Exploration

Again, a critical factor is scale. In addition, both in deep water exploration and in unconventional resources it is vital to construct an effective business model, custom designed for success in the type of play being addressed, with "the right people looking at the right things". The concentration of expertise within such a business model reduces aggregate risk.

Going back to basics, the most important metrics for an explorer are volumes found and the cost per barrel. Although expenses are important, especially in the current environment of high rig and access costs, a company can't simply save its way to success. Successful exploration requires significant investment in data, people, technology, drilling and access. The biggest lever is the denominator - recoverable reserves. Once the exploration infrastructure is in place it's important to explore for scale. Historical data tends to indicate that with time, big fields tend to get bigger as technology improves. Small discoveries on the other hand rarely grow and frequently disappoint either due to their size or complexity.

Multiple large fields tend to be found in basins with a world-class working source rock. This is the starting point for any exploration program. The world's best fiscal terms are no replacement for the fundamental ability of a basin to generate and expel hydrocarbons. With that in place, a company can then build and leverage the knowledge of first class people and the technology they know how to use. The Gulf of Mexico for example is a basin that while highly complex, has incredibly rich source rocks as well as attractive fiscal terms.

The complexity of the Gulf of Mexico requires the intense use of technology and know-how to be consistently successful in exploration. This requires detailed study. For example, one older study of the Gulf of Mexico estimated the volume of oil in place by analyzing the scale of the basin and the quality of the source rock, and then estimating the in-place volume. The study assessed how much would be discovered from current plays from the creaming curve and determined that there was a huge volume of oil still to be found in new plays - these are turning out to be the Cretaceous and Lower Tertiary plays.

The critical success factor within a basin is to develop an appropriate and efficient business model. Cobalt has put together a small team of world class people, provided them with the right infrastructure and good data and eliminated distractions from total focus on a few important things. Further, the entire team is aligned through the compensation system and truly believes they are exploring in the right place, so there is a clear vision of what the company wants to be. There are obviously special challenges involved in leading a small group of world class experts but that is a good challenge to address.

By doing this, risk is reduced - good people with knowledge and experience of the basin, highly focused on specific prospects should be able to achieve a 50% success rate. If the targets are large and the prospect portfolio is well chosen, the overall program risk will be quite low and the expected value very high. Perhaps the biggest lever toward efficient exploration is having and making choices. In other words, having a deep enough portfolio where you can high-grade and drill the best of the best, and have the discipline to never drill the bottom half of your portfolio (with your company's money). The difference between great exploration and mediocre exploration is simply the discipline to have the highest quality people, data and know-how; then drill only the very best.

A much more risky strategy is followed by some companies of not going for the big opportunities, selecting prospects that seem individually low risk but pursuing a course that in aggregate is much higher risk, with lower commercial success rates, lower volumes discovered and higher finding costs. These companies must then make up for this lost margin by being very focused on delivering lower development and operating costs. In fact, for the deep water there is significant data that suggest that there are more risks in development than in exploration.

Exploration is a different concept for resource plays than for conventional oil and gas. HighMount finds that the key is to 'reprogram' the approach to recognize significant opportunities. The mental model of exploration for conventional oil and gas generally involves interpretation of seismic data covering discrete, frequently structural, targets. Explorationists trained for and with experience in successfully discovering these targets may not be good at visualizing large stratigraphic traps in "challenging" reservoirs containing huge gas resources. For example, the Sonora field in west Texas, HighMount's largest asset, was "discovered" ten times as explorationists trained in conventional settings drilled through the various producing zones and discovered them again and again before they finally recognized that the several "fields" were truly just one.

Nevertheless, the resource plays share the same need as deep water for the "right people looking for the right things"; in this case, open to looking at microdarcy rather than 1 darcy rock, and moving rapidly to consideration of how to access the gas. This requires a different skill set that focuses quickly on the reservoir quality, a property that may be taken for granted in deep water exploration. The right people build experience in working with "weird" reservoirs, they understand rock sections with high organic content, from tight sands to coal, and are looking for smaller, more diverse clues to understand the potential. Core data frequently provides the critical information about the reservoirs and clues about the technologies that will be necessary to free the gas to move to well bores. After an appropriate potential opportunity is identified a company has to move early, often with inadequate information because scale is so important, and use real option thinking. The acquired acreage provides the option to explore, and though the early wells will most likely not be profitable, each well provides critical information and increases the chances of a profitable program later. But it may take a couple of years to figure out.

Similarly, ConocoPhillips Company finds that the oil sands "exploration" phase requires conventional skills in how fluids move through rock, but applied in very different ways. A vital issue is to understand how steam interacts with bitumen in the reservoir, and how the energy of the steam is dispersed within the sands through to condensation. New innovations have the potential to improve recovery efficiency and effectiveness by more evenly distributing the steam within the reservoir, allowing for greater control of the steam chamber. Experience, innovation and collaboration with the regulatory agencies will be necessary to define better ways of delineating this massive resource. Further challenges are to lower overall costs and manage the environmental footprint of the full oil sands value chain.