The New York Times: A Wildcatter Pounces

By JAD MOUAWAD
Published: May 20, 2007
HOUSTON

JOSEPH H. BRYANT, still boyish-looking at 51, jostles with glee among tens of thousands of people here at the Offshore Technology Conference, one of the energy industry’s biggest trade fairs. He is surrounded by newfangled technologies occupying more than half a million square feet of display space: drills stuffed with electronic sensors, underwater wells shaped like Christmas trees, mini-submarines and pipes, pumps, tubes, gauges, valves and gadgets galore.

“There is every little gizmo you need to make this business work,” Mr. Bryant says, joyously. He stops at a plastic model of an offshore oil rig, an exact replica of a huge platform he commissioned while running BP’s business in Angola a few years ago. “I love this stuff.”

Like the pieces of a giant puzzle, the parts showcased here could fit together and build an oil company — and that’s exactly what Mr. Bryant set out to do two years ago after a 30-year career directing energy projects for the likes of Amoco, Unocal and BP. With a team composed largely of retired energy executives, he wants to hunt for oil in the deep waters of the Gulf of Mexico or offshore West Africa, challenging Big Oil in its own backyard.

The American oil patch, once left to languish during an extended period of low oil prices, is on the rebound. Wildcatters like Mr. Bryant are ready to pounce. With oil prices now hovering around $60 a barrel — three times higher than they were throughout the 1990s — the industry is expanding at a pace last seen decades ago.

“The oil industry has changed dramatically in the last 20 years,” Mr. Bryant says. “Barriers to entry have dropped significantly. It doesn’t matter if you’ve been in the business 100 years or 100 days.”

Easily available capital and technology, once the preserve of traditional oil companies, are reordering the business. Investors are lining up to finance energy projects while leaps in computing power, imaging technology and collaborative online networks now allow the smallest entities to compete on an equal footing with the biggest players.

“There’s a lot of money out there looking for opportunities,” said John Schaeffer, the head of the oil and gas unit at GE Energy Financial Services. “It seems like everyone wants to own an oil well now.”

Still, oil exploration remains a costly business fraught with peril. While the odds have improved, success is elusive; three-quarters of all exploration wells come up dry, either because there is no oil or because geologists miss its exact location. All of which means that Mr. Bryant’s start-up, Cobalt International Energy, which plans to begin drilling next year, faces formidable hurdles.

“There’s no sugar-coating this — at the end of the day, it’s a high risk venture,” Mr. Bryant says. “Financially, we’re definitely wildcatting. It’s either all or nothing.”

OTHER challenges face Mr. Bryant as well. Despite the excitement and money flowing around the energy business these days, not every site is open to small wildcatters. Deepwater exploration, for example, remains far beyond their reach.

The logistics of deep-water drilling are daunting. On Sept. 5, 2006, Chevron tested a well in 7,000 feet of water in an underwater valley called Walker Ridge, about 175 miles off the coast of Louisiana in the Gulf of Mexico. With a total drilled depth exceeding five miles, it was the deepest well ever tested in the gulf and marked a new milestone in offshore exploration. It cost about $100 million.

Yet even with big oil finds in the deepwater recently, most major oil companies have been retreating from exploration, choosing instead to focus on developing large projects and exploiting existing discoveries.

In the mid-1990s, oil companies spent about 30 percent of their capital investments on exploration; last year, that share was closer to 18 percent, according to Arthur L. Smith, chairman of John S. Herold Inc., a consulting firm. And over the last two years, the cost of hiring deepwater drill ships has doubled because of their limited availability. The cost now runs about $500,000 a day — or $21,000 an hour. On average, drilling a well can cost $1 million a day and take months to complete.

Instead of looking for new petroleum sources, the big oil companies now spend more money on strategic and financial maneuvers like acquisitions and share buybacks, according to analysts. Many have also bolstered dividend payments in order to please their shareholders. A decade ago, oil companies spent $2 on exploration for every $1 spent on acquisitions; today, it’s the other way around. Exploration, which once took a place of pride among major oil companies, now takes a back seat.

But analysts warn that the industry should be expanding exploration, because much more energy will be needed in coming years. According to the International Energy Agency, the world will be consuming 115 million barrels of oil a day by 2030, up from 85 million today.

“It’s hard to explain why exploration isn’t getting more attention,” Mr. Smith said. Oil companies, he said, “have become more risk-averse.”

For whatever reasons Big Oil is forgoing exploration, that reluctance has opened a door to entrepreneurs like Mr. Bryant. Cobalt, taking advantage of the lush financing available to energy start-ups, has secured $600 million from investors like Goldman Sachs and Carlyle/Riverstone, a private equity firm. It is about to secure an additional $600 million to $900 million from its investors.

Cobalt, based here, has 35 employees, owns few assets, uses off-the-shelf technology and outsources most of its functions, including its human resources department. What’s left is the inner core of an oil company: a small team of experienced geologists looking around the world for hydrocarbon sources.

And lean and mean, Mr. Bryant says, is the right business model. “It’s clear to me the industry has not taken the efficient form of a virtual oil company,” he says. “This is a niche whose time has come.”

Unlike traditional wildcatters, Cobalt is hedging its risks by focusing on regions with proven track records, like the Gulf of Mexico, Angola and Gabon. “What successful explorers do is try to explore where there is known oil, where there is the highest probability of being successful,” says Robert Heinemann, the chief executive of Berry Petroleum, a small oil company based in Bakersfield, Calif. (Mr. Bryant is a member of Berry’s board.)

“One of the unique things about Joe is that he knows his way around the drill bit and he knows his way around the balance sheet,” Mr. Heinemann says, “and that’s the magic combination you need.”
MR. BRYANT was born in Kansas City, Kan., in 1955. His father was an engineer who helped build the federal highway system. After graduating with an engineering degree from the University of Nebraska in 1977, Mr. Bryant wanted a job that allowed him to be outdoors. Shunning offers from the likes of Ford and Procter & Gamble, he says, he went to work for Amoco in Wyoming.

“All I wanted to do was live in the mountains,” he recalls.

A 22-year-old with a bachelor’s degree, he had no knowledge of the petroleum industry. Amoco gave him basic training in petroleum engineering and geology in Tulsa, Okla. After that, he worked for the company in various positions and by 1988 was running Amoco’s exploration and production unit for the Gulf of Mexico.

It was a much different industry then. The oil business was entering a period of transformation, with oil-producing countries nationalizing their industries.

Mr. Bryant says Big Oil lost its focus in the 1980s, when, faced with a loss of access, low prices and pressure from Wall Street, it cut costs, sharply reducing the size of its work force, and shrank most of the in-house research teams.

The period traumatized an entire generation of engineers and left a long-lasting wound in the industry, leading to a brain drain of experienced engineers and geologists that can still be felt today. From a high of 800,000 employees in the early 1980s, the work force in the American oil industry had withered to 285,000 by 2005 — leaving the companies leaner and more willing to rely on technological innovation, but also grayer.

Most oil executives now say that the biggest problem facing their industry is finding enough young people to replace employees who retire. From 1985 to 2005, the average age of petroleum geologists rose to 55 from 35, according to industry groups.

Against this backdrop, Big Oil became even bigger. During the 1990s, oil companies stopped looking for riches through exploration and turned instead to Wall Street to expand. What resulted was a wave of megamergers — Exxon bought Mobil, Chevron bought Texaco, BP bought Amoco. While greater size might have allowed the new behemoths to take greater exploratory risks, the opposite occurred: exploration fell off.

In the summer of 2005, Mr. Bryant was at his ranch in Whitefish, Mont., a small, scenic mountain town, pondering his next career move. He had left BP the previous year to become president of Unocal, a struggling independent producer described in industry circles as “the best-looking girl that never got a date.” But within a year, Unocal was acquired by Chevron for $18 billion after a fierce takeover battle with a Chinese company.

Newly unemployed after the takeover, Mr. Bryant retreated to Whitefish and put together a plans for a new oil company, which he gave the code name “Montana.” Several former Unocal managers joined him, including Samuel H. Gillespie, a former general counsel at Unocal and Mobil, and James H. Painter, the ex-head of exploration. James W. Farnsworth, in charge of global exploration at BP, also took early retirement and joined the group.

They decided to name their company Cobalt, in homage to the midnight blue hue of the ocean’s deep waters, where they plan to focus their operations.

“It was serendipity,” Mr. Gillespie says. “A lot of things were coming together: high oil prices, consolidation in the industry, technology was becoming available. Five years ago, Cobalt could not have happened.”

It was the strength of Cobalt’s management team, and its ability to lure top geologists, that persuaded investors to back Cobalt’s project — to put together a crack team of experts who focus exclusively on looking for oil, while every other function of the company is subcontracted. Even once it finds oil, Cobalt will consider bringing in other companies to help shoulder its drilling and development costs.

Finding, developing and operating costs in the Gulf of Mexico run below $20 a barrel. With oil prices at $65 a barrel, if the company finds a field that flows at 50,000 barrels a day, it can potentially earn more than $2 million a day — or $800 million a year — from a single field. “The whole game is to put a string of those together,” Mr. Bryant says.

After securing financing, Cobalt spent about $35 million on 30 offshore blocks in the Gulf of Mexico; it expects to drill its first well next year. That is a breakneck pace for what can generally be a slow-moving industry.

Cobalt’s offices are on the 12th floor of a modern office tower in a fashionable part of Houston, close to the Galleria shopping mall. There are few indications of the type of work done here, other than a few geological maps pinned on walls. There are no replicas of tankers or offshore platforms in the lobby; no photographs of drill ships.

Cobalt says it has spent “tens of millions” of dollars acquiring and analyzing seismic data, the heart of any exploration business. Specialized companies sell the data, which they collect by surveying the world’s oceans, sending sound waves into the bottom of the sea and then recording the reflection they make.

Geologists spend months, sometime years, with that raw material, trying to read the results. They refine the information by running unpolished data through complex mathematical algorithms that require huge computing power to try drawing a clearer picture of subsoil — which they hope will lead them to oil deposits.

Cobalt now has about 25 geologists and geophysicists who spend their days staring at their dual-screen workstations or locking themselves in conference rooms to stare at large projections of seismic data on the wall. A lot of information is analyzed here, with nary a well ever drilled.

Subcontractors oversee the number-crunching, using computer servers located in a hardened bunker north of town, which was built to resist chemical and nuclear attacks. The atmosphere is collegial and relaxed, and everyone on Cobalt’s team, owners and geologists alike, stands to benefit handsomely from any discovery the company makes.

AT the heart of the project lies a simple realization, said Mr. Farnsworth, the company’s president: When it comes to pure exploration, only a handful of people find most of the oil. At BP, where he spent 23 years, only about 25 people were responsible for finding one billion barrels of oil each year.

“There’s a great deal of science in exploration,” Mr. Farnsworth said. “But it’s also an art. It’s interpretation.”

Cobalt is looking for oil reserves ranging from 100 million to 300 million barrels. While a big discovery can instantly earn the company billions, there is no guarantee that the company will find oil at all. “How are you successful in oil and gas exploration? It doesn’t need a whole committee,” said Mike Lentini, a 49-year-old geologist who spent 25 years looking for oil at Shell and recently moved to Cobalt. “If you go the consensus path, you get the average result rather than what is truly path-breaking.”

On a recent afternoon here, Mr. Byrant, who had just returned from a visit to the Middle East, said Cobalt would never be able to compete with Big Oil everywhere. But he said independent companies now had more than a fighting chance.

“Exploration has become a game of super technology,” he says. “That’s a lot different from the early days of the industry when wildcatters would just drill a well, cross their fingers and hope for the best.”

He adds: “What I would like is for people to look back in 10 years and say, ‘Yeah, these guys got it right.’ ”

http://www.nytimes.com/2007/05/20/business/yourmoney/20wildcat.html?_r=1&oref=slogin&pagewanted=all

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