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Oil Explorers Searching Ever More Remote Areas

The New York Times: Oil Explorers Searching Ever More Remote Areas

“Exxon Mobil, BP and Shell will have to find a total of 4.4 billion new barrels of oil each year just to replace their current production.”

By JAD MOUAWAD

Published: September 9, 2004

TAVANGER, Norway, Sept. 3 – It is a tale that Statoil’s explorers enjoy retelling. In 1992, the company decided to give up on an offshore tract after two exploratory wells came up dry. Management was getting nervous about the cost – $15 million a well – and was ready to cut its losses.

The explorers still had hopes, though, and managed to get permission for one last try. The third well struck oil, opening a field with about 550 million barrels of recoverable oil, enough to satisfy Britain’s consumption for a year.

The story would make any wildcatter proud. But the find by Statoil, the Norne field, was the last significant crude oil discovery in Norway. In 11 years of hunting since then, quite a bit of natural gas has been found, but hardly any more oil.

The same is true across much of the industrial world. Western oil companies are running out of likely places to look, and significant finds are becoming rarer. With the most accessible areas either picked clean or kept off limits for political reasons, exploration teams are having to push into harsher, more remote and less promising territory, where costs and risks are high.

Oil trading in the range of $40 to $45 a barrel may make such projects seem attractive anyway, but there is widespread concern in the industry that prices cannot be counted on to stay that high. So companies direct much of their effort toward wringing more production from known fields rather than hunting for new ones.

“There’s not enough long-term investments,” says Claude Mandil, executive director of the International Energy Agency in Paris, which represents the interests of 26 oil-consuming nations. “There’s a need to invest in more production capacity. We’re ringing the alarm bell.”

In Stavanger, a former sardine-canning city of more than 100,000 people that has become the low-key capital of Norway’s $44-billion-a-year oil and gas industry, these trends are visible in microcosm.

Statoil, the largest Norwegian oil company, and others are spending more in this country – up to $9 billion last year, twice the level of the mid-80’s – but are drilling fewer exploratory wells. As a result, production in Norway, a leading exporter, has leveled off around three million barrels a day. By 2005 or 2006, it is expected to start falling as new discoveries do not make up for what is pumped out.

“Finding sufficient quantities of oil will get more difficult,” said Tore Torvund, the head of oil and energy at Norsk Hydro.

Strategists have been surprised this year by the strength of global demand for oil, driven in large part by breathtaking growth in the appetite for cars, manufactured goods and electricity, particularly in China. Some energy planners express concern about the oil industry’s response.

According to Wood Mackenzie, an energy research firm, 6 of the 10 largest oil companies have reduced their investments in exploration since 1998. Together, the world’s leading companies spent $8 billion drilling for oil last year; in 1998, they spent more than $11 billion. The number of wells drilled in OPEC nations fell 6.5 percent in 2003 from 2002.

As worldwide consumption has grown by about 17 percent in the last decade, to about 80 million barrels a day, explorers need to find ever-growing quantities of oil to replace depleted reserves. Exxon Mobil, BP and Shell will have to find a total of 4.4 billion new barrels of oil each year just to replace their current production. The next six largest companies need to find 2.6 billion barrels more. According to Neil McMahon in the London office of Sanford C. Bernstein & Company, drilling teams in the most active exploration areas – the Gulf of Mexico, South America and the waters off West Africa – have been discovering less, about five billion barrels a year.

“You’re not finding enough oil through exploration,” Mr. McMahon said. “It’s going to be a struggle for exploration to be the key growth for oil companies.”

Along with most domestic production, Alaska’s North Slope, which provides a quarter of American output, is in decline. With the United States importing more of its oil – 54 percent in 2002, and a projected 70 percent in 2025, according to a forecast by the Energy Information Administration – the industry wants to be allowed to drill in the Alaska National Wildlife Refuge.

To be sure, the world still has a lot of underground oil left to develop. Five Middle East countries -Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates – are situated atop 700 billion barrels of oil, or 61 percent of the world’s proven oil reserves. At today’s pace of production, enough oil has already been found to last 41 years, according to statistics compiled by BP.

Exploration has been restricted in some of the richest oil zones. Sanctions imposed on Iran, Iraq and Libya in the 1980’s and 90’s have slowed development there, while countries like Saudi Arabia and Mexico have government oil monopolies and allow only limited foreign involvement.

Russia, though, has seen a stunning increase in oil production. Output jumped 40 percent from 1998 to 2003, in part because of the industry’s privatization and the adoption of Western methods. Production is still short of the Soviet-era peaks, and there are mounting concerns about government intervention.

Analysts say the industry worldwide has disappointingly little to show for its exploration efforts in recent years. There have been only a few big strikes, notably the Kashagan field in Kazakhstan in 2000, the largest in 30 years, with 10 billion to 30 billion barrels. It is expected to start producing in 2008.

But while exploration activity is declining, oil companies are stepping up production and spending more on existing projects. According to Wood Mackenzie, the top 10 oil companies spent $50 billion on field development in 2003, up 42 percent from 1998.

Memories of that year haunt the industry. Financial crises in Asia undercut demand for oil so rapidly that prices plunged for a time below $10 a barrel, prompting production cuts and the cancellation of dozens of exploration projects. Such recollections make oil companies cautious.

“Executives have taken a more conservative outlook for oil prices” since then, said Frederick Leuffer of Bear, Stearns in New York. In planning development budgets, Mr. Leuffer said, “most companies are still thinking in terms of $20 to $25 a barrel – no one is thinking in terms of $30 oil.”

The industry has also consolidated, in a wave of mergers driven by cost-cutting. And new technology has made it cheaper to recover oil from existing

fields. Average production costs fell to $5.95 a barrel last year, according to Bear, Stearns, from about $7.30 in the early 1990’s.

As a result, “exploration has become much more disciplined, with a real focus on returns,” said Daniel Yergin, chairman of Cambridge Energy Research Associates.

The biggest oil companies are, at the least, treading water with their exploration efforts. Mr. Leuffer said they had found enough new oil in 8 of the last 10 years to replace their production, and last year they found 9 percent more than they pumped. “We see no fallout or reduction in the industry’s performance,” he said.

But they are having to look in ever-more-forbidding places to find it, as Norway’s recent experience illustrates. Though the country still has potential, “the easy part is done,” said Tor Fjaeran, head of exploration at Statoil.

Unlike the British sector of the North Sea, which is considered completely explored, the Norwegian continental shelf is thought to contain substantial quantities of undiscovered oil – perhaps one-third of the amount already found, or 9.4 billion barrels of oil and 67 trillion cubic feet of gas, according to the Norwegian Petroleum Directorate, the government agency that oversees the industry. But only 19 exploratory wells were drilled last year in Norwegian waters, the fewest since 1977. Of those, only one in three turned up oil or gas, down from half in 2002.

Increasingly, the search is moving northward into the Barents Sea, above the Arctic Circle and near Norway’s far northeastern border with Russia, where the weather is bitter and in the winter there is no daylight for months.

“You have to go to more difficult areas to find oil,” said Ashley Heppenstall, chief executive of the Swedish oil company Lundin. “The Barents Sea is clearly very prospective, but it’s a very challenging environment.”

Though it may harbor a third of Norway’s undiscovered energy reserves, the Barents Sea has had only limited prospecting so far. Sixty-one exploratory wells have been drilled, but only one production project has been begun, a $7.5 billion installation to liquefy natural gas for export to the United States starting in 2006.

The oil industry is also looking at the Lofoten Islands off northern Norway, which are now closed to exploration because of seabird colonies and cod spawning grounds that environmental advocates and the Norwegian fishing industry want to protect. Environmental concerns led to a two-year halt in drilling throughout the Barents Sea, but the Norwegian government allowed exploration programs to resume in December, and three more wells are to be drilled this winter.

“We’re forced into new frontier areas, into deeper and harsher conditions, and into potentially more politically and environmentally sensitive areas,” says Tore Holm, director of exploration for Shell in Norway. “It’s by nature riskier, and by nature most costly. But the rewards could be higher.”

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