On the hunt for ‘black gold’

The world’s oil supplies are dwindling – governments know it, the oil giants know it, even the public are aware that it’s not going to be around forever to feed our insatiable craving for energy. Satisfying this appetite, swollen in part by China and India’s economic boom, is an escalating challenge for the word’s major oil companies. Whilst most parts of the world where crude oil has identified have been tapped, there are still some of the more inhospitable areas that may be housing raw energy. The problem is that exploration in these regions, especially deep-sea drilling, is a hugely expensive operation – sometimes costing up to US$100 million for a deep-water well. As well as the heavy costs, there is the significant chance that the search will prove fruitless.

Sure, the industry knows that exploration is a risky game but the potential rewards are too good to ignore. Oil extraction is high on the agenda at the moment with world oil production stretched on the back of geopolitical problems. Output has dropped due to the war in Iraq, unrest in Nigeria and Venezuela, as well as the ongoing uncertainty over availability of exports from Iran. And production in the US was rocked by last year’s hurricanes – toppling offshore platforms and bringing drilling to a halt. These incidents have contributed to the inflated price of crude oil and hit US motorists hard in the pocket at the pumps. It is these factors that have fuelled the Bush Administration’s desire to slash the nation’s dependence on overseas oil.

US drilling

Despite being the world’s largest energy consumer, the waters off most US states are out of bounds for oil exploration teams, while offshore exploration is constrained to the Gulf of Mexico. This means that over 80 percent of the country’s waters are off limits, even though around 30 percent of the oil and 20 percent of the gas the US produces comes from offshore fields – mostly in the Gulf of Mexico. Most of the oil is thought to be located in the areas currently open to drilling, but the inaccessible waters could hold billions of barrels of oil. Despite the no drill zones, a bill was passed in August allowing more than eight million acres to be opened up to oil and gas drilling.

Environmentalists continue to lobby against oil exploration off US shores, protesting that the country has not exhausted alternative sources to meet the country’s massive energy needs. As well as being concerned about the impact drilling has on the environment and wildlife, they also argue that cleaner cars and more efficient homes and offices are the way forward.

Another contentious spot for potential oil drilling is Alaska’s Arctic National Wildlife Refuge (ANWR). The US Energy Department forecasts that if the ANWR was opened to drilling it would add 900,000 barrels of oil a day to world production – making up for the fall in Iraq’s production. The White House also believes that drilling in Alaska would go some way to reducing the US’s reliance on imports, create jobs and raise revenue. Those against the idea argue that its ecosystem is so fragile, any exploration could cause irreparable damage to the environment and put animals such as native bears and migratory birds at risk.

Hard to reach

When it comes to rest of the world, it seems that most oil fields have been discovered tapped – apart from perhaps the inhospitable Arctic region. Nevertheless, offshore exploration at existing sites appears to be the focus for drillers. “There has definitely been an awful lot of emphasis placed on investing in upstream activities and drilling in general,” suggests Simon Walder, Oil Analyst at Global Insight. “At the moment, the extreme of that focus is in deepwater acreage. However, there hasn’t been too much sign of going to more exotic locations in terms of the oil and gas sector. I think they are still looking for conventionally strong areas of the world – particularly the Middle East and Asia.” Walder adds: “In the Gulf of Mexico and off the West African coast seems to be the focus of where the more inhospitable drilling areas are situated.” One major problem facing the companies is getting access to potential oil fields in ‘closed off’ parts of the world like Russia.”

Chris Skrebowski, an Oil and Gas expert, is of the view that there are few, if any, parts of the world that have not been assessed. “Obviously, [oil companies] are keen to find more oil but there are few, if any, untapped regions on the globe,” he says. “People mutter about the high Arctic but it has no infrastructure, no licensing, no access and no rules, so their ability to drill there is rather limited. By and large, they are intensively working all the known areas and deeper offshore areas off Angola, the Gulf of Mexico and Brazil. Evidence suggests that exploration seems to be inhibited at the moment – both by a lack of decent prospects and the high risk, high cost problem the companies are up against.”

Wardell adds: “The main problem companies are facing is access in terms of getting into regions that have resources and getting the government onside to allow investment to occur there. For some of these other areas, like Central Russia, massive investment in infrastructure is required. This means the economics become tricky because you might only have one or two markets you can reasonably access from that area, rather than getting to a port conveniently located for global markets.” He adds: “They are thinking about the more inhospitable areas but there is still a question of whether it is economically viable. Most of the companies are focusing on the more traditional areas where they can get access.”

When it comes to deep sea exploration, particularly in the more inhospitable regions, the oil firms have to weigh up the cost of surveying and drilling against the potentially huge rewards of discovering lucrative wells. Shallow shelf oil wells can cost anything between US$10 million and US$30 million, while deep-sea wells can be up to US$100 million. However, hundreds of smaller companies drill oil onshore for as little as US$500,000. “You have to be accurate with your targeting if you are drilling in these kinds of environments,” Wardell asserts. “However, you can potentially reach very large amounts of reserves in areas that don’t have the same kind of political or regulatory risks that you might have in the more traditional oil and gas areas of the world. It is a high risk, high reward strategy.” Within the industry, high-risk prospects are seen as having a 10 percent chance of striking oil. Medium risks have a 10-20 percent success rate, while low risks offer up more than a 20 percent chance. On the whole, about 40 percent of wells are found to contain hydrocarbons – making it a truly hit or miss exercise for drillers.

Tools of the trade

Of course, before any drilling can happen, the geologists and oil companies need to assess whether there is a good chance the ground or seabed is oil-rich. Today, finding oil is a precise science, with the industry investing heavily in hi-tech machinery and 3D computing to track down the black stuff. One of the most widely used methods is seismic surveying. This involves sending shock waves in the ground and measuring how long it takes for the surface rock to reflect the waves back to the surface. From there, 3D computer models of the data can be constructed to give underground geometries of the rock. Another technique is to use sound waves that reflect differently off porous and nonporous rock layers to create maps of underground oil pockets.

Back at the oil company’s HQ, hi-tech 3D labs put data at the oilmen’s fingertips with advanced visualization technology used to look at rock formations on the other side of the world. Some of the rocks being surveyed may be buried thousands of meters below the earth’s surface. Geologists need to know how these rocks have been affected by events stretching back over millions of years. They also need to identify traps where oil may have accumulated over the years. “We are now able to find a needle in a haystack but it is still a needle,” Skrebowski says philosophically. “All of the world’s big oil fields were found by geologists wandering around with hammers. He says the companies have to put their faith in the hands of the technology when it comes to surveying and drilling. “We now have technology to drill into 9000 feet of water but the costs and complications are horrendous. It comes down to whether you have targets big enough to pay for it all – you have got to be pretty sure you are going to find a big oil to justify US$50-100 million wells. You can do almost everything subsurface nowadays but when you get these ultra-expensive projects, understandably a certain conservatism about some aspects of the technology creeps in.”

In many cases the drillers are turning the theory and 3D data into an economic reality. Even when a development well is drilled between two producing wells, there is still risk that nothing will be unearthed. The odds are lengthened further if it is a so-called ‘wildcat’ well in unexplored territory. And with so much of the earth being tapped for oil, and gas too, the need to protect wildlife and the environment is paramount. The oil companies and geologists are all too aware of the environmental impact of searching for oil, especially when it comes to seismic surveying. For instance, improved methods for clearing and using narrower cutlines reduces the impact on soil, water, plants and wildlife in forested areas. In mountainous terrain helicopters or even packhorses are used to minimize surface disturbance. Likewise, in offshore exploration ‘air guns’ using compressed air have replaced dynamite as a better and safer energy source, which also reduces the risk on marine life.

Under pressure

Today, oil production is running at peak capacity with very little surplus. Geopolitical influences and the strain of China and India’s booming economies are having a profound effect on supplies. “China and India are the key to the current increase in demand and the main reason for squeezing the market,” comments Wardell. “That puts pressure on the companies because they are quite aggressively looking to compete in the areas like Africa and the Middle East where there is growth potential. That is forcing the majors to consider deepwater drilling.”

Skrebowski also argues that this strain on supplies is creating a vulnerable situation for the industry. “We are in a position where there is effectively no spare global capacity because everything is flat out – and any mechanism operated flat out is intrinsically unstable. Throw in on top of that all these political wildcards and you have a very unstable system. The nature of this means that it may run sweetly for a while but then suddenly become violently unpredictable.”

There is still much debate surrounding the theory that one day we could reach the stage where crude oil will run dry or become so limited that only the very rich will be able to afford it. At the moment, world daily consumption of crude oil is running at 87 million barrels. How much we will need in the future is an educated guess, taking into account of emerging economies and their rapid energy consumption. As well as this, it is almost impossible to gauge how much oil the world has in reserves at any given time because many countries do not allow outsiders to audit their oil field.

Skrebowski says: “I think the national oil companies are becoming like elephants on a patch of grass that is too small. They clearly can’t find their way out of the problem and they can’t excuse their way out. Either they have to increasingly focus on the refining and marketing, which historically has never been the fast route to profitability, or they have got to form active working alliances with national oil companies in which they become effective partners. I can’t see any other solution because the discovery rate is too low and they are not really replacing their reserves.”