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Oil explorers find new fields to conquer

Times Online
June 8, 2008

Oil explorers find new fields to conquer

As oil reaches $139 a barrel, previously uneconomic reserves are becoming viable

Russian oil gaint Yukos oil rig

(Alexander Korolkov)

FOUR years ago, oil-industry veteran Lawrie Payne was at a loose end in his native Canada and casting around for a new business venture.

Then a contact in Britain called — would he be interested in looking for oil in the North Sea?

On the face of it, it was an odd idea. As president of Sunningdale Oil, Payne had experienced the North Sea’s heyday in the 1970s, when the big oil groups invested billions in giant fields. Now it was making its swansong, with production in decline and the big boys packing up and going in search of new finds in more exotic climes.

For Payne, however, the idea struck a chord. He knew oil prices were only going one way — up. He also knew from his time at Sunningdale that there were plenty of pockets of oil left in the North Sea too small to interest the likes of BP or Royal Dutch Shell, but just right for a smaller, nimbler group. He got on a plane to Aberdeen.

After small beginnings — money invested by the management, friends and family, then private placings with City institutions — Payne’s group, Ithaca Energy, quoted on the London Stock Exchange, is set to start producing oil and is drilling for more. It will pump 1,800 barrels a day by the end of the year and forecasts 25,000 a day in 2010.

It has sunk six wells, only two of which have been “dusters” — industry slang for a dud. And all the while the rocketing oil price is making Payne’s hunch look more and more clever.

“We couldn’t have done this without a higher oil price, and we thought that it would go up. But we had no idea it would go up this much,” he said.

Payne’s North Sea adventure is a small example of what $130-a-barrel oil — on Friday it reached $139, with many analysts predicting $150 next month — is doing to the oil-exploration game across the globe. Fields that were once thought too small, too deep under the sea, or in too dangerous a country, are being rushed into production.

Companies are also dipping into “unconventional” hydrocarbon deposits — the sticky mountains of tar sands in Alberta, Canada and on the banks of Venezuela’s Orinoco river, the “tight sands” gas reserves of western Australia, and the methane trapped in long-disused European coal mines.

It is not an easy road to riches. Oil prospecting remains a risky game, and costs have marched up in line with the oil price.

Companies that at the start of the decade would have expected a decent return on a field at $20-$30 a barrel now have to clear $70-$80 and more to make money.

They also face fierce competition from groups that don’t care too much about the price — national oil groups from the resource-hungry nations of Asia, led by China and India.

“The price is really a red herring. What drives price is scarcity, and that is what drives these state groups,” said one senior oil-industry consultant.

“They want to make sure they have oil in 20 years’ time. They are not too concerned about the price they have to pay because they know they have to have it.”

Canada is one of the biggest beneficiaries of the booming oil price. Its huge reserves of tar sands — a sludgy mix of soil and heavy oil — have been mapped for decades, but the relatively high cost of recovery and processing have kept them out of the mainstream oil game.

At $139 a barrel, however, Alberta, the state where most of the tar sands are located, has become an oil province to rival Saudi Arabia. The Athabasca sands are thought to contain 1.7 trillion barrels of oil, nearly as much as the amount of conventional oil estimated to remain in the ground worldwide.

Big oil groups such as Royal Dutch Shell and Exxon Mobil are ploughing billions into Canada, while rivals like Eni, the Italian group, are pushing into new territories. Eni recently announced the discovery of an oil-sands province in the Democratic Republic of the Congo that should yield about 2.5 billion barrels.

Extracting the oil comes at a high environmental price, however. The hydrocarbons are normally flushed out by injecting hot water or steam and caustic soda into the mined sands, which brings the oil floating to the top.

It is skimmed off, and usually mixed with lighter conventional oil before being piped away.

The Environmental Integrity Project (EIP), a lobby group set up by former lawyers at America’s Environmental Protection Agency, last week published research claiming that hydrocarbons from oil sands generated three times as much greenhouse gases as those from conventional sources. The extra emissions came from the energy used in digging up and processing the sands, the EIP said.

Eric Schaeffer, EIP director, said: “It’s hard to imagine what else it is that the US oil industry could do to go backwards further and faster than to rely on Canadian tar sands or similar resources in the United States.

“Not only would this mean significantly more pollution overall, but it would substantially boost the greenhouse-gas emissions linked to global warming.”

The oil-sands rush is part of a reassessment of prospects in North America.

“Most people forget America is still a top-five oil-producing country,” said Bob Fryklund, vice-president of industry relations at the consultancy IHS.

“There has been a flight back to the US by large and medium-sized oil groups. They have doubled their portfolio in North America in the last few years.”

More unfamiliar territories are being opened up.

“For the large oil companies, the key areas are the East and Africa,” said Fryklund.

Here, the big players can find fields of the size and technical complexity that only they can exploit.

Promising new territories are the Gulf of Guinea, off the coast of west Africa, Vietnam and Indonesia.

Back in the Americas, Petrobras, Brazil’s national oil group, recently found two giant offshore fields, Tupi and Jupiter, that have the potential to turn the country into a world player in oil exports.

The scramble has brought rampant price inflation to oil exploration.

IHS and Cambridge Energy Research Associates compile an index of industry costs, with 2000 set as the benchmark at 100. Last month, the index hit a record high of 210.

Hiring a drilling rig to explore a potential field now costs at least $650,000 (£332,500) a day, rising to $1m a day once all the attendant costs are added.

High rewards and high costs have made what was always a risky game even more sporty.

“There’s a tremendous amount of uncertainty out there,” said Alan Murray, project manager for exploration strategy at the consultants Wood MacKenzie. “There is a high oil price to plan on, but a lot of it is going straight out the other end.”

If the cost pressures were not enough, governments of oil-rich states are driving tougher bargains. They want more — if not nearly all — of the cream off the top. Oil companies are now usually asked to sign production or revenue-sharing agreements, which will typically give the local government 80% of the profits.

In recent auctions of blocks in Libya, regarded as a red-hot new oil province, firms have promised up to 95% to land the deal.

“That’s an amazing margin to commit to,” said Fryklund.

Murray said: “There are a lot of things — costs, shortage of key personnel, the inherently risky nature of the business — to keep oil executives awake at night.”

Payne added: “This is not a business for someone with a banker’s mentality. You have to have people who are prepared to live with uncertainty.”

For those who do get it right, however, the rewards can be substantial. Payne gives the example of one of his potential fields — he declines to identify which one — that would break even at $60 a barrel. At $100 a barrel, its value climbs to $350m. At $135, the figure is $720m.

“Once it’s running, the production costs are fixed, so the high oil price flows straight to the bottom line.”

Payne is not the only entrepreneur picking over the North Sea. Xcite, a company that listed on AIM, the junior London stock market, last year, has a single prospect — the Bentley field, which first produced oil in the 1970s when it was run by Amoco.

Xcite’s management bought the block knowing that Amoco had ignored a layer of heavy oil, a treacly liquid heavier than the deposits normally pumped out of the ground.

“We are not explorers,” said Rupert Cole, finance director. “We knew the oil was there, they just went straight past it.”

Advances in recovery technology — and, of course, the high oil price — has made Bentley gleam again. While the field has not yet been developed sufficiently to have independently verified reserve levels, the work so far indicates a value of $1 billion is not out of the question.

Xcite hopes to have the independent verification later in the year and, once Bentley is back on its feet, may go looking for other developments.

Other UK groups are looking further afield. Africa Oil Exploration Company, listed on the Plus market in London, was set up as a shell to invest in possible African wells. It recently bought into Wilton, a group with rights to an onshore heavy-oil block in Madagascar. Exxon has the rights to a larger offshore block next door.

“There’s no doubt that the high oil price makes investors prick up their ears,” said Africa Oil director Jock Buchanan.

It was vital to find the right types of engineering teams, he said, possession of which was one of the factors that had led his group to invest in Wilton.

“They have a great group of engineers who not only know their stuff technically but know Madagascar and Africa. There aren’t many people like that around.”

Payne, who has worked in the industry for 40 years, said the high prices should alert governments to the reality of oil supply.

“It’s a call to efficiency. Oil is a must-have commodity, and there is less and less of it out there,” he said. “We need to wake up to that fact fast.”

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4086604.ece

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