Operator budgets leaving little for frontier exploration

The Borgny Dolphin semi submersible played a key role in evaluating the frontier Falklands area.

• The Falklands concessions were deemed a disappointment, marking the last frontier exploration effort. [7,452 bytes]
• The Faroes and the West of Shetlands areas also offer key frontier potential. [20,387 bytes]

Is frontier exploration justifiable at $12/bbl oil? The answer from operators around the world seems to be a resounding no. During this latest downturn, operators have been cutting budgets an average of 34%. Exploration in frontier regions seems to have been included in that cut, despite the fact that lease and licensing periods are running.

An area is deemed frontier when it meets two main criteria:

• The area has not been developed due to geographic challenges. This may be due to the relative location, lack of infrastructure, under a boundary dispute, or affected by some other factor that has left it relatively undeveloped.
• The area presents a technological challenge. This means special and advanced technologies are essential for operations.

However, when an area is classified as being "challenging" or necessitates major technological innovation, costs almost always go up - well above operating costs in more established areas.

Frontier costs, risks

The average development cost threshold an operator must meet when deciding the economic feasibility of a project is $8/bbl, including deepwater. If costs exceed that mark, an operator will most likely cancel or postpone the project. Sometimes costs get below that mark in more established areas. In fact, Petrobras, the leader in deepwater technology, recently announced that it had pushed development costs in the Campos Basin down to $6/bbl for deepwater.

This threshold figure fluctuates with the price of oil. If the price of oil is $23/bbl, then $10/bbl development costs are still justifiable, for the short term. And, likewise, if oil is at $11/bbl, an $8/bbl development cost does not give the operator much breathing room. The threshold must be lower.

For example, two of the more recent frontier developments in the Atlantic Margin frontier, BP's Schiehallion and Foinaven, were sanctioned during a time when oil was at $21/bbl. If the oil price was at current levels, the chances of their development would have been slim. Frontier exploration costs, with their added challenges, typically lie at the higher end of the cost threshold.

Another addition to the cost is the amount of relative risk that an operator faces coming into a new frontier. Although the old gambler's adage "the bigger the risk - the bigger the payoff" frequently applies, an operator must weigh the potential cost of this risk, such as a dry hole, compounded with increased operational costs of frontier areas. From an economic prospective, the only times this sort of operation would make sense would be when an operator could get costs equivalent to an established exploration area, or more importantly, when the commodity price is high enough to justify it.

While the advent of more sophisticated technology is making exploration and production more precise and results in lower overall costs, even in some frontier areas, from a commodity price standpoint, conditions now are bad for high cost projects. When an operator decides to cut the budget, the first to go are the high cost projects, of which frontier areas top the list.

In the past and in the future, frontier exploration will always be a mixed bag of risk and payoff. Many projects have been largely successful, but many have been utter disappointments. Others have been successful only after long exploration programs.

Falkland Islands

The most recent frontier project was the offshore Falkland Islands area. This exploration project has thus far turned out to be a dis appointment. The Falkland Islands licensed seven areas for exploration, covering 12,800 sq km about 100-250 km north of the islands. In order to mitigate costs, the four operators - Amerada Hess, Lasmo, Lundin Oil, and Shell - created the Falkland Offshore Sharing Agreement (FOSA) and contracted the Borgny Dolphin semi sub mersible to drill a 6-well program on five of the seven areas. The operators have tried six wells in the area on tranches A, B, C, D,and F, and have encountered some oil shows, but did not strike anything close to commercial levels.

It has been estimated that the group will need a discovery with at least 140 million bbl of oil to justify development off the Falklands. With the harsh environment of the Falklands, well costs are currently estimated at between $25-30 million per well. The FOSA drilling program is now complete, and the operators are evaluating well data. No plans for the future have been announced.

Atlantic Margin

The Atlantic Margin has long been one of the key frontier plays, but it also presents some of the harshest operating conditions in the world. The area is prone to extreme environmental conditions, such as wind speeds over 80 knots, currents as high as 4 knots, wave heights up to 80-90 ft, and water temperatures at the freezing mark near the seabed. These make activities a major operational challenge. Several equipment problems with production systems at the surface and on the seabed in the Atlantic Margin indicate that operators will have to design for conditions that are harsher than the North Sea.

Almost 100 wells were drilled in the region before two major commercial discoveries came in - the 500-million-bbl Schiehallion and Foinaven fields. Several more discoveries have followed, with most information on them being tighthole.

Other sectors within the Atlantic Margin also offer potential, such as off Ireland in the Porcupine Basin and the eastern basins off the Faeroe Islands. Exploration has been taking place sporadically off Ireland for some years, but only two fields have entered development and are considered marginal. Statoil's Connemara discovery was earlier thought to be a major success, the first off western Ireland, but the company deemed it non-commercial.

The government of Ireland recently held a South Porcupine Basin Frontier licensing round. Only two companies, Elf and Agip, bid for blocks. Exploration is planned in the area for the future, following award of the blocks.

The Faeroe Islands also have planned a licensing round offshore. A number of speculative surveys have been performed over the Faeroe's prospective regions, particularly in the east and south. However, the challenge for this area is the thick layers of basalt covering the Faeroe's shelf.

Companies currently are devising ways to improve sub-basalt imaging and penetration through the basalt, and time is on their side. The Faeroes' concessions are under a boundary dispute with the UK and opening of the round has been pushed back several times, while waiting for a settlement. Current plans are to open the round in the fall of this year.

Also off the Faeroes, Saga, Total, and Anadarko have agreed to jointly operate in the deepwater sector. Saga will serve as the operator. Operations are expected to begin by the end of the year.

Southern Caspian Sea

Another area of significant frontier interest is the southern Caspian Sea, primarily in Iranian waters. The geological structures in that area reportedly are some of the largest in the Caspian. Historically, sheens of oil have been found floating over large areas indicating that the structures underneath are discharging oil.

At the present, National Iranian Oil Corporation (NIOC), Shell, and Lasmo have an agreement to drill exploration wells in the region, although drilling is not expected to get underway until later next year or 2001.

Water depths over the best prospects are estimated at 600-800 meters, which would require a deepwater drilling unit in the Caspian Sea. No such rig is working there now, and one would have to be brought in. Considering that the unit would have to be broken up and floated down several rivers from the Baltic Sea, no quick action is expected, although day rate prices on such rigs are becoming very attractive.

The final frontiers

The largest, most long-standing, and most sought after frontiers will always remain the ultra-ultra-deepwater, such as 12,000+ ft of water, and the deepwater arctic. These areas are often spoken of as the final frontier.

For the ultra-ultra deepwater, many geologists believe that 10,000-15,000 ft of water is the limit of sedimentary deposition. However, sedimentation has a tendency to flow to the lowest level, and even the deepest basins should not be considered devoid of prospectivity before being drilled. But industry has a long way to go before it is technologically capable of drilling in such depths.

Operators are now fringing on what is considered to be ultra-deepwater. The current world record water depth drilling record is 7,718 ft. New vessels floating out of the shipyards are equipped to drill in a water depth maximum of 10,000-12,000 ft.

Before drillers can even think about going to 15,000 ft or greater, vessels must be designed to handle such depths and new technologies - such as riserless drilling - must become reliable and economical.

Drilling in the ultra-ultra-deepwater probably will occur long before a way is discovered to drill and develop in the deeper waters of the Arctic Ocean. Shelf areas out to the 100-ft contour present little opportunity for drillers. Unless a drilling unit is firmly attached to the seafloor and has an ice sheet resistant hull, attempting to keep a vessel on station in anything other than open water is impossible at this time. Current conditions below the Arctic ice sheet also present a formidible challenge for drillers, as well as hydrate formation during both drilling and production operations.

The Arctic Ocean will remain a final global frontier long after development of the other frontier areas of the world.

Other frontiers

Other frontier areas exist off southern Greenland, the far-eastern reaches of the Eastern Canadian shelf, and East Africa, all of which have been gaining interest from oil companies.

• Greenland: This government of Greenland has awarded its first offshore license since the 1970s with the Fylla concession to Statoil, Phillips, Dopas, and Nunaoil. The group had planned to begin drilling this year on the concession, but the rig they planned to use, the West Navion drillship, has had major delays. Operations are now planned to begin in the summer of next year. Seismic surveys in the area have indicated that the area has sedimentary basins larger than the Viking-Central Graben area of the North Sea.
• French islands: On the east coast of Canada, the government of France has granted Gulf Canada Resources a license to explore in the region of the French Islands of Saint Pierre and Miquelon. The license covers 800,000 acres that have been under moratorium since the 1960s. Gulf has acquired some seismic over the license and is currently in the process of shooting an additional 4,000 miles of new 2D data. Drilling is expected to begin next year.
• East Africa: This area is also beginning to gain interest. Two development schemes by Canadian companies are under review off Tanzania to help alleviate local dependence on diesel fuel and hydro-electricity for power generation. Two consortia are managing these projects, which include establishing processing facilities and pipelines in areas short of oil industry infrastructure. One of the companies concerned, Tornado Resources, is also preparing to explore for gas off Kenya. The most probable exploration plan is off the Songo Songo Island in Tanzania where gas is known to exist following ample studies.

Lesser frontiers

Some other areas fall into the classification of lesser frontiers. These are areas that are not as remote, but have yet to be explored or developed, therefore allowing for less risk and potentially lower cost. These areas include new acreage that has been on offer in the past year and have been catching the eyes of the operators despite low oil prices and cut budgets.

• Brazil: The opening of Brazil to the international operators represents one of the most attractive areas for exploration. The area for the most part is frontier for everyone except Petrobras. The risk for operation in the area is relatively low and it has a strong infrastructure with vast proven reserves.
• India and China: Both countries have offered new, relatively unexplored acreage. Several discoveries have been made in both regions and they remain attractive to operators, despite the downturn.
• Ultra-deepwater West Africa: Next to Brazil, however, the most prolific of the lesser frontiers are those in the deepwaters off West Africa. Acreage has been snatched up all along the western coast line, especially in Angola where bid amounts are very high. This area is relatively unexplored, but the potential in the area is extremely high.

So is frontier exploration dead? For the time being, until prices stabilize and begin moving back upward at a consistent rate, frontier exploration will be put on hold. The massive potential for some of these areas will always keep frontier exploration alive and companies will keep investing when the timing is right.

Some companies might find that now is the perfect time to begin making investments in some of these frontier areas. With low prices, a company with foresight and substantial cash reserves could take advantage of the weak market and make a play for the frontier and wait out the current slump.

Even when the oil price comes back up, there will still be a lag time of about 6-12 months before frontier areas are placed back on producers' budgets. When prices go back up, operators will begin reviving projects in order of costs and relative economics. Frontier areas are more than likely far down the list.

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