan for the delineation and evaluation of the discovery. The plan is usually discussed and approved by the host country. This provides the host country an opportunity to express its views and preferences on the plan. • The licensee is usually required to report on the results of delineation and evaluation in a special report (Commerciality Evaluation Report). • If more work is required to determine commerciality, the licensee is required to submit a special leading up to either a commerciality 25 declaration or a noncommerciality declaration. 18 Host country priorities in the evaluation phase >> The host country has the following major concerns at the end of the delineation phase: 1. That all potentially commercial discoveries are properly documented and evaluated. 2. That the evaluation of commerciality is well considered from all angles to ensure optimum utilization of resources. 3. That preparations for a field development plan consider the country’s priorities, overall interests, and concerns. 4. That the final development plan contributes optimally, and avoids any potential harm, to the total economic and social development plans in the country. 26 19 • How can the host country perform its role By following up on the assessment of resources in all prospects that are potentially of commercial interest • By monitoring exploration drilling and updating the resource assessment locally and regionally • By ensuring that optimal data including testing are collected from exploration wells to ensure adequate assessment of discoveries and of HC potential generally • By having a positive dialogue with licensees on the need to 27 discover petroleum near existing infrastructure 20 Discovery report >> The licensee is expected to submit a discovery report to the government as soon as the preliminary evaluation has been made. The following must be considered: • The report reviews exploration drilling plans to ensure proper documentation of potential HC bearing horizons. • The requirement for data increases if a discovery is made. Data, samples, and tests on all HC-bearing horizons can facilitate commercial exploitation and are in any case important for further exploration. • Data should preferably be compatible with the processing and interpretation requirements of users. • The host country should have its own assessment of discovery. • The discovery report must address unknowns and risk factors. it forms the basis 28 for the decision on appraisal programme. Thank you for your attention! 29