A hunting we will go: the industry is short on prospects, and it faces diverse challenges in its quest to ramp up U.S. exploration drilling.(Industry Overview)

Publication: Oil and Gas Investor

Publication Date: 01-JAN-05

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COPYRIGHT 2005 Access Intelligence, LLC.

In his classic Geology of Petroleum, A.I. Levorson defined a prospect as "a set of circumstances, both geologic and economic, that justify the drilling of a wildcat well."

Clearly, with today's prices, those circumstances can occur more frequently than in years past. Yet, a popular refrain among E&P companies is that there aren't enough good prospects left to drill.

The U.S. is indeed a mature petroleum country, and it is true that the supply of classic structural prospects at depths above 12,000 feet is limited. At the same time, companies are slowly beginning to shoulder more risk, technological advances are illuminating previously overlooked or unrecognized opportunities, and today's robust commodity prices are opening up new types of resource plays.

An exploration revival

Signs do point to a broad-based revival of exploration.

A notable development is the blossoming of start-up companies funded with significant amounts of capital. "There are a number of new companies--some led by people who were formerly with large firms--that are emphasizing exploration," says Jeffrey Lund, Houston-based senior exploration advisor for international consulting firm Ammonite Resources.

Adding to that is a brisk level of prospecting activity by small, entrepreneurial companies. Even one-man shops can now afford to buy sophisticated PC-based workstations, and great volumes of 3-D data are available at reasonable prices or through sweat-equity arrangements throughout broad swaths of the productive U.S. basins.

The widespread adoption of these workstations by independents has marked a turning point in exploration. Certainly, the sizes of prospects generated by this data-mining, oftentimes the second or third go-through on a seismic volume, generally hold smaller potential. But, these can be attractive opportunities for modestly sized firms.

Lund is chairman of the American Association of Petroleum Geologists' (AAPG) advisory committee for its Prospect & Property Expo. "At the 2004 APPEX Houston, there were a large number of excellent prospects shown by small entrepreneurial companies, but there was a pronounced tendency for the prospects to be lower-risk, lower-reward.

"Many prospects were actually extensions of existing production or low-risk step-outs to established fields, rather than new-field wildcats." Not surprisingly, there were also a number of coalbed-methane and unconventional prospects at the show.

APPEX London, in contrast, grew dramatically in 2004 and pulled in large- and multinational independents and major oil companies. "Onshore North America has many prospects, but they are not large, conventional prospects. For those, most companies look to the deepwater Gulf of Mexico or to international plays."

While exploration activity appears to be accelerating, several factors are placing a drag on the industry's optimism. Foremost is a widespread concern about compliance with the Sarbanes-Oxley provisions, and about reserve issues.

Clearly, there is also a deeply rooted conservatism rampant throughout the industry. Exploration has not risen in concert with higher commodity prices because companies just don't believe that higher prices are permanent. Too, analysts tend to reward predictability, which isn't a characteristic of a drilling program that includes wildcats.

"When people begin to be comfortable that there is a floor to prices, say more than $30 per barrel of oil or $4 per thousand cubic feet of gas, there will be a more consistent exploration effort."

Another issue that U.S. prospectors face is the amount of federal land that is off-limits. Many prospective areas in offshore and onshore the U.S. are not accessible to drilling and development.

Finally, one of the most serious concerns is the aging of the exploration workforce. The mean age of AAPG members is now 49.5 years, says Lund, who is also AAPG's membership chairman.

"There's a shortage of up-and-coming, prospect-generating talent." Consultants in their 60s and 70s are currently filling the gap, but this is only a short-term fix. "Many U.S. geologists are changing jobs in their late 50s, taking early retirement packages and then working as consultants or cycling into new jobs," he says.

"There is a serious problem developing as we move into the next 10 to 15 years if more people don't come into the profession."

Although the organization believes careers in geoscience offer people a bright future for many decades to come, AAPG is finding that the students it does recruit don't stay in the profession. "Petroleum geology is viewed as having a limited future, and that's a perception that we need to change. We lose a lot of members in their late 20s and early 30s as they move out of the oil and gas industry into other fields."

At Colorado School of Mines, Tom Davis, professor of geophysics, sees more companies coming to the...

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