Finding New Exploration Ideas

---

Why “finding costs per barrel” is not the best value proposition Applying the lessons of the 1986 crash The technology future seismic budgets will be spent on Why you should not trust well classifications Why there is money to be made in North Sea exploration Event Report, Finding New Exploration Ideas, Sep 20, 2016, London

Special report

Finding New Exploration Ideas Sep 20, 2016, London

Event sponsored by:

Landmark

Finding New Exploration Ideas

Truthful, professional consulting; no repeating what you already know, and no spin. Petromall is a unique oil and gas advisory service which prides itself on technical excellence in selected fields and supplementing business management and leadership in the face of uncertainty. • Exploration • Subsurface • Project Capital • Field Operations • Security of Supply • Decommissioning Petromall actively participates in the facilitation and conduct of seminars worldwide, and has been a proud sponsor of this event with Finding Petroleum. Our presence is across the globe in the UK, Malta, North America, with partners in the Middle East, North and Sub- Saharan Africa. We help you to put science and engineering back into every decision made. Visit us at

www.petromall.org [email protected] +44 020 3286 2556

2

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas

Finding new exploration ideas Finding Petroleum’s London forum on September 20, 2016, “Finding New Exploration Ideas”, looked at how oil and gas exploration could become more of a business, technology which might lead to improvements, and business opportunities around the world, including the North Sea This is a report from the Finding Petroleum conference “New Exploration Ideas” held at the Geological Society, London, on Sept 20, 2016

Event website http://www.findingpetroleum.com/ event/beadb.aspx Some presentations and videos from the conference can be downloaded from the event website. Report written by Karl Jeffery, editor of Digital Energy Journal [email protected] Tel 44 208 150 5292

Sales manager

Richard McIntyre [email protected] Tel 44 208 150 5291 Conference chairman and producer: David Bamford Layout by Laura Jones, Very Vermilion Ltd Cover art by Alexandra Mckenzie

Digital Energy Journal www.d-e-j.com Future Energy Publishing, 39-41 North Road, London, N7 9DP, UK www.fuenp.com

Oil companies might not be very interested in exploration now, with the oil price low, and a big list of projects which have been put on hold. But there will come a time, maybe in 5-6 years, when companies want to get more reserves on their books, so long as they can be developed at low cost. That means that there could be business opportunities for exploration companies, and the remaining exploration professionals in oil and gas companies, if they can identify the right sort of opportunities, said Andrew Lodge, principal with oil and gas consultancy StrategicFit, former director of exploration with Premier Oil, and chairman of the Finding Petroleum forum. The sort of opportunities oil companies will look for in 5 years might be very different to the ones they were interested in when the oil price was high, he said. Consider that over the past 5 years, the oil and gas industry has opened up many new provinces around the world including Eastern Canada, extending North Sea discoveries to the Barents Sea, offshore East Africa, onshore East Africa, North West Africa, North East Latin America and the Eastern Mediterranean. The problem is that “they can all be characterised as remote or difficult, that translates to expensive,” Mr Lodge said. Most of these places need an oil price of above

$60 to work, and we don’t expect to see that again for a few years. “The decisions for exploring into those areas were made when oil prices were relatively high. [Now] we are in a different position,” Mr Lodge said. And if you find oil and gas in a place where it is too expensive to produce, you are not generating much value for your company. Thinking back to 2000, a time of similar oil prices to now, the industry could make money and find oil. It had lower costs and was working in less extreme environments. And the governmental regimes were more lenient than they are now. But when the oil price went up, “we went a little bit wild,” he said. Enormous sums were spent on exploration, and there were some huge discoveries. But it turns out not to make much returns for investors, or mean you can add reserves to your books, if it can’t be produced at today’s oil price. You could say that the period of high oil prices “wasn’t necessarily good for the industry as a whole,” he said. Some new discoveries . work. For example, ENI believes it can produce from its Zohr gas discovery offshore Egypt at less than $30 per barrel equivalent. It helps that there is already infrastructure there, including a LNG plant. “Essentially it’s a big tie-back going into an established LNG [operation]. Therefore they can make a profit,” he said. In East Africa, Tullow has stated they can make their operations work at $24 a bar-

Report Notes High resolution videos (showing slides), and pdfs of most of the presentations, can be downloaded from the conference web page www.findingpetroleum.com/event/beadb.aspx The conference also included a talk from Andrew Lavender, head of consultancy Landmark Exploration Insights on Prospectivity screening of exploration frontiers – from global to play scale (not included in this report).

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

3

Finding New Exploration Ideas rel, although StrategicFit’s analysis estimates that the oil price needs to be a “bit higher” to move the oil from where it is in Uganda to the market. But all other new discoveries will be very difficult to make work, he said. Perhaps we got the metrics wrong. Since 2010, companies were focussed on their finding costs per barrel, not the overall value proposition, he said. Investors were starting to lose patience with the oil and gas industry even before the oil price slumped, he said. Today, oil companies have changed their targets and have massively reduced capital budgets. Average annual discoveries have dropped from 30bn barrels in 2014 to 2.8bn now. One audience member commented that there have been industry analysis showing that the ‘success rate’ in exploration is 30 per cent, and ‘commercial success’ is just 5 per cent – with only one

4

commercial oil discovery in 2015, Exxon’s Liza well offshore Guyana, which was not in a mature field.

Solutions So how can the industry improve how it does exploration? Explorers will probably have to put more emphasis on mature basins rather than frontier basins, he said. Companies will have to think hard about how they fill the skills gap, with older experts retiring and fewer new experts developing. There should be more collaboration in exploration. “We like to talk about it, but we very rarely do it,” Mr Lodge said. “Sharing data, sharing knowledge, making investment collectively.” There is more that governments can do, for example the tax breaks for exploration drilling which Norway introduced in the mid-1990s worked, he said. “It brought in exploration. It causes a lot of bad exploration, but out of it came a lot of great big resources.”

Governments should also make more data available. “Australia is a good example of that, making more data freely available. We can all go in collectively and make some new ideas.” Governments can also be more flexible about licenses, and “not be so dramatic about that major change from exploration to development,” he said. “We’re starting to see that.” Perhaps we will see more national oil companies doing what the Nigerian National Petroleum Corporation has done, doing frontier exploration and drilling themselves, if private companies are not willing to do it. Once they have proven the basin they can get more companies interested. For the oil and gas industry overall, the shortfall in supply might not happen for 10 years, he said. So there might not be pressure to spend more on exploration over the next 5 years. “It is going to be a difficult period certainly in the next 5 years,” he said.

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas

Ian Jack – lessons from 1986 Much of what is currently happening in the industry also happened in 1986, said Ian Jack, a former distinguished advisor at BP. So does this help us predict the future? One of the few successful oil and gas predictions was by Shell geophysicist M King Hubbert, who proposed in 1956 that US oil production would peak in 1970. “Nobody paid any attention,” Mr Jack said. But US oil production did peak in the 1970s and “this spawned large numbers of people predicting peak oil,”.

Interpreting a recent prediction by Bernstein, more GDP means you have more money to spend, which could result in a doubling of air passenger miles, cars, trucks, and seaborne trade.

As reported in The Times on January 18, 2008, oil and gas research organisation CERA made a prediction that we weren’t running out of oil after all, there’s lots of oil and oil output will continue to rise for the next decade. Again in the Times, one week later, Shell’s then CEO Jeroen van der Veer was reported saying that he feared an oil shortage in 7 years, with demand outstripping supply. But of course by 2015 the oil price had crashed and Shell was cutting spending, anticipating (The Times June 8th 2016) that oil prices might remain “lower forever”.

Predictions Looking at current predictions from oil majors, ExxonMobil is saying that population is going up, and GDP will “more than double between now and 2040. This will all drive much more energy demand.”

But can we make predictions on the future based on what happened in 1986?

Just looking at a flight tracker snapshot map makes it clear that the richer an area, the more aeroplanes are in the sky above it. So there could be as many airlines in the skies in developing regions as there are in Europe now.

Much of what is happening today was also happening in the mid-1980s, including continued growth in population, GDP and energy demand, and oil companies starting to worry about reserves and growth.

ExxonMobil predicts that oil will remain the world’s primary fuel, with 95 per cent of transport needs still met by oil in 2040. Gasoline demand will flatten as engines get more efficient, but there will be big rises in demand for diesel and jet fuel.

Then, as now, there was an increased attention to enhanced oil recovery. Older reservoirs were being depleted, and newer reservoirs were smaller. Big cost reductions were taking place, with big layoffs, consolidations and mergers, But also the introduction of new technology. Then, as now, the average reservoir recovery factor was still around 35 per cent.

This all leads to about a 25 per cent growth in energy demand between now and 2040, according to ExxonMobil’s prediction.

Following Hubbert’s prediction, a forecast was made in 2003 by Colin Campbell and Jean Laherèrre, that oil production would peak in 2004. “Did it happen? No, it didn’t,” he said.

Learning from 1986

Meanwhile Statoil looks at the future with several options, such as a ‘renewal’ scenario, in which countries reach their CO2 targets and collaborate, and a ‘rivalry’ scenario which is more like a continuation of past and current practise. Although both scenarios lead to a similar trajectory for energy use up to around 2025. The US Energy Information Administration is predicting a 48 per cent increase in energy consumption up to 2040, which works out at 1.4 per cent a year. There has been a statement from Statoil saying that “even if demand growth is moderate, the decline from existing sources of oil and gas virtually guarantees a future gap between demand and supply if investments don’t pick up.” As an illustration, oil and gas discoveries during 2016 up to the date of the conference, in September 2016, “are a week’s supply for the planet,” he said. So in other words, a future oil price spike is probably inevitable, Mr Jack said.

Some things are different – like US unconventional oil and gas production – although the US is still importing a large amount of its oil. There is more pressure from environmentalists today. Another issue different between now and 1986 is the drive for energy efficiency. “Norway is considering making it much more difficult to drive or purchase any petrol or diesel car from 2025. Holland is talking about doing the same thing. You can expect big increases in the number of electric cars,” he said. But altogether, Mr Jack predicts that “this downturn will end much the same as the previous one in the 1980s,” he said. Mr Jack showed a graph of seismic expenditure from 1980 to the present, and the oil price, both in inflation adjusted terms. With the 1986 downturn, increased spending in seismic surveys started again four years after the start of the downturn, and was back to where it was before, six years later. However the oil price did not recover, it stayed low until around 2006. So it was not the oil price driving spend. Per-

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

5

Finding New Exploration Ideas haps it was more oil companies wanting to get more reserves on their books, he suggested.

crossline direction, which can be used to make a seismic cube.

“So the oil price might carry on bumping around with low prices for a while, you’d better get used to it,” he said. Shell might have been right! “But my prediction is that seismic spend will build again within 2 years from now.”

Examples of other “left field” arrivals are:

Technology Something else which usually happens after a downturn is a big drive for new technology. We might see a big increase in spending in seismic technology. “The best seismic images that we get now are irresistible,” he said. We might also see research and development departments being more active, and new technologies arriving from the ‘left field’. Something similar happened in the 1980s, with seismic companies investing almost immediately in larger and better boats with more cables. “We said goodbye to single cable boats in the North Sea at the time. We went to 4, 6, 8, and 12 cables.” Also, “we realised we had been doing these surveys year after year along a single azimuth,” he said. There was a move to multi-azimuth surveys, such as with vessels in overlapping circles or with ocean-bottom recording. Also there was better technology for streamer control. So perhaps we will see a similar move to new seismic technology at the end of this downturn. We will see more use of ‘blended sources’. This has been done on land for several years, with recording from a number of independent vibrators simultaneously. There will be more use of it in the marine environment. We may see more use of broadband seismic surveys, with recording additional bandwidth at low and high frequencies. “I think we have to credit PGS for getting this into the marine streamer market,” he said. WesternGeco has moved a step forward, where it installs an additional sensor in a

6

Seismic company CGG recently launched TopSeis, disengaging the seismic source and the seismic vessel. “That gives you a much better azimuth sampling at the near offsets,” he said. “That’s a step forward.” There had previously been a trend towards more ocean bottom recording, for example with fibre optic permanent reservoir monitoring systems. But now we may see more ‘nodes’, devices which are temporarily left on the seabed. “I think we have to give Fairfield Nodal credit for stimulating this market,” he said. The first nodal surveys had a few hundred nodes, in shallow water only, which were placed with ropes. For deeper surveys, you can place and retrieve them using Remotely Operated Underwater Vehicles (ROV) which can be very expensive. “But I do happen to know, this year, there has been an ocean bottom survey which cost 10 per cent what it would have cost in 2010. The project uses 9000 nodes and blended sources,” he said. Norwegian company inApril AS (www. inapril.com) is developing a 10,000 node offshore system, where the nodes can be launched from a vessel. “These numbers will probably become the norm,” he said. But it gets very interesting when we start to talk about robotics. “We’ll start with flying nodes in the marine environment, with a device that has its own propulsion system, he said. The vessel can drop many nodes into the water in a basket, so they are close to where they need to be, and then the nodes fly themselves through the water into their recording positions. They communicate acoustically for positioning and retrieval. Another recent arrival from the company Kietta consists of autonomous (drone) vessels on the surface connected to seismic recording cables. You could have say 10 cables, 8 km long, each with a drone vessel at each end, keeping the cables tensioned. The cables could be shallow or tens of metres deep.

“The drones can hold the cables steady while the source boat goes transversely, or the entire patch could move itself slowly.” Another possibility is SoundSabre -- a recording with multicomponent receivers buried in the ground as vertical arrays, connected to seabed nodes, spaced flexibly according to requirements. This would be much cheaper than a permanent reservoir monitoring system, because drilling site-survey boreholes offshore is routine and less expensive than digging long trenches. They would also be recording microseismic energy. There could also be interesting developments in seismic sources, including from Chelminsky Technology, a company which developed the first airgun in the 1970s. It is developing a “tuned” pulse source, a low frequency low pressure airgun system. “It gives another octave lower than the current spectrum. Because it is lower pressure it is more durable, repeatable and predictable.” The device doesn’t generate frequencies above 150 Hz, and can be a “plug-in” replacement for existing airgun systems.

Jobs In 1986, nearly all geophysics students ended up finding jobs in the City of London, since there were no oil and gas jobs available. However this year, oil and gas companies are still recruiting in geophysics, but on a smaller scale, ‘taking the best of the best’ and often putting people on a fast track. This can lead to graduates who have been in the industry for 4-5 years not getting opportunities, and so leaving the industry for related industries such as mining. “That’s the reality of the moment,” he said. One audience member suggested that four or five young graduates might be able to make a similar contribution to the industry as one senior executive, at much less cost. “We are paying people £200,000 a year,” he said.  “I think we underestimate the capacity of young people to do what we do.” You can watch Ian Jack’s talk online at

http://www.findingpetroleum.com/event/beadb. aspx

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas

Bain – exploration in a different way Oil companies are used to seeing the world in terms of scarcity of hydrocarbons – now they need to switch to seeing it as abundance, said Peter Parry, leader of the oil and gas division of Bain & Co In conversations with people from international oil companies, Bain staff talk about the change of moving from a world of scarcity of hydrocarbons to one of abundance, said Peter Parry, partner and leader of the oil and gas division of management consulting company Bain & Co. “That world of abundance may not last forever, but we’re in a world of abundance today.” “We support many major IOCs in their strategic thinking and development of their business,” he said. “If we don’t think about the future in a very different way we may be somewhat stuck.” Companies already have a backlog of projects they are ready to start once the investment environment becomes more favourable. So the question arises of whether you even need exploration. “If we think in a traditional way it won’t [help], it will add to the back of the train what is already overcrowded service,” he said. “I think the context within which the conversations in the oil and gas industry are taking place are changing,” he said.

from where you started off.” Today, ‘megaprojects’ are really out of favour, although you can question if they were ever in favour, he said. The really great projects in the industry’s history are usually projects which came together quickly with a small group of partners and began to deliver on a simple objective quickly, he said. By comparison, “mega projects are a real struggle. There may be some but there won’t be many in a few years to come,” he said. There have been many recent technical developments and other breakthroughs which mean that projects can be turned around much faster, he said. But still, the industry is not making enough money. To be sustainable, “an industry needs to return 10-15 per cent return on capital to investors.” “Companies didn’t make money in Q1 of 2016, Q2 of 2016, or throughout 2015.” It isn’t necessarily the fall in the oil price which put exploration in a difficult position. “It was the prior decade that put it in a difficult position,” he said.

Future scenarios Many people in the industry are talking about the oil price, but it might be more helpful to think about the “different worlds we may have to survive and thrive in,” he said.

“It is not just about the oil price changing, not just about sources of supply changing, not just about low returns to investors [but] it is the development of an industry which has been, dare I say, rather sluggish to develop itself over time. The speed of change is probably our biggest problem.”

One world could be the ‘new normal’ world, where the oil price stays below $50 for a long time.

“The first thing is to recognise why you need to change and have some idea of what the destination might look like, and how different

Or there could be a return to the old paradigm (but not the old oil price), with $75 to $85 prices.

Another world could be where there is some disruption to supply, which means that the oil price recovers a little to $60-$70.

“These are the scenarios that major investors in the industry are working around,” he said. Of course the gigantic oil and gas stocks need to be ‘bled down’ before the market comes back to equilibrium, he said. There could be other changes, driven by a major non-technical disruption, such as a political disruption, he said. “The question is how do you survive and thrive under those conditions.”

Exploration and risk Exploration’s role in the wider industry, “as far as I understand, is about de-risking things, before we invest serious amounts of money,” he said. “Not necessarily about finding hydrocarbons”. Oil and gas explorers “tend to rely, I would suggest, on a technical story rather than a business story. That technical story may be very exciting but it has to be underpinned by a clear business rationale otherwise this part of the industry has its funding removed.” Exploration spend “is largely discretionary. We tend to dial it up and down very fast. If the returns are not there we dial it down.” The parts of the E&P industry not involved in exploration has seen headcount reductions of 10 to 40 per cent, capex down 25 per cent, two years in a row, and operating costs going down 12 per cent every year from 2014 to 2016. “Not a lot of that comes from really different ways of working,” he said. As an example, one company said they had managed to cut operation costs mainly through exchange rate changes and lower rates, he said. Companies are also moving to shorter time cycles, of 1-2 years rather than 3-5 years. Explorers will need to follow. “Explorers really don’t like short cycle,” he said. But “I’d rather hope every explorer in the industry

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

7

Finding New Exploration Ideas loves short cycle in 2016 and beyond, because that is the name of the game. It is not 5-7 year maturation. It’s going to be 1-2 years to push your projects through, to get ideas into reality and funding.” “Moving from long to short cycle is a really big shift in the way people think, the way people do their work, the speed they can bring opportunities to bear,” he said. “If you’re in the long cycle business that’s going to be really tough.” “But, the best players in the industry are going to be driving short cycle.” Other areas of the industry will go through a similar change, for example the LNG industry. “There’s a lagging effect still working through energy system,” he said.

The value of exploration To try to calculate the value of exploration, consider that in the 10 years before the oil price crash, the biggest oil companies in the world, together, added 80bn barrels of proven reserves, through extensions and discoveries. 80 billion barrels sounds like a big number, but it was actually only replacing 63 per cent of the production of these companies, he said. “Proven reserves” is the only classification of resources which matters from a business perspective, he said. Meanwhile around $400bn was spent on exploration over the 10 years, including $92bn in 2013 alone, when the most money was spent. There is also another ‘bucket’ of exploration expenditure on company’s profit and loss sheets, the “unproven property acquisition costs”, when money was spent on exploration which did not directly lead to more reserves, such as acquiring licenses, or acquiring a company with unproven assets. This adds up to $720bn “in a bucket I would describe as exploration”. If you divide in the additions to reserves, you end with a finding cost of $9 per barrel of oil equivalent over the 10 years. “It sounds a good number in a world where

8

the oil price is significantly above $9,” he said. But “there’s a lot of gas in there, and it contains a lot of stuff which is taking a long time to develop.” Another way to look at the cost of exploration is to look at money which is ‘written off’ in exploration, or spend which did not provide a viable exploration asset. About 70 per cent of exploration spend is ‘expensed’ in this way, he said. This spend is kept on the balance sheet as unproductive capital – the company has spent money on something which is not providing anything useful in balance sheet terms. “It is pretty hard to do 10-15 per cent returns [to investors] when you have a large chunk of unproductive capital,” he said. So altogether you can say that the finding costs are about $9 a barrel and the success rate is about 30 per cent. The industry pays a lot of attention to ‘activity levels’, how many seismic ships, rigs and people are in operation. But the value of this metric is questionable. As an example consider that the number of rigs in the US shale industry reduced from 1600 in October 2014 to 416 units in early September 2015. But oil and gas experts say that the industry might only need 700 to 800 rigs to get to the previous level of production, he said, due to advances in technology and know-how, and more effective work schedules.

How to explore in 2016 Exploration spend typically tracks the oil price, and so we might shortly see exploration spend similar to what it was in 2006, when the oil price was between $50 and $60. But we can’t spend money now the same way as we did in 2006 – because the $22bn the industry spent in 2006 did not turn out to create much value. Companies will need to think more clearly about what they are actually trying to do, whether find more hydrocarbons, or commercialise hydrocarbons they have already found,

accelerating them into production. They will need to think about whether they want to follow conventional paths or try to do something different. Companies will also have to consider what risk equation they are working with. “I’ve done many exploration strategies in my career - we always have a fascinating debate about what do we mean by exploration risk.” “Exploration risk in this case is about funding, can I get funding, and does it make sense to put money to work, is this going to deliver me a good solid outcome.” If we can get that description of risk right, “we’ll put resources to work in the right places, attract talent in the right way,” he said. But “in order to get there, there’s a lot of sorting out to do.” Many companies are carrying portfolios of resources as a result of the past 10-20 years’ work, which have “very little to do with that short cycle, rapid turnaround business.” So now companies will need to “get out of things that don’t make sense.” The industry should be looking at how it organises itself and works with other companies. “Almost all exploration is carried out in partnerships. It needs rethinking. The best explorers in this industry have gone the other way, taken on the risk almost entirely themselves. Many people are talking about different ways to structure the industry, with different relationships between investors and suppliers, getting away from day rates, lowest cost wins mindset, he said. But, “that’s a concept embraced by everybody but applied by nobody. It’s part of the discussion but I’m not sure we can wait for that.” Perhaps reservoir appraisal should be part of the projects and development part of the company. “It is the same business,” he said. “We’ve got to get in appraisal in a much more active way. I’m talking about something much more integrated, much more focussed.” “Exploration has traditionally been looking for new stuff in technically scary places. It’s now switching to less scary places.”

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas “The bottom line is exploration has to be a competitive source of new production,” he said. “If it is, there’s an exciting future for exploration. If it isn’t, we’ll be pushing against the abundant resource base we already know about.” “The future is much more about doing things much better and integrating more closely with developments and production operations, and this shift to the short cycle.” “Speed is the essence. Not reckless speed, but getting pace into exploration, if you look into

other industries what they’ve been able to do - they get speed into their system.” Andrew Lodge of StrategicFit, event chairman, noted that sometimes the organisational structure of companies seems almost designed to work against the idea of moving resources into proven reserves. “Have you seen any evidence of the industry changing its practise to allow efficiency?” he asked.

“People are going for their 2017 budgets, still presenting resource pictures,” he said. “Very few companies are presenting programs with accelerating bookings as the fundamental story of their 2017 program.” You can watch Peter Parry’s talk online at

http://www.findingpetroleum.com/event/beadb. aspx

Mr Parry answered “70 per cent no, 30 per cent yes.”

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

9

Finding New Exploration Ideas

Spectrum - a closer look at well results using seismic data The oil and gas industry has a herd instinct of going towards the same places and running away from the same places. Maybe one way to be successful in exploration is to look harder at well reports and integrating the results with seismic data, said Spectrum’s Karyna Rodriguez The industry can be very herd-like, chasing to get into an area after there has been a successful well, or abandoning an area quickly after a dry well, said Karyna Rodriguez, director of geoscience with seismic company Spectrum.

of reality to seismic interpretation,” she said. Spectrum does this. It has a vast database of seismic data from the whole world, and every time an oil company manages to drill a new well, Spectrum staff look at the seismic data they have which is closest to it, and try to understand the target. They also try to find on trend analogues or similar targets in other basins. By integrating well results back with seismic, you can generate new ideas, she said.

Liza

Perhaps the industry walks away from many opportunities this way, she said. Ms Rodriguez previously worked at Mexican oil and gas company PEMEX, where she was involved in analysing post drill well results for about 300 wells, in a team including geophysicists, geologists and drillers. “I was surprised to see that a lot of well classifications didn’t match what [actually] happened with the well,” she said. The well classification can be a result of a fight between geology and operations as to who is to blame for a poorly performing well. For example drillers will claim that a well failed due to geology, but actually it failed due to formation damage while drilling. “From that moment on, I decided I will never trust a well classification. I will never condemn an area that is full of dry wells. I will look and look again. And it has paid off,” she said. Also, once a well has been drilled, explorers should not see that their work is over. They should go back and evaluate the well results and feed that back into the cycle. “The well is the one control point that can bring a little bit

10

One interesting recent discovery is the Liza-1 well, a discovery made by ExxonMobil, offshore Guyana, which connects to a reservoir with 1.4bn barrels of oil. Spectrum has some seismic data which was shot close to the well. “It’s quite a complex section with a lot of sequence boundaries,” she said. The geological ‘context’ is tectonic evolution, with the separation of North and South America. Also when Africa pulled away from South America, and the anticlockwise rotation of Africa. There was a major transgression, where sea level rose above the level of the land. It all makes for a very interesting geological picture. “It’s quite complex and subtle,” she said. Spectrum has made a quiz out of Liza, showing geologists different places where Liza might be and asking them to guess the target. One sequence has high amplitude anomalies; a second looks a “little more transparent but with interesting amplitude anomalies;” a third is “a very eroded sequence with a lot of high amplitude anomalies.” The right answer is sequence two. But the really interesting question is what Liza can tell us, she said.

Another well was drilled nearby, called “SkipJack” which was dry, although the announcement specifically says it failed to find commercial hydrocarbons. “This is why the well classification is so delicate, we shouldn’t go with the first thing we hear,” she said. Ms Rodriguez said she thinks a bigger contribution Liza made was to help Exxon “derisk” the petroleum system in the area. It is a very complex basin, with many play types and potential prospectivity. On the seismic picture, Ms Rodriguez can see “one of my main play types - an amplitude supported three way closure and stratigraphic pinch out.” “Having worked in Mexico with hundreds of amplitude prospects, [I can say] that conformance with structure is one key characteristic which points to the amplitude probably being an indicator of hydrocarbons.” The basin has been classified as “second most prospective” by the US Geological Survey. “Having done our own evaluation we come up with 24 bbo (billion barrels of oil), so 22.5 yet to find. These are not small numbers,” she said.

South America Ms Rodriguez then turned to South America, where Petrobras announced the Poco Verde discovery in the Sergipe basin in 2015. A number of other discoveries have been made there since 2010. The discovery extended the area of the oil province. “It took a lot of boldness, Petrobras is quite an expert in bold exploration,” she said. “There’s 3bn barrels of oil in place between all these different discoveries.”

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas Looking at Poco Verde in more detail, we can ask “have we really finished drilling here or is there anything else to find?” Spectrum has a lot of 2D data of the region. The well can be shown on Post Stack Time Migration (PSTM) 2D data. With a little post stack processing, “an amplitude anomaly really stands out,” she said. “We do know there is a dry well here. When you look in detail, you can see there’s a change in facies. We do have to be careful, not all amplitude anomalies are going to yield hydrocarbons.” It might be possible to use the well data to calibrate the seismic. “20 years ago if I’d opened up a seismic line in this basin I would have said ‘no, there’s nothing here,’” she said. But today, “every time you open up a seismic line from Sergipe, there are amplitude anomalies exactly like the amplitude anomalies of the discoveries, a lot of them in open acreage.”

Gavea Ms Rodriguez then turned to the Gavea discovery in the Campos basin offshore Brazil. “Gavea helps us calibrate even further and gives us an even deeper understanding of this presalt play,” she said.

tensions and we do see possibility of similar structures.” “There are some possible structures here in the presalt that repeats itself time and time again when you look below unsuccessful post salt wells.” Just beyond the salt dome province, we have identified actual source rock draping over these basement highs. Then we have some additional prospectivity which has not been explored.”

Raya Another interesting well is the Raya well, drilled in 3480m water, offshore Uruguay, by a Total led consortium. “Total believe they had this giant stratigraphic play, they thought they could see a flatspot. A lot of geophysical derisking done on this,” she said. The official conclusion of the drilling from the oil ministry was that the well was dry, with an announcement stating ‘it did not deliver the results expected by Uruguay’. “So that left a lot of questions open to me. What were the results that Uruguay didn’t get?”

Total farmed into a block nearby soon afterwards, and put a lot of effort testing the well data, she said. “So this region is far from dead.” Spectrum has data from across the Atlantic in Namibia, with Aptian source rock which has a “semi-transparent, low frequency seismic character”. The same type of character can be seen in the seismic in Uruguay. There are also oil seeps in the region. “What we believe is happening, we’ve got the Aptian source rock, that is mature, the oil is migrating up,” she said. “We were hoping that Total would have seen the deeper basin floor fans over the Aptian source rock and would have drilled down to this.” “So we think we have the largest undrilled prospect in the world. This whole area is full of high amplitude anomalies, very low risk.”

You can watch Karyna Rodriguez’s talk online at

http://www.findingpetroleum.com/event/beadb. aspx

Spectrum has put together a “composite arbitrary” line of seismic running North West to South East, in order to “try to show the importance of using the right kind of seismic,” she said. “You can see the presalt structure associated with how the carbonates are growing. You see the salt above which forms the seal.” “Now our task, to extend this play out of here, would be to find more of these structures.” “Where we go into publicly available data, we can no longer see a structure. So if I had [just] this data set I would not be able to see anything.” “So I have replaced it with a nearby line from Spectrum dataset. You can see we do see ex

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

11

Finding New Exploration Ideas

Azinor Catalyst – significant opportunities remain in the North Sea Seacrest Capital backed UK exploration company Azinor Catalyst believes there is money to be made from North Sea exploration – and the commercial success rates are higher than average for the industry. Analysis shows that the chance of commercial success from frontier drilling turns out to be “actually quite low, 15 to 20 per cent in frontier regions,” said Henry Morris, Technical Director of UK exploration company Azinor Catalyst, “whereas Hannon Westwood noted the commercial success rate for UK offshore waters last year turned out to be 46 per cent. We have also made significant progress in controlling costs,” he said. In the UK North Sea, 165m barrels were found through exploration, and a further 100m barrels progressed through appraisal in the last year. Whilst these volumes are not huge, it is a move in the right direction, chasing quality rather than quantity, and we do see some serious potential still remaining

wells that have been drilled offshore UK and you have quantifiable exploration which is low risk and actually more like appraisal rather than wildcat, high risk exploration.  Another advantage of working with mature fields like the North Sea is that the cycle time from looking for oil to producing is shorter. Today, “investors want returns, they aren’t willing to wait,” he said. “In a shallow water mature basin such as the North Sea, it’s a lot easier to reduce your lead time, we don’t have to be looking 10 years ahead,” he said. For example, you can “do an easy tie-back to existing infrastructure which is already in place.” Analysis by Richmond Energy Partners shows that from 2012 to 2014, companies were still more interested in frontier exploration rather than mature basins. This was based on the number of wells drilled by the top 40 companies in the sector classified as frontier, emerging, maturing and mature during that time.

Geologists might find it more attractive to spend their time looking for a new ‘elephant’ oilfield in frontier environments. But companies and investors are more interested in lower risk, high value exploration, and the industry has made a shift towards this over the past 2 years - this is what the North Sea has to offer. “Investors are risk averse in a low oil price environment. That steers you back to geology that you know and oil that you can see, not high risk untested frontier geology in deepwaters,” he said. For example, the North Sea has recently been covered by latest generation broadband seismic, this gives the regional picture whilst providing detailed insight and understanding of the subsurface. Integrate this with the 14,000

12

Sea,” he said. Now semi-subs and jackups are available for around $100,000 a day. “That’s a material decline [and representative of declines across the oil service sector], and underpins why we are going to be able to drill wells in the nearterm.” This means that the average cost of wells has gone down by around 50 per cent, to a £20m average cost per well, this includes high temperature, high pressure wells with some shallower more conventional prospects which could now be drilled for less than £8m (we use £ above, we should be consistent). This means that investors can retain stronger equity positions and get more for their investment.  Also, the fiscal terms in the UK are much improved and more attractive. “The government has reacted to make sure when we produce hydrocarbons we’re in a competitive environment,” he said. 

But after the oil price dropped, interest in frontier environments also dropped and more wells were drilled in mature basins. “This is a trend we expect to see continue,” he said.

There is an estimated 2 to 6bn barrels of oil ‘yet to find’ offshore UK, he said. If “we’ve got the right methodology and the right techniques, we can find the remaining hydrocarbons”. 

“Whilst we’re generally seeing less wells, the chances of success is increasing.”

Azinor Catalyst

Perhaps unexpectedly, more hydrocarbons were found in the UK Continental Shelf than the Norwegian Continental Shelf in 2015, he said and the finding costs in Norway have been increasing (due less oil being found and higher drilling costs). But in the UK, “our finding costs have in fact dropped dramatically,” he said.

Azinor Catalyst was founded by Henry Morris and Nick Terrell, both of whom have over 10 years’ experience working as explorers in the UK.

So overall you could say, “in terms of bang for your buck, the UK is the place to be.”

The company has acquired 15 licenses in different areas of the UK Continental Shelf, and is working very hard to ‘de-risk’ them before planning drilling.

Drilling rig rates have come down enormously. Before the crash, semi-submersible rig rentals were over $400,000 a day. “That was extortionate, and over-inflated prices are essentially what’s been killing the North

The business is backed by private equity group Seacrest Capital, which has six exploration portfolio companies in total.

The license blocks include 4 discoveries, 19 prospects and 11 leads.

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding New Exploration Ideas Azinor Catalyst is more interested in oil than gas. Technically, the company has invested upfront in high quality seismic, including over 26,000 km2 of broadband seismic and 110,000 km2 of 3D. This huge bank of seismic data is probably bigger and better than most majors and should help de-risk prospects, leading to a quantitative estimate of how much oil there might be.  One prospect, Partridge, on one of the company’s license blocks, has 120-260m barrels at just over 2000m, strong direct hydrocarbon indicators and a chance of success estimated at 40 per cent. Due to the shallow depth of the

target and low rig rates, the prospect should be able to be drilled for less than £8m; another equally interesting opportunity, Hinson, has 126-255m barrels with chances estimated at 34 per cent. So lots of potential still remains.

upfront investment by Azinor Catalyst into a vast seismic database along with their more quantitative approach will give them a new perspective and insight into the remaining potential of the North Sea. 

Importantly, these prospects are close to other infrastructure, which should make it easier to get the oil to market.

The North Sea has the potential ingredients and Azinor Catalyst have the right tools, so it will be an interesting company to watch in the near future.

The North Sea’s potential is known, as a wealth of prospects have already been mapped out by a range of companies, numerous times in the past. All too often, unfortunately, the use of poor quality seismic has meant that risk levels have remained high and potential doesn’t mature. However, the

You can watch Henry Morris’ talk online at

http://www.findingpetroleum.com/event/beadb. aspx

David Bamford - exploration is a business The exploration function of oil companies is a business – and needs to focus on making sure it makes returns, said David Bamford, a former head of exploration with BP “In the past, exploration has been an activity, or a discipline, or indeed a lifestyle choice,” said David Bamford, a former head of exploration with BP.

“If you believe successful exploration is a business, then things have to change,” he said. Oil majors are indicating that they would like exploration to be done in a different way. “When [BP CEO] Bob Dudley stands up and says, ‘big is not always better, small is beautiful,’ he’s sending a message. When exploration is moved from being a business to being a technical function again, he is sending a message.” Some European oil majors are saying, they have billions of barrels of undeveloped discoveries, “we do not need this high risk, low success rate, dodgy frontier stuff”.

“But actually, it’s a business.” “I think that’s what our US colleagues have demonstrated over the last 6-8 years. There has been one spectacular success over the last 6 to 8 years by people who would call themselves explorers, that’s the folk that have been working on US shale gas and shale oil.” “There was a moment 2-3 years ago when people working in deepwater would say, ‘that US thing, it’s just a manufacturing process, it’s not real work,’ he said. “But it is [real work], and it has been spectacularly successful.”

“They are talking about exploiting discovered or extremely low risk accumulations. They will drag the industry with them.” Estimates vary about how many ‘fallow’ discoveries there are in the North Sea (which are known about but not being produced), ranging from 90 to 400. That is “arguably a significant base in a mature province,” he said. A similar story is heard about other mature provinces around the world. Exploiting known accumulations “is going to work for a lot of companies,” he said. “In 3-5 years’ time, some companies will be very successful in pursuing this.”

In a few years, oil majors might decide that they want to spend money to increase their reserves. They may have lost their in-house exploration expertise, and be keen to buy a company which has found oil and gas. So there could be a business opportunity for companies to find oil and gas now, and sell their businesses in a few years. The oil price is expected to stay low, so reserves will only be worth buying if they can be developed at low cost. That probably means more onshore operations rather than offshore, where virtually everything is cheaper. One audience member asked if perhaps most of the people with exploration expertise and ability to take exploration risks were themselves becoming much older, and so less inclined to take risks. “I think it’s certainly true that you can see a shift in risk appetite of people becoming senior executives in the majors,” Mr Bamford replied. “More and more engineers running companies, more people with an accounting background, and less risk orientation.” “People who are risk takers, for example working in Kurdistan, uniformly get a bad press,” he said. “The other thing that disturbs me is seeing that young folk coming into the system are

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

13

Finding New Exploration Ideas indeed more risk averse. But it is a sort of learned challenge.”

Infrastructure A major economic driver for exploration is the closeness to existing infrastructure, which makes it faster to get the first oil and gas to market. So it could be called “infrastructure led exploration”. Following on from this, it might make sense for oil majors to emphasise maintaining control of the infrastructure, so they can make money while other companies do the more risky drilling activity around, he said. One audience member, who was formerly in charge of the North Sea portfolio for a small oil and gas company, commented that UK oil majors have been focused on maintaining control of infrastructure for decades, and have stopped smaller oil companies being able to do anything. “We were completely stymied. Unless we had access to that infrastructure, none of the ideas we might have got any traction,” he said. Mr Bamford replied that a few decades ago he had been working for an oil major and seen it play hardball with independents, saying things like “didn’t we tell you we have 3 months maintenance to do so we can’ take your oil.”

Company overheads Operating at low cost means taking a different approach to company overheads. Mr Bamford gave an example of a company who had a number of projects which they thought would work at $40 a barrel. But an analyst calculated that once they had added company overheads such as executive salaries, the company would need an oil price of $53 a barrel to make them work. “You need a company with a low top and a broad reach, that doesn’t have that problem,” he said. Perhaps in future geoscientists will not work in a standalone exploration team, but be part of a broader ‘exploitation’ team, which could be called a ‘project’ team or a ‘development’ team. This could be a way to keep business administrative costs down. Oil companies have been exploiting their cost leverage with suppliers, to the point where prices for seismic surveys, drilling and well materials are down by 50 per cent in some places. Prices have dropped in many other areas such as helicopter maintenance and scaffolding. But many companies, including in the UK, still have an ‘extraordinary’ general and administrative costs, “given the oil price,” he said. It might make sense to become a ‘regional scale exploration’ company, maintaining a wide portfolio of opportunities in a certain

14

region, so the overhead of running the company is spread over as many assets as possible.

Digital If we are going to do more onshore exploration, we should make more use of all the digital technology which can help us, including seeps data, gravity, rock data (stratigraphy, sedimentology, structural geology, geochemistry, petrophysics) and then find ways to integrate all of this together. “There is a prize for the company that does that, he said. The onshore technology suite can be quite different to offshore, where the main technology is marine seismic, he said. A recent report by McKinsey on the digital revolution in the oil and gas industry cited preventative maintenance and better use of seismic data, particularly 4D seismic, as the biggest two areas digital technology will change the industry, he said. Machine learning tools might make it easier for geoscientists to absorb the lessons from the different interpretations, or help work out the best way to make sure an unconventional well turns out profitable taking out the different factors, such as fracture properties or porosity. You can watch David Bamford’s talk online at http://www.findingpetroleum.com/event/

beadb.aspx

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

Finding FindingNew newExploration exploration Ideas ideas

Finding Petroleum: Finding New Exploration Ideas The Geological Society, London, September 20, 2016 Attendee List Christian Bukovics, Partner, Adamant Ventures Duncan McSorland, Business Development Manager, Aker Solutions Julian Moore, Technical Director, APT UK Christian Richards, Sales Manager, AustinBridgeporth Henry Morris, Executive Director, Azinor Catalyst Alice Carroll, Marketing Manager, Azinor Catalyst Suzanne Corfield, Senior Advisor, Bain & Company Peter Parry, Partner, Bain & Company John Argent, Global New Ventures Geologist, BG Group Philip Leijten, Front End Development manager, BG Group James Andrew, Busines Development Mgr EAME, CGG George Steel, Director, Connect2 LLC Ian Jack, Mostly Retired, Consultant Eleanor Jack, Consultant Maria Mackey, Energy Sector, Cray UK Chad Barnes, Upstream Analyst, Energy Industries Council

Michael Doherty, Chairman, Impact Oil & Gas Limited

Peter Elliott, Consultant, PVE Consulting Ltd Krisztina Kovacs, Manager, PwC Deals Strategy O&G, PWC

Anthony Younis, Exploration Manager, Impact Oil and Gas Ben Dewhirst, Geologist, Independent Resources plc Mark Jones, Business Development Manager E&A, INTECSEA Jonathan Brown, Geoscientist, JB Geosciences John Griffith, Upstream Advisor, JJG Consulting International Ltd

Richard McIntyre, Sales Manager, Finding Petroleum Avinga Pallangyo, Conference Producer, Finding Petroleum Drew Powell, Global Director-Operations, Gaffney, Cline & Associates Jim House, Director, GeoSeis Ltd.

Morten Lindback, Analyst, Lindback Energy Richard Bootle, Lukoil

Philip Birch, Exploration Manager, Impact Oil & Gas

Kevin Dale, Exploration Advisor, New Ventures, Sasol E & P International

Kai Gruschwitz, Senior Geophysical Advisor, Lukoil

David Webber, Seismic Operations Supervisor, Sceptre Oil & Gas

Brian McCleery, Director, M2C Energy Advisers

Tom Martin, Director, Shikra Consulting

Nina Gray, Managing Director, Major, Lindsey & Africa

Pete Nolan, Exploration Consultant, SHP

Hamish Wilson, CEO, Minus7

Karyna Rodriguez, Director of Geoscience, Spectrum

Neil Hodgson, New Ventures Manager, Spectrum

Mike King, Oil & Gas Manager, NPA Satellite Mapping

Anongporn Intawong, Geoscientist, Spectrum ASA Andrew Lodge, Principal, Strategic Fit, Egdon Resources Vibhusha Raj Sharma, StrategicFit

Mark Robinson, Managing Director - Geoscientist, Oil and Gas Consultancy Steve Pitman, VP Corporate Marketing, PGS Iain Brown, PGS

Jon Ford, Consultant, Tedstone Oil & Gas Daniel Plant, Business Director, Terrabotics John Weston, Tecnical Director, Thalweg Energy Ltd. Nigel Quinton, Director of Exploration, Tower Resources plc Steven McTiernan, Director, Tullow Oil plc.

Kevin Sylvester, Director, Pinnacle Energy Limited

Andrei Belopolsky, Hess

Martin Smith, Business Development Manager, Operations, RPS Energy

Abhi Manerikar, Exploration Director, Sand Hill Petroleum

Andrew Lavender, Head of Consultancy, Landmark Exploration Insights

Frederic Yeterian, Director, Philax Resources (EMEA) Ltd

Norman Hempstead, Director, Hempstead Geophysical Svcs

Robert Stevens, Richmond Energy Partners

Norrie Stanley, Consultant, RPS Energy

Sangeeta Jordan, Researcher, JOGMEC

David Bamford, Director, New Eyes Exploration Ltd

Karl Jeffery, Editor, Finding Petroleum

Mark Redway, Fund Manager, RAB Capital

Paul Strachowski, Seismic QC, RPS Energy

James Dodson, Business Development Director, NEOS

Martin Riddle, Technical Manager, Envoi

Josh King, Analyst, RAB Capital

Peter Jeans, Geologist, PJ Exploration Ltd. Chris Newton, Sales Manager, Polarcus UK Ltd.

Hugh Ebbutt, Independent, Upstream Adviser Steve Bottomley, Director, Upstream Consultants Limited

What did you enjoy most about the event? Ian Jack’s presentation, especially important for me, seeing as I work in seismic crew supervision through RPS Energy. Was particularly interested to hear Ian’s opinion on when the level of activity might increase..... Paul Strachowski (RPS Energy) Ian’s, David’s and the Azinor presentation. As always, it’s a good networking opportunity and I enjoyed meeting old friends again.

The quality of the speakers, their messages, and the Q&A’s following the presentations. Philip Leijten (BG Group)

Interesting and thought provoking presentations.

Networking. The different viewpoints.

Excellent insightful presentations. Steven McTiernan (Tullow Oil plc)

Networking and learning, venue.

The chairing, relaxed nature, sense of honesty and openness.... limited sales pitch which is refreshing....

The talk on Mature Basins and networking.

Good mixture of talks.

Karyna Rodriguez’s presentation.

Finding Petroleum - Special report, Finding New Exploration Ideas, The Geological Society, London, Sep 20, 2016

15

Helping you make quality decisions StrategicFit is a strategy consulting firm specialising in the upstream oil and gas industry. We help companies, licence partnerships and stakeholders make difficult decisions they can be confident in. Through decision analysis, a collaborative strategy process and sector expertise, we’ll give you a clearer way forward.

www.strategicfit.co.uk + 44 (0) 20 7637 0324