In 1958, just a few months following the successful launch of Sputnik I, the US President’s Science Advisory Committee released a little report titled “Introduction to Outer Space.” In it four factors were provided that “give the importance, urgency, and inevitability to the advancement of space technology.” Strategic defense, national prestige, and the furthering of scientific knowledge were seen as key motivators.

The primary motivator, however, was the “compelling urge of man to explore and to discover, the thrust of curiosity that leads men to try to go where no one has gone before.”

Outer space was considered the next logical place to explore, according to the report, since most of the surface of the earth had been explored. But somebody forgot to tell the industrious geoscientists and engineers toiling in the world’s oil and gas fields that fact as they explored on and under the earth’s surface.

A surface that, it is worth noting, is more wet than dry since the ocean covers 70% of the planet. Of that 70%, less than 5% has been explored to date, according to the US National Oceanic Atmospheric Administration’s Office of Ocean Exploration and Research.

The surface of our knowledge has just been scratched, and advancements in technology continue to help energy researchers reach farther and drill deeper. The thrill of exploration coupled with the very real need for reliable supply sources to fill the growing global energy demand boldly pushes industry into new frontiers.

Nine billion reasons

In “The Outlook for Energy: A View to 2040,” Exxon-Mobil puts forward its assessment of future trends in energy. For its 2013 report, the company finds that the energy demand in developing nations will rise 65% by 2040 compared to 2010. On a global scale it finds, even with significant gains in energy efficiencies, that demand will grow 35%.

What is driving this demand? Population increases and economic growth in developing countries certainly contribute. By 2040 the world’s population will rise by more than 25%, from 7 billion people today to more than 9 billion. More than 75% of the world’s population will reside in the Asia-Pacific region and Africa, with India set to have the world’s largest population post-2030, the company said in the outlook.

Prosperity and improved living standards in the developing world will mean “more air-conditioning systems, appliances, and electronic devices driving demand.” Also contributing is “the shifting population from rural areas to cities. An average urban resident consumes more energy than his or her rural counterpart.”

Economic growth and the improved living standards it enables will require more energy. China will contribute more than 20% of global economic growth as its economic output rises more than 5% per year through 2040. India will grow at a similar rate on average as China and will be an important growth engine in the years ahead. The gross domestic product of Africa is expected to grow by an average of 4% annually through 2040, the report continued. Energy demand, the company predicts, should rise in four main sectors: electricity generation, industrial, transportation, and residential/commercial. Electricity generation represents the largest growth area in energy use in the next 30 years.

This feat is, “quite remarkable considering that a little over a century ago, electricity use was a novelty. Today, electricity is a basic necessity in the lives of most people. Yet even now, around 1.3 billion people don’t have access to electricity, according to the International Energy Agency,” the report states.

On the supply front, according to ExxonMobil, oil is projected to remain the primary fuel of choice, with natural gas overtaking coal as the secondary fuel source by 2040.

“Oil and gas will supply about 60% of global energy demand in 2040, up from 55% in 2010,” the report continues. Conventional crude production from both OPEC and non-OPEC sources will see a “slight decline over time,” but the decline is “more than offset by rising production of crude oil from deep water, oil sands, and tight oil resources.”

The report singles out the successes of deep water and oil sands developments as examples of how new technologies are key to delivering additional sources of liquid supplies to meet rising demand.

ExxonMobil finds that the world continues to hold significant oil resources and estimates that less than half of the world’s recoverable crude and condensate will have been produced by 2040.

“Even with production, the resource base will continue to grow due to the ability of the industry to find and develop new types of resources through improved science and technical innovations,” the report said.

Finding and developing new resources as well as developing the new technologies necessary to access those resources are activities that keep exploration companies boldly pushing the limits of the frontier.

Frontier defined, risks assessed

A quick check of Oxford’s Dictionary revealed that a frontier can be either a “border separating two countries” or the “extreme limit of understanding or achievement in a particular area.” Pushing limits to the extreme is an activity familiar to the oil and gas industry. So how does it define “frontier?”

“There are several ways to define it,” said Donald Paul, executive director of the University of Southern California Energy Institute. “Many people will think of undeveloped, remote basins or the next step-out into ultra-deep water. In my view, it certainly includes the development of the Arctic. However, one could argue that, up until a few years ago, development of shale resources was a frontier.”

He added that the term “frontier” typically applies to resources where current or historical activities have been limited by geography or political access and where current technology has not been applied at scale.

“It can be geographically remote, or it can be, in effect, technically remote – such as ultra-deepwater development, for example. It also can be a technical frontier. And in some cases it can be a frontier because geopolitically you’ve never been allowed to go there,” he said. “I think all of those – technical, geographic, political, or economic, because the technology didn’t allow it – could all describe a frontier.”

Part of the expansion planning process involves the performance of an extensive risk assessment.

“Every company probably does it differently,” Paul said. “But you look at the dimensions – geologic risk, technology development risk, political risk, environmental and regulatory risk, and economic risk – and then determine the aggregated economics of developing the resources. Are the financial terms in place to allow you to recover your investment? It’s a multidimensional risk assessment that is stacked up against other choices in the opportunity queue.”

The project can move up or down in the opportunity queue if a condition in the assessment changes.

“The play could look promising, but if after a number of exploration wells it turns out it doesn’t have favorable geological potential as originally thought, then that play would drop in its valuation down your queue,” he said. “The hydrocarbon opportunity has to be there, so ultimately, petroleum geology is fundamental. You have to have attractive source rock, attractive reservoirs, and production potential, or companies aren’t going to develop the resource.”

Technology, geology

Just as our understanding of the petroleum system has evolved, so has the technology. “The continued advancement of seismic imaging has always played a key role as it allows explorationists to re-visualize the subsurface – to see previously hidden or invisible geological information,” Paul said. “This can change the way geologists view the subsurface, and it can change geological models. Changing geological models is what ultimately leads to discoveries. “

Advancements in drilling technology, such as the ability to drill precision targeted wells to great depths, also have made a difference. “The advancement of seismic imaging, drilling technology, and sophisticated recovery capabilities along with inventive geological thinking are the key pieces that probably make a difference over the long run,” he said.

Great exploration geologists are decisive in his view. And if companies do not have them as a core part of their exploration team, then to some extent, they are not going to be able to play the frontier game, he adds. Why?

“Because it takes someone who can envision a new play opportunity in their mind, based on sound geological thinking but before the availability of definitive data, that can lead you to a new discovery,” he said.

The importance of geologic knowledge is a sentiment shared by Tim Dodson, executive vice president of exploration for Statoil ASA.

“When you are going after these frontier plays, if you don’t have a pretty thorough understanding of the globe, where the best basins are, and where the best parts of the best basins are, certain sweet spots, then it’s just pot luck, to be honest,” he said. “Statoil has spent the better part of the last 10 years since 2002 screening the globe and literally using thousands of man-hours to pinpoint the basins around the world where we think there is the most oil and gas potential and then prioritizing that potential.”

Every year the company goes through the process of prioritizing basins, Dodson noted.

“I think at this point in time we have 18 basins on a global basis that are prioritized, and then there are a whole bunch of others,” he said. “There are about 500 to 600 sedimentary basins around the world to choose from. We’re not saying that those 18 are necessarily the ones that work, but that’s where we target our efforts.

“It’s about being nimble; it’s about seeing things early and then acting on them as quickly as you can,” he said. “It really comes back to geological insight. If you haven’t got the insight and you don’t really understand the geology, then you most likely are not going to succeed.”

Evolution, risk mitigation

During a presentation at SPE Offshore Europe 2013, Norrie McKay, CEO for Aberdeen, Scotland’s KCA Deutag, encouraged companies to review all angles when considering a frontier region for exploration.

“Geographical frontiers evolve with time. What is a frontier today may not be so after a certain period,” he said. “Different nationalities can result in evident difference in cultures. Consideration of the customs, cultures, and habits should be factored in to the decision-making process.”

The North Sea provided a perfect backdrop for McKay to illustrate this as he noted how strange the cowboy-booted Texans must have appeared to the local Aberdonians and vice versa when the industry first got started there in the late 1960s.

“The challenge today is the successful integration of the company’s existing operating culture within the local operating environment,” he said.

Operating in a frontier provides numerous advantages for companies willing to take on the risks, but, “there has to be compelling enough reason to overcome them,” he said. These reasons could be mutually beneficial, like the introduction of new technologies and financial investment into the country or the opening of new markets for the company.

“Expanding business across multiple boundaries diminishes risks and reliance on any single project,” he added.

For each challenge or opportunity that a company can face in a new country, there are ways to mitigate the risk, he said. Compliance with local legislation can be less painful by partnering with the right people with strong local knowledge, for example. A strong local team with corporate backing is the key for effective supply chain management, logistics, and operations, he said.

One way to success

Like KCA Deutag, Ophir Energy, an independent upstream oil and gas exploration company based in London, has had considerable success in frontier plays, notably in Africa. Ophir Energy’s spokesperson said the company recognizes it is potentially exposed to a number of different risks, ranging from strategic to operational, financial, and environmental.

In addressing these risks, the company is committed to effective risk management, and this is an integral part of its activities. Generally speaking, key elements of its approach to risk management include risk assessment, risk analysis and evaluation, risk mitigation, risk monitoring and reviewing, communication, and consultation.

The company provided a few examples of risk and how it manages and mitigates these risks, which include:

  • Political risk. Ophir strives to maintain positive relationships in all host countries in which it operates. Further, the company works to the highest industry standards with all regulators. Compliance with Ophir’s license and production-sharing contract obligations are closely monitored on a continual basis;
  • HSE. The company upholds and closely monitors a comprehensive system of HSE procedures that teams are required to comply with. Prior to projects, the company performs comprehensive environmental impact assessments and has comprehensive spill and emergency plans in place should an incident occur. Ophir further provides equipment and regular training to staff and service providers; and
  • Stakeholders. The company maintains a regular dialog with all key stakeholders and provides stakeholders with required information in accordance with applicable regulations.

The various risk areas identified are further managed and under continual supervision by the relevant board committees, including the audit committee and the HSE committee, according to the company. Ophir’s competitive advantage in Africa rests with its technical expertise (geoscience) and early entry into new plays and basins ahead of the rest of the industry, according to the company spokesperson. Its strategy is founded on a number of key pillars, including:

  • Securing significant operated equity positions in plays with substantial running room;
  • Funding extensive seismic acquisition and interpretation; and
  • Bringing in partners with both financial and technical strengths (such as BG in Tanzania for LNG/gas and Petrobras in presalt Gabon) as well as securing attractive farm-in terms to minimize the exposure of shareholders’ capital to high-risk exploration.

The company’s success in Tanzania is a template for what it is trying to achieve across its portfolio: early entry into a new play ahead of the rest of the industry; taking a rigorous approach to de-risking the assets through the application of geoscience; and acknowledging ahead of drilling that the play was likely to be gas-prone, which allowed the company to bring in as a partner the leading LNG player, BG Group.

The same approach is being applied in Gabon. There the company has picked up acreage ahead of the presalt play in West Africa, worked up the prospects to drillable status, and brought in one of the leaders in presalt exploration with Petrobras as a partner, which also is carrying the costs on the first exploration well, according to the company.

In taking on the challenge of frontier plays, exploration companies and partners are discovering and developing today the resources necessary to meet the energy demands of tomorrow. In doing so, these companies are helping to ensure that we all will live long and prosper.

Iraq: the growth of an oil and gas frontier

By Darren Grainger, NES Global Talent

Iraq has faced many challenges since conflict began there a decade ago. As one of the first registered staffing agencies in the country, during this time NES Global Talent has seen the region develop from an emerging frontier to a major player in the global oil and gas market.

According to the US Energy Information Administration, Iraq has the fifth largest proven crude reserves in the world. While increases in oil production have been impacted by infrastructure and political challenges, the EIA states that Iraq passed Iran as the second biggest OPEC producer of crude oil toward year-end 2012.

Indeed, in its “Iraq Energy Outlook” report, the International Energy Association (IEA) said that Iraq will make the largest contribution to global oil supply growth over the coming decades with current production of 3 MMb/d more than doubling by 2020 and going on to reach more that 8 MMb/d by 2035. The report finds that Iraq will become a key supplier to growing Asian markets such as China and will overtake Russia to become the world’s second largest oil exporter by the 2030s.

NES Global Talent is seeing this growth on the ground. More investment is being pumped into the region, and new projects are springing into life. In northern Iraq and Kurdistan the company is seeing a great deal of growth in operation and drilling services, with in-demand disciplines including subsurface, project services, and operations and maintenance. In southern Iraq, existing oil fields such as Rumaila also are going from strength to strength and creating more job opportunities.

To drive growth in the region, the oil and gas industry needs to attract the best in local and global talent. With about 50% of skilled engineers being eligible to retire in the next decade, this is a challenge. However, by implementing a mix of innovative hiring and retention strategies and by offering robust safety and security support, the industry can ensure it attracts the talent it needs in regions such as Iraq to fulfill local and global energy requirements.

Energy reform creates opportunity in Mexico

By Velda Addison, Associate Online Editor

Mexico is not considered a frontier area in terms of oil and gas production, but energy reform proposals being discussed in the country could open doors to unconventional and deepwater finds.

Forging new relationships with international players could set Mexico on pace to capitalize on what the US Energy Information Administration (EIA) estimates to be 16 Tcm (545 Tcf) of technically recoverable shale gas resources – the sixth largest amount in the world. Mexico is believed to have at least 10 Bbbl of proven oil reserves, mostly heavy crude and mostly offshore, and about 481 Bcm (17 Tcf) of proven natural gas reserves.

However, private investment in the energy sector by foreign companies is prohibited by law, which has held back the country and state-run oil company Pemex.

“When you hold back market economics like you’ve done in Mexico for the past 75 years and when you create one company that is supposed to satisfy the nation’s entire energy needs, you’re going to run into problems,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, said during Mayer Brown’s Mexico Energy Reforms seminar Sept. 13 in Houston. “One company can’t do it all.”

Oil production has steadily fallen in Mexico, and the country continues to rely on natural gas imports to meet energy needs despite its abundant resources. While Pemex has found success in the shallow-water Gulf of Mexico and has made some major deepwater finds within the past few years, challenges ahead include drumming up the needed support and technology to tap shale and deepwater plays.

But change is on the horizon for Mexico, considering that three energy reform proposals have been presented by the country’s political parties. If the proposal of the ruling party – the Partido Revolucionario Institucional – is approved, Pemex will be allowed to enter joint ventures with international oil companies (IOCs), national oil companies, and other producers to develop upstream activity. The door to profit-sharing agreements also would open.The proposal, brought by Mexican President Enrique Pe?a Nieto, “cleans the slate at the constitutional level for the congress to set energy policy and legislate who can do what and under what conditions without any constitutional constrictions,” said Jose Valera, a partner with Mayer Brown.

If the constitutional changes are made and the necessary secondary legislation is approved, making the proposal a reality, foreign investors would be able to enter Mexico. But not all will jump into the action if the conditions are not right.

“Mexicans, including policymakers, believe that the private sector internationally is so desperate to get into Mexican deep water that it will accept anything,” Wood said. “But we all know that the private sector makes investment decisions based on the bottom line, and if it’s not a good deal, it is not going to go in.”

Many questions remain about Mexico’s future energy policy. The percentage of government take, local content requirements, and taxes and royalties are all unanswered questions at the moment.

But potential remains, and that is something that won’t go overlooked.

“I think the big IOCs are going to be looking at deep water. That’s where you have the biggest potential upside,” Wood said. “That’s where the government is very anxious to move on, so I think they are going to make that attractive. But there are certain players that are going to be very, very interested in shale as well.”

The majority of Mexico’s shale gas resources are in its northeast and east-central regions, according to the EIA. The Burgos basin, which accounts for two-thirds of the country’s technically recoverable shale gas, includes parts of the Eagle Ford.

Dallas Parker, partner with Mayer Brown and moderator of the event, pointed out that about 671,000 b/d were produced in the Eagle Ford in June 2013, up 60% from June 2012.

“If you multiply that times the price of a barrel of oil, to me that’s big money,” Parker said. “That would reduce a huge percentage of what [Mexico has] lost in production.”