The problem with being a big oil and gas producer is that each day takes you closer to going out of business – unless you can find new reserves to replace those sent to market.
In the last five years, the oil majors have been exploring the proven shallow waters of the Gulf of Mexico, Nigeria and Angola, but their efforts to find new reserves here have not been especially successful. Meanwhile, their smaller and bolder oil explorer rivals have made significant new discoveries in deepwater locations off the coast of Brazil, Ghana and the Gulf of Mexico, as well as significant onshore discoveries in Kurdistan and Uganda.
With their coffers filled from selling oil at $120 a barrel, the majors are increasing their exploration budgets and are keen to look at new frontiers. This has important implications for pioneering oil exploration companies.
The terms of any ‘farm-in’ deal are very important. The junior oil explorer has the rights to the licence and a package of data, while the oil major has cash and expertise. Both need each other and the exact terms of any deal depend upon whose need is greater.
The oil majors today are making good money and need to get involved in new frontiers, so the junior oil explorers should be able to drive a hard bargain. Over the next few months we could see industry majors farming in to projects off the coast of Namibia and the Bahamas, and in the South Falklands Basin especially.
Technology Has Transformed Oil Exploration
Scientific advancements in oil technology over the last ten years have transformed exploration.
In its early years, the oil industry relied upon visualisation techniques, the most basic of which was simply finding oil seeps on the surface. In the mid-nineteenth century, when lamps were lit with whale oil, the black oil that could be found lying in small puddles on the ground offered a convenient alternative.
Seismic reflection, originally used to locate submarines in World War One, was another key breakthrough in oil discovery. In the 1920s, experts started to measure gravity and magnetic resonance. Oil and rock samples were taken away for analysis in laboratories. In 1927, the Schlumberger brothers (a physicist and an engineer) developed a way to use electrical resistivity to identify rock layers containing oil and water from within the borehole.
After 1955, seismic measurement became even more sophisticated. Wireline logging, geochemistry and laboratory equipment and satellites came to be used to map the surface and the gravitational field. The process known as 3D seismic was followed by 4D, which tracks changes in 3D images over time.
Today deepwater oil exploration begins with a fleet of seismic vessels dragging sonar equipment thousands of feet below the ocean surface to bounce sound waves beneath the bedrock. Each layer of sedimentary rock reflects different parts of the waves back to shipboard receptors. Huge amounts of seismic data will be collated into detailed 3D maps of the oil-filled caverns – so oil experts can pinpoint the best place to sink a drill. For an oil explorer it is often a case of how best to place an $80m-$100m well the size of a dinner plate on the seafloor.
That is allowing oil explorers to seek out ever more remote basins. Big Oil has to go where the big resources are. So the majors are forced into hostile territory where finding oil is a huge challenge. That’s why they are leaving the job to small oil explorers. The attitude is – “let them take the risk”. With new equipment at their disposal, these small oil explorers are on the cusp of some remarkable oil discoveries.
Investors have retreated from the higher-risk exploration plays and headed back towards the oil producers.
But good oil exploration assets, especially in major new basins, are likely to remain in demand.
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in MoneyWeek (UK)
From the Archives…
Free of the Dragon: Why the Energy Market Doesn’t Need China
2012-05-25 – Kris Sayce
China Stirs Up Troubled Waters in the South China Sea
2012-05-24 – Dan Denning
How Chinese Stocks Are Fading Fast
2012-05-23 – Lars Henriksson
LNG: Why Australia Will Be a New Global Gas Leader
2012-05-22 – Dr. Kent Moors
A Shocking Week for China’s Economy
2012-04-21 – Dr. Alex Cowie