From an address at the leadoff session of the European Association of Exploration Geophysicists/European Association of Petroleum Geoscientists convention June 2, 1992, in Paris, The author is Bernard C. Duval, senior vice-president exploration, Total Exploration Production, Paris.
What I would like to accomplish in this article is:
- Describe the current international picture of exploration/production.
- Express the most prominent challenges I see emerging from changing conditions.
- Discuss briefly how the industry can and does answer these challenges.
GEOLOGIC STATUS
First, oil and gas provinces are obviously maturing.
The peak of discoveries in the U.K. North Sea is well past, and if yearly additions still appear more or less stable, this happens at the expense of a larger number of exploratory wells being drilled. This is going on with variations in a number of areas.
Second, the world is shrinking in terms of new prospective basins. For instance, the Norwegian Barents Sea looked so promising a few years ago but has yet to yield a major field. The case is not unique, and everyone can make his own list of disappointments: East African rift basins, Paraguay, and so on.
One article pointed out that the last decade's reserve addition from wildcat oil discoveries was down by almost 40% from additions registered during 1972-81. This excluded the U.S.S.R., Eastern Europe, China, Mexico, and a couple of Middle East countries.
The article also concluded that the familiar "old stomping grounds" still outdo new frontiers in providing new barrels. This is a rather pessimistic view.
THE WORLD OPENS
Vast areas of the world where many of us never expected to have the opportunity to explore and produce have opened to the western industry the last few years.
New states of the former U.S.S.R., Vietnam, certain South American and African countries, and others appear regularly in oil company executive committee discussions.
Not only exploration is involved. More and more attention is paid to developed and undeveloped properties for the short term as well as to frontier type exploration in some deep offshore areas and unconventional crude for the long term.
North Americans are well aware of the industry-wide reorganizations, massive layoffs, and refocusing from U.S. domestic exploration to overseas exploration accentuated since the mid-1980s.
That causes integrated U.S. companies like Mobil, ARCO, and others to redirect their large domestic organization and go international again, stronger than before.
Non-U.S. actors like British Gas and BHP seem more and more active, as well as omnipresent Japanese, Korean, and Taiwanese companies.
RELATED ISSUES
Consider also several nontechnical issues:
Most discussions of political risk center on nationalization and problems arising in developing countries. But hazards like tax changes exist next door, such as a very serious impact on the economics of the Troll project off Norway.
The new system brings taxes up by 30% and the net present value down by almost 40%. If anyone believes a 17% rate of return is high, please consider the more than $4 billion investment.
The environment is another issue. A striking case is the massive water production expected from the North Sea fields during this decade.
As regulations and specifications for rejected water and drilling fluids are becoming more stringent, you get an idea of the task ahead. Think also of the numerous platforms to be removed in the coming years.
Speaking of the environment, cleaner energy is clearly a dominant factor in the observed increased gas demand in many countries, Western and Eastern Europe, C.I.S., and the Far East.
What is new is not that there is increased gas demand. It is the continuous increase of forecast figures. Every year we get higher figures than the year before. We'll return to the gas issue later.
Now comes a discussion of existing and possible answers to challenges, by segment (Fig. 1).
MATURE AREAS
The first two challenges deal with mature areas.
First is how to find and develop smaller targets economically. Everyone knows one answer: "magic 3-D seismic."
Consider a gas field in the Gulf of Thailand. In an amplitude-coded horizon slice followed across the area, after eliminating the faults, meanders appear beautifully. Even some brightly lighted gas bearing meander beach sands are visible along the curves.
Many faults cross the structure, and the slice map or seis crop shows an impressively detailed and accurate picture that no other technique would have brought forth. Extensive use of such displays is without doubt an essential part of development preparation and supervision, and is even gaining ground at the exploration stage.
On the production side, the challenge is technological and the recipes are multiple (Fig. 2). Some have direct application in the Total operated Dunbar project in the North Sea Viking graben, treated as a satellite of South Alwyn field, where most of the processing will take place.
Part of the field complex will be subsea, the Dunbar platform will be partially unmanned with multipurpose operators, and tender assisted drilling will be used. Production from this field will start in 1994 and peak at 50,000 b/d and 7.5 million cu m/day.
Multiphase development is for the future. Although we have an actual case off Argentina, it would ideally help to eliminate totally the platform item and also solve in the long term the environmental snag.
Institut Francais du Petrole, Statoil, and Total carried out a significant research and development project known as Poseidon. The project has gone far beyond blueprint, and the two phase pump has already been successfully tested at a field onshore Tunisia. Subsequent underwater engineering and testing are contemplated.
DEALING WITH DATABASES
Inflation--or lack--of databases is another challenge.
When dealing with parts of the C.I.S., be prepared to take many trips, and with patience you will eventually build up a picture.
A well known saying is that "the trouble with facts is that there are just too many of them..."
The number of wells for each year since 1970 obtained by Total's U.K. subsidiary, either by trading or as a partner or operator, is staggering. So is North Sea seismic activity, with an impressive increase of the 3-D portion.
To absorb, classify, process, and interpret those data is more than a challenge, even though various means are available.
It is not at all a trivial matter, and I consider it a high priority. Total has a data manager and procedures and so on. There is no magic global kind of "black box" solution.
One obvious answer is to disregard information that is not useful, and there is a lot of it in the supercrowded world of information we can access. I think the main answer is focus. Focus on the area you know better, where you can be more efficient, and where the business environment will make money for your companies.
FOCUSING ON DATA
Here is a case history where the focus concept has worked well.
Total and Inpex of Japan have a more than 20 year old permit in the Mahakam delta area on Borneo's East Coast in Indonesia.
The first discovery was made there more than 100 years ago. Exploration picked up again offshore in the 1970s, and 2.5 billion bbl of oil and more than 25 tcf of gas have been found in the area since then.
After 15 years of intensive exploration, all four-way closures had been drilled. Oil production was declining, and more gas was needed to feed the existing LNG plant of Bontang outside the area to the north, and because gas is a good business there as we'll see later, something had to be done about it.
Total established a group of some of its best people, disconnected from operations, located in Balikpapan near the fields, with easy access to the database and to people who knew the fields and lived with them, and we gave them time.
They had to deal with 250 wells and 35,000 km of seismic. They used extensively sequence and seismic stratigraphy, they built or rebuilt a thorough comprehensive picture of the oil machine, and eventually came up with a number of new prospects, most of them stratigraphic, of course.
These actions led to discovery of a new giant gas field, called Peciko, which involves a complex combination of facies variations, hydrodynamics, and high pressure seals.
The reserves are evaluated to be at least 3 tcf and likely will be more than that. As a result of this and previous exploration, the overall production of the area will reach in a few years the unprecedented peak of 12 bcm/year, and gas will do much better than replacing oil in the long term perspectives.
COMPETITION FOR ACREAGE
How do we deal with increased competition for good quality acreage?
Different types of actions have taken place in lieu of or as a complement to traditional classical intensive exploration. Acquisition has allowed companies to maintain or increase reserve bases.
Asset management has become a key component of E&P strategies, swaps are not uncommon, allowing each party to focus more on its own core area or fit better its strategy, for instance swapping a smaller number of short term barrels for more long term barrels.
However, those exercises do not create physical producible barrels, and acquisitions can be expensive.
A new type of deal exists that is not exactly an acquisition but has similarities with it. While involving proved reserves, it does create new physical producible barrels at reasonable cost. This is what we have internally called "third type" deals (Fig. 3).
Their characteristics:
- They are located in developing countries or countries with special needs.
- They involve agreements with a national company as a partner.
- There must be no question about reserves, and anyway you make sure they will be there.
- You have to design a technical program to develop, improve production, or even reactivate fields.
- The cash consideration can be relatively low, and the commitments consist in drilling wells, building facilities, supporting normal operating costs, etc.
The expected return is high, and has to be high because you get nothing for free and these deals have a specific challenge attached to them: there is always some special technical difficulty such as CO2, H2S, complicated structure, and so on, that you have to study carefully and overcome. If you are convinced you can do it, then it becomes a good business opportunity.
KHARYAGA EXAMPLE
Total signed a deal in May involving Kharyaga oil field in the Timan Pechora basin west of the Ural mountains and north of the Arctic Circle.
The field is producing from reservoirs 1, 4, 5, and 6, and Total intends to produce reservoirs 2 and 3 using water alternating gas injection (Fig. 4). The Russian partner is Komineft, and production sharing is the contractual framework.
The snag is H2S in reservoirs 2 and 3 which although found in modest percentages (1.5-2.5%) requires use of special equipment not available locally.
Total believes it can recover 250 million bbl of oil with a $900 million investment, stretched in several phases.
EXPLORATION CHALLENGES
To meet another challenge, we should not forget about exploration.
We still have to look for the big new discoveries that will replace the declining giants found in the last 2-3 decades, and this is high risk business. My answer to this challenge is contained in three words: selectivity, size, and alliances, and the maxim is "back to basics."
Be selective. You don't want to throw all your exploration money into high risk prospects, only 10-20%. Some companies do more. Total is in the 10-15% range.
Size. Obviously you won't risk big money unless you expect a high reward, which in turn means a reasonably large target.
Alliances. You want to share the risk and take partners, and in that respect one does not see many of those 100% actions so common until a few years ago.
This is so because of scarce money for everybody, big or small, because there are not enough targets at one time on the planet, and because there might be no other way to enter into a play than taking a farmout.
CUSIANA EXAMPLE
These points and the maxim can be shown in an example using Cusiana field in the Colombian foothills.
In spite of 17 wells having been drilled in the past in the prospect area and even some on the prospect itself with no discovery, the farmout was taken on the basis of:
- A careful and detailed analysis of the results of those wells, some with shows, several abandoned for technical reasons before reaching the target.
- The demonstration of a large anticline covering more than 100 sq km.
- The concept of a potential working petroleum system with reservoirs, source rock, and strong vertical drainage.
- A regional view showing analogs along the cordillera.
So "back to basics" means perseverance, critical view of data, regional understanding and acceptable petroleum system, which incidentally does not exclude the use of modern and sophisticated techniques like, in this case, backstripping structural reconstructions, pre-stack migrations, etc.
With BP, operator, and Total with 40% each and Triton with 20%, six rigs will be operating this year. Plans are under way to produce the field through a sequence of modules of 75,000 b/d each.
THE GAS ISSUE
A very simple and schematic map of some major resources speaks by itself and makes us understand what happens on the European scene, where there is a large increase in demand.
There is no limit to reserves availability in physical terms, but transportation systems are saturated, and the location of reserves is such that most of those long term available sources are remote and will be very expensive to bring to markets.
Price speculation notwithstanding, there is a short term premium for gas located near markets, even for small plays such as for instance a 1-2 bcm target off Netherlands or in the U.K. southern gas basin if facilities are nearby.
Far East gas demand is large in industrialized countries such as Japan, South Korea, and Taiwan, and also from developing countries with rapid economic growth and little oil, like Thailand.
The Far East's contribution to world reserves, although significant, is extremely modest when compared with other regions. LNG is dominant in this market.
Because of the situation, there is a premium for gas compared with what happens to other areas, so that finding and developing gas in the Far East, and more especially near a working plant, is good business the same as the Total/Inpex Indonesian operation.
Long term alternate and additional sources exist, of course, mainly in the Middle East. This is the reason Japanese and Western companies, including Total, are involved in a megaproject in Qatar.
POLITICAL ISSUES
Because it is to a certain extent immaterial or at least complex and difficult to analyze rationally, the approach and answers to political challenges are more general and more subjective.
But they are essential to long term strategies, particularly as the industry will be dealing more and more with operations in non-OECD countries. Here are some ideas (Fig. 5):
One way of drawing a line of caution somewhere in the course of those expensive projects is phasing.
Contain commitments within some limits, and extend them through time. Such policy makes an operation more acceptable and more in line with the financial and management capabilities of the moment.
Those projects need partnerships, with industrial and financial associates to make the burden feel fighter. Be sure to include commercial parties, particularly in gas, where major consumers are necessarily parts of the picture.
So we'll see more and more involvements and interconnections of a number of actors and institutions.
Now the best way to protect an investment, I think, is for a company to become a full scale local actor, work with national oil companies as strategic partners for managing risk with long term perspectives, fill most needed skills, and innovate in contract terms.
Here is an example of the last point, Hamra gas/condensate field in Algeria. The principle at Hamra is to produce gas and recycle it to recover 160 million bbl of liquids. Three points make this partnership between Total and Sonatrach unusual:
- The financing is shared between the partners, hard currency for the foreign company, local currency for the national company.
- The foreign partner's contribution to the investment is treated as a prepayment of future sales and the company has the right to lift all condensates at a discounted price, which in turn allows a normal return on the investment.
- A joint company is created to market LPGs.
Total believes strongly that such an arrangement should strengthen and tighten the links between the national oil company of the host country and the international companies involved, and therefore constitutes the best guarantee for fair long term relationships.
In other words, the message here is that we'll have to be creative, not only in exploration, not only in technology, but also in contracts, marketing arrangements, etc.
PERSONNEL CHALLENGES
Now we come to the last item--people.
People are the key to a company's efficiency. The maxim that only 10-20% of your explorers are the real oil finders is probably true, but those few cannot do their jobs without the other support explorationists to back them up.
The challenge is to get all of the staff motivated, all focused on finding those prospects and carrying out the programs that are going to make the money for your company to survive and prosper.
I don't have magic recipes either on that but my contribution will be to show you what I'm trying to do with my exploration staff (Fig. 6).
First, we are trying to make the overall number nondependent on short term budget fluctuations. That might be sometimes difficult to do, because the bottom line is always there, but I must say I receive full support for this policy.
We try to hire more or less a constant number of young graduates, but we also hire on a very selective basis a limited number of senior people if and when we have special needs and the persons meet quality criteria.
We do increase our international content and practice more and more cross-postings between the head office and subsidiaries, and also between subsidiaries. That helps in the field of language, cultural cross-fertilization, and in establishing a common culture and philosophy for success.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
