Exploration

Here in Houston, we’re expecting a low of 25ºF (about 4º C) with a chance of snow Jan. 7. And that will be downright balmy compared to other parts of North America.

(Nairobi, on the other hand, is looking at a comfy 84ºF or 29ºC.)

But many places in the Northern Hemisphere, and particularly in North America, are in the midst of a cold snap as the new year begins. And energy pundits couldn’t be happier. After all, transportation fuel is not the only demand driver in this industry. Weather has a huge effect on the price of crude oil and natural gas. And we’re already seeing signs of higher prices to come.

Bill Herbert, in his Simmons Morning Energy Note, has posted a lengthy discussion about North American gas-related drilling activity. “Our repeated refrain of four prominent unknowns with respect to [North American] natural gas-related drilling activity – how soon, how sharp, how high, and how long – are being partly addressed by weather,” Herbert writes. “… how soon/sharp was partly if not largely contingent on felicitous weather as an early, cold weather was likely to yield a very brisk beginning to ’10.”

Already indications are positive. The US Q4 horizontal rig count was up 20-25% quarter to quarter. “An epic cold wave coupled with well-hedged E&Ps and replenished balance sheets will likely result in US drilling activity in ’10 being markedly better behaved,” he writes.

He expects fourth-quarter conference calls to be “buoyant,” especially for pressure pumping companies and land drillers.

With IOCs entering the shale picture (ExxonMobil and Total being the latest, but probably not the last, entries,) Herbert writes that the forecast for 2011 becomes much hazier due to production increases likely in 2010. This means that the “how high and how long” unknowns remain prominent.

Overall, he expects North American activity to be the focus this year, with a shift back to deepwater and international plays in 2011.

Meanwhile, crude prices are also enjoying a resurgence due to chilly weather. The Associated Press reported that crude is up 14% since mid-December, and they closed higher Jan. 5 than any day in 2009.

While part of this is economics, the article gives much of the credit to the cold snap in the US, which has resulted in four deaths in Tennessee attributed to low temperatures. This weather has affected heating oil supplies in some parts of the country, which have constrained supplies due to lower demand and thus lower refinery output last year.

Will it last? Houston’s high this coming Sunday is forecast to be 49ºF (9.4ºC) under sunny skies. But for most parts of North America, winter is far from over.

I’m glad my purchases don’t excite such scrutiny.

But then, I don’t make a habit of dropping US $41 billion on a regular basis, either.

That’s the price ExxonMobil has offered to pay for XTO, a company active in the unconventional shale plays in North America. The purchase is subject to XTO shareholder approval and regulatory issues but has been agreed to by both boards of directors.

It’s always amusing to watch the pendulum swing back and forth in this industry. Plays onshore North America have been, for the most part, the playground of the independents for several years as the majors went offshore and overseas seeking the remaining elephants. Through the patience of companies like Mitchell Energy (now part of Devon), the elephants in our own backyard finally began to give up their treasures. And while Exxon was developing its deep, challenging fields offshore West Africa and elsewhere in the world, US independents were in the frenzy of a land grab in plays like the Barnett, the Haynesville, the Fayetteville, the Marcellus, and a host of others.

With all of that prospective acreage already leased, what’s a major to do? Forget the acreage – just buy the independent instead.

This in and of itself is not that unusual a move – majors have been buying independents, and independents have been buying each other, for years. What makes it noteworthy is the fact that a company like Exxon, which doesn’t exactly act on capricious whims, is entering the unconventional world. These plays have had tongues wagging in recent months as some question their long-term profitability and others point to them as being too prolific and smothering natural gas prices in the process.

Now the tongues are flapping incessantly, partly because an Exxon exec can barely sneeze without making the news and mostly because this could be the start of the majors flocking back to North America to share in the fun. Some major names – Apache, Devon, Chesapeake – could perhaps become tantalizing tidbits if the likes of Shell, Chevron, BP, and ConocoPhillips decide to take the bait.

Simmons & Co. sees the move as an indication that Exxon is bullish on natural gas in the long term since management has admitted that the strategic benefits of the transaction may take as long as 30 years to fully vest. Analysts point out that the purchase price is roughly $12 billion more than the cost of the Exxon shares used in the deal. This suggests, they say, “a) quite a lot of synergistic value creation or b) a long-term view of natural gas as a growth fuel possibly supporting the narrowing in the natgas/crude price divergence (in our view, XOM likely assumed both).” The move also indicates Exxon’s assumption that natural gas demand will outpace oil and coal, they say. “As the majors tend to be somewhat agnostic with respect to which hydrocarbon they exploit (at least between crude and natural gas), increasing opportunities for unconventional natural gas investment and the prospect of above-average demand growth from the hydrocarbon with the lowest inherent carbon footprint appear to make the idea of adding to natural gas resources more affordable than crude at today’s levels.”

They add that Exxon’s participation in the LNG markets may imply that the company has “superior information” regarding LNG imports to North America.

It will be interesting to watch this deal unfold. There is a tremendous move afoot amongst the larger independents in this country to make natural gas a major part of the climate change debate. With Exxon putting its heft behind the proponents of natural gas, this could have significant implications for that conversation going forward.

A shout-out to Allen Brooks of Parks Paton Hoepfl & Brown, an energy investment baking firm, who spent 23 pages “musing” about the debate over climate change, which he refers to as “Climategate.” With the UN Framework Conference on Climate Change in full swing in Copenhagen, these musings are proving to be particularly timely.

The recent spate of e-mails hacked from the computer at the University of East Anglia’s Climatic Research Center (CRU) have already raised the issue of sound science, as some of them seem to imply that “concerted and supposedly coordinated efforts [were made] to prevent the publication of scientific data and analyses that challenge the global warming orthodoxy,” the report states.

Even more bizarre, a British court recently determined that this “orthodoxy” is equivalent to a religion. “In a case involving the termination of an employee who claimed that his strong moral beliefs about global warming forced him to live his life in a certain way that clashed with the demands of his job, the role of global warming orthodoxy was at issue,” the report states. “The employee was terminated for his inability to fulfill his job responsibilities, according to his employer. Justice Burton of the British court stated, ‘A belief in man-made climate change and the alleged moral imperatives is capable, if genuinely held, of being a philosophical belief for the purpose of the 2003 Religion and Beliefs Regulations.’ Some climate change critics would suggest that this is what global warming science has become – a religion.”

Given the lack of raw data, much of it destroyed because of computer storage capacity issues in the 1980s, it can be argued that evidence for man-made climate change is more faith-based than fact-based. One e-mail quoted in the New York Times read, “It’s Sunday evening, I’ve worked all weekend, and just when I thought it was done, I’m hitting another problem that’s based on the hopeless state of our databases. There is no uniform data integrity.”

So what information is being used? Some of it comes from indirect indications of temperature change such as tree rings and ice cores. While most of these data support the theory that temperatures declined in the 19^th century and rose in the first half of the 20^th century, the tree ring data actually shows a sharp decrease in temperature over this time period.

“Because of this data conflict, Dr. Phil Jones, the head of the CRU, removed the later tree-ring temperature-derived data and replaced it with direct thermometer readings when preparing the temperature graph that was used for the cover of the 1999 report of the World Meteorological Organization and was designed to show that temperatures in the past several decades were the warmest in the past millennium,” Brooks writes. “No one was ever told of this data shift, and the line on the graph suggests one continuous data source. The shift in data is done so well that only a blown-up chart shows the termination of one data source and the start of another.”

Is this gross negligence or something more sinister? Brooks notes that part of the e-mail discussion from the CRU discusses how to avoid the release of data under the US Freedom of Information Act and how to keep secret the fact that the UK has a similar law. “By working diligently to prevent disclosure of data and computer codes that underlie the climate models producing the cataclysmic forecasts, these scientists have done great harm to their efforts,” he writes.

This is truly troubling. The oil and gas industry is stuck in a terrible rut here. Many industry folks are scientists by training and understand the rigorous scrutiny that accompanies any new findings in the scientific realm. Yet to argue against climate change is tantamount to saying the Beatles are bigger than Jesus.

Let’s hope that nothing is rotten in the state of Denmark this week.

As with many large industries whose inception predated computers, the oil and gas industry has been making a slow but steady transition from paper to software to business management platforms.

One move within the industry is toward performance management. Performance management can help control costs, improve customer service, maximize productivity, and manage operations. Within this overarching theme is business intelligence, which takes historical, current, and predictive views of business operations based on data gathered from disparate sources.

Epmag.com has just issued its first “alert,” a white paper sponsored by IBM, titled “Why Performance Management Matters.” Geared to upstream operations, the paper discusses the need for performance management in this industry.

According to Paul Hoy, industry director for IBM Cognos software, the industry is still transitioning “from day-to-day transactions in the strategic use of information as a means for driving optimized business operations.” An array of enterprise resource planning applications combined with the standard “home grown” systems, may each serve individual purposes well, but getting all of the systems to talk to each other so that businesses can make sense of the information they store can be tricky.

IBM hopes its Cognos software will provide an alternative to “cumbersome budgeting and forecasting processes.” It’s intended to automate workflows, collaborate among stakeholders, model key business drivers, and increase understanding of the implications of changes in production volumes.

To download a copy of this free white paper, visit http://www.epmag.com/whitepapers/IBM200911.

For almost 40 years Hart has been awarding innovations in upstream technology through our Meritorious Engineering Awards, or MEAs. These are highly prestigious awards because they are judged by industry experts, not by E&P editors, and are completely independent of a company’s ability to advertise in our magazine. There is also no fee. All of these things set us apart from some of our competitors.

But you can’t win if you don’t enter. And the deadline is fast approaching. This year all entries must be submitted no later than Dec. 31. It’s not a hugely onerous process, but it does take some time.

Here’s how it works:

1. Go to http://www.epmag.com/mea/mea.process.php. There’s also a link through our website, www.epmag.com.
2. Click on “2010 Online Form.” This page lists all of the categories.
3. If you have not entered before, click on “Create an Account” in the upper right-hand corner. You will fill out a form and submit it, and you will then be cleared to continue the entry process once we’ve reviewed the request. Then you can continue to step 4.
4. If you have entered before, click on “Personal Entry Page.” You will be asked for your log-in information. (If you have forgotten your log-in or password, send me an e-mail at rduey@hartenergy.com.) Once you’ve logged in, you can view anything you’ve already entered as well as create new entries. A new entry consists of a 500-word abstract, a 500-word case study, and up to three additional files. These files can be additional documents, product brochures, image files, videos, etc. Entries may be edited or modified at any time up to the deadline.

Once the deadline has passed, our judges will view all of the entries and make their selections. In early March both winners and losers will be notified. Most of the awards will be presented during the Offshore Technology Conference in May, although other arrangements are also available for those who will not be attending or exhibiting at the show.

If you have any questions, please e-mail me or call me at +1-713-260-6459. We hope to have a broad representation of the best the industry has to offer.

Raise your hand if you get too much promotional e-mail that’s not relevant to your job.

(Now put down your hand. You look foolish.)

I, too, get way too much e-mail – this, in fact, is why I resisted getting a BlackBerry for many years. Now that I have one, my fears are realized. The thing buzzes constantly. Luckily the need to stay connected offsets this annoyance.

I got to thinking about the relevance of e-mails when a new report came my way. Titled “Why relevance drives response and relationships,” the report is geared toward companies that market to consumers. But I think it’s equally applicable to companies that market to oil and gas employees or, for that matter, magazine editors.

Here’s my predicament: I basically get three types of e-mails. The first type is stuff I really need – responses to requests for article submissions, answers to questions, missives from my boss, etc. The second type is borderline spam. While we have a good spam filter in place, somehow over the years I’ve been “discovered” by companies like Rodale Books, which sends me an e-mail at least once a week asking if my thyroid is making me fat (“probably” is my response as I delete the e-mail), or a company whose catalog I may have used in the past telling me that I only have until midnight to take advantage of their latest promotion, which of course will either be extended or replaced by the next promotion the following day.

So that leaves a third class, those e-mails that would be pertinent to a different editor working at a different magazine but that have no bearing on my job. These include:

• The amazing new skin cream that totally eliminates hideous scars;
• New tinted windows that block 90% of UV light;
• Reports on how many Texas RVers will be hitting the campgrounds on holiday weekends;
• Information from the Texas State Board of Insurance;
• Information on solar panels, wind farms, ethanol research, biofuels, biomass, etc.;
• Invitations to attend webcasts on SQL servers;
• Announcements from utility companies;
• Etc.

On the rare occasion that I get to speak to a public relations person, I ask them to please do their homework before sending these press releases to every journalist they can find. But the fact that most PR professionals don’t have much of a grasp on the E&P industry means that anything with the word “oil” in it is likely to crowd into my inbox.

The report has some interesting information about customers and their message preferences. More than 90% o the respondents have used the opportunity to unsubscribe to at least one e-mail newsletter, and it’s not just due to lack of time – most respondents say they opt out because the information is not relevant to them.

Which means marketers need to do their homework better. “Marketers are failing to connect with new customers and existing ones as a staggering 73% say they have received promotional offers on products they have already purchased.”

The report defines “precision marketing” as more than just customized e-mails. It should also “leverage insight to deliver individualized offers, deals, and value-added services at the right place, and the most appropriate time, [and] through the most preferred format or channel of communication to trigger purchase or influence behavior.”

In other words, I’ll be more likely to publish that skin cream press release after my disfiguring scar disappears.

To view the report, visit http://www.precisionpromotion.org/report.php.

Those darned deepwater explorers are at it again. They just can’t be happy unless they’re pushing technology to the limit. Their most recent target is the Lower Tertiary trend in the Gulf of Mexico, characterized by deep water, deep targets, and deep salt, all of which add up to deep, well, you get the gist.

But the hardy few who have taken on the challenge are starting to see some pretty serious rewards. James Cearley, general manager of Gulf of Mexico Deepwater Expllration for Chevron North American Exploration and Production Co., recently addressed the Houston Geological Society to discuss the challenges and potential rewards of this huge play.

In charting the industry’s march into deeper water over the past 60 years, Cearley said “Every 10 years we did the equivalent of a moon shot.” It started with the Lower Miocene in 1947 and was followed eventually by a move to the shelf, deepwater mini-basins, the flex trend, the fold belts, and finally the deepwater subsalt efforts taking place today.

The resource isn’t as large as the Miocene – 3.4 Bboe of total discovered resource compared to 9 Bboe for the Miocene – but the success rate in the Lower Tertiary Wilcox as a whole is better, at 44% compared to 40% in the Miocene, and even the subsalt Wilcox, a challenging play with 2.7 Bboe in total discovered resource, brags a 40% success rate. These deeper plays are also very underexplored compared to the Miocene.

The Lower Tertiary Wilcox is a 300-mile-long, primarily subsalt trend in ultra-deep water that targets some of the oldest and deepest clastic reservoirs ever developed in the Gulf. Oil fields discovered to date have been very large with significant thicknesses, but flow rate challenges due to low-permeability rocks and low-mobility hydrocarbons provide significant completions and production hurdles. Cearley said the Jack well test was an important milestone in confirming the producibility and commerciality of the pay in these deep fields.

He outlined challenges all along the value chain, from imaging to production. Imaging challenges have been greatly enhanced by the move to wide-azimuth seismic acquisition, which he said was a “game-changer for the deep water. Comparing narrow-azimuth to wide-azimuth on Jack, we’re seeing fine details not discernible on the narrow-azimuth. And that’s not all of the story. On Tahiti, on the original velocity model, we couldn’t see against the salt. But with our new velocity model, we can see events going right up to the salt.”

Drilling challenges are numerous and include storms and hurricanes, vortex-induced vibration, loop currents, high-pressure gas stringers, pressure regions and thief zones, high-pressure/high-temperature issues, and challenges to casing design. “In a simple salt canopy, you might have five or six casing strings,” he said. “In more complex canopies, you need more strings, and it requires an intricate casing design.”

Choosing the right production system is also a challenge, and several are being considered, including spars, semisubmersibles, tension-leg platforms, etc. Petrobras will be bringing the Gulf’s first FPSO to produce its Cascade and Chinook fields, which are also in this trend.

Ultimately, Cearley said, the key to unlocking the value of the Lower Tertiary Wilcox trend will be the practical application of existing technologies, the rapid maturation of new technologies, and the efficient sharing of infrastructure development. “These fields have world-class potential, and there are lots of opportunities in the subsalt reservoirs,” he said. “But they’re at significant water depths, and we’re fighting temperature and pressure.”

When the definitive textbook on successful oil and gas plays gets written, at least a chapter should be devoted to the Barnett Shale. It’s the classic oilfield yarn – a vast amount of natural gas tied up in confounding shale, requiring the derring-do of a few companies willing to experiment until they find the way to crack the code.

Cracking, in fact, is one of the keys to producing shale reservoirs like the Barnett, as is horizontal drilling. Multi-stage fracturing creates several “mini-wells” within a single wellbore, increasing production significantly, and simultaneous fracturing prevents a well being fractured from killing nearby producing wells. The results speak for themselves – Devon Energy Corp. just drilled a well in East Texas that is producing 31 MMcfd, one of the most prolific wells drilled in the US this year.

While no operator is going to complain about this level of production, the fact that new technology applications are creating these super wells is creating a supply-demand imbalance that is keeping natural gas prices low. A recent Wall Street Journal article said that the expected production cutback simply hasn’t happened, despite the fact that companies began stacking rigs in the shale plays earlier this year. In addition to the Devon well, Chesapeake Energy Corp. and Anadarko Petroleum Corp. reported large increases in gas production despite a reduction in spending (and profits).

According to the article, Jon Wolff, an energy analyst with Credit Suisse, said that production has remained high because companies are only drilling in the most productive areas and can demand the best technology and personnel from service companies needing the contracts. Easier credit and somewhat higher prices will probably encourage companies to increase drilling activity, he added.

Analysts at Tudor Pickering disagree, maintaining that the production uptick in August was “a fluke” and predicting higher gas prices in 2010. And Aubrey McClendon, chairman of Chesapeake, told investors during a conference call that it takes time for reduced drilling activity to have an impact on supplies. “Gas production will be down significantly in the months and quarters ahead,” he said.

According to the Baker Hughes rig count, natural gas drilling in the US has fallen 53% in the past year.

Natural gas is currently hovering just below US $5 per Mcf, about double what it was earlier this year. While I’ve not seen metrics regarding the minimum price needed to make shale plays economic, the fact is that operators are drilling shale wells faster and cheaper than ever before. It will be interesting to see whether or not they can curb their enthusiasm.

Nothing like dropping a tantalizing bombshell on the eve of a major trade show. In an announcement that initially took the industry by surprise, ION announced Oct. 23 that it was forming a joint venture (JV) with BGP, the world’s largest land seismic contractor and owned by CNPC, one of China’s national oil companies.

The announcement came right before the annual meeting of the Society of Exploration Geophysicists (SEG).

I used the word “initially” because, upon further reflection, this decision starts to make pretty good sense. 

I talked to Bob Peebler during SEG about the rationale behind the JV, and from his standpoint, there are two solid reasons for the move. Firstly, ION has never had a service arm, unlike its rival Sercel, and this makes it difficult to do full-scale testing of new land equipment without seeking out a like-minded operator (think BP and Apache with FireFly). Secondly, ION’s purchase of Aram last year came at what turned out to be a horrible time, leaving the company saddled with unmanageable debt.

The JV will enhance ION’s financial position significantly, with total cash proceeds of $175 million from BGP. BGP, in turn, will receive a 51% interest in the JV and about 16.66% interest in ION. Prior to the JV closing, ION will also receive up to $40 million of bridge financing arranged by BGP. At the closing ION will refinance and reduce its long-term debt and receive an expanded replacement revolving line of credit.

Overall, after closing ION expects to have more than $100 million in liquidity from cash and spare capacity on its revolving line of credit.

Peebler said that the two companies have been talking for a couple of years about a possible alliance. While BGP is by far the largest land contractor, with 113 crews, it doesn’t do much in the way of R&D, and he said that ION’s innovative technology ideas “piqued their interest.” When the economic meltdown came in fall of 2008, the financial implications of such an alliance also gained importance, he said.

Talks started in earnest in June, and by late October the deal was finalized. The JV will be a standalone company with its own board of directors, Peebler said.

Rumors about ION’s balance sheet have been flying since the bottom dropped out of the market, and at SEG talk was that BGP was buying 51% of the entire company, not just the JV. But Peebler insisted this wasn’t some sort of fire sale but rather a serendipitous aligning of the planets. “This company is in a better position than it’s ever been,” he said.

It’s not quite Ed Sullivan’s variety show, but the annual meeting of the Society of Exploration Geophysicists (SEG) begs the question – what recession?

The show, being held Oct. 25-29, is always a happening event. But the current economic situation, coupled with the choice of Houston as a locale, had some worried. After all, when the going gets tough, travel budgets are often the first things to be cut. And the oil industry folks based in Houston often feel conflicted by work and family obligations, limiting their attendance at the show.

Not to worry, as it turns out. At a recent Geophysical Society of Houston luncheon, SEG General Chairman Roy Clark said that preregistration was already at 6,400, a new record. People from 60 countries are traveling to the event, also a new record.

Perhaps the most telling indicator is the fact that the SEG had to expand its exhibit space not once but twice due to the overwhelming demand from companies wishing to showcase their technologies and services.

This is good news in these troubled times. The geophysical industry has not been immune to the downturn any more than any other segment, yet people still flock to shows like SEG to learn more about the profession. And it’s not just the conferences that are successful – SEG’s two publications, The Leading Edge and Geophysics, have received so many contributions that they’ve often run special supplements to accommodate them.

Maybe people just have more time on their hands. But I don’t think that’s it. As a watcher and purveyor of information about exploration technology, I find these exciting times indeed. So many new technologies, from acquisition through processing and interpretation, have come into play in just a few short years. R&D efforts continue at a frantic pace. Those who attend the show are likely to learn a lot in a short time from browsing the booths, attending papers, and talking to poster presenters.

I wouldn’t miss it for the world.