Exploration Business Processes

Lesson Overview

The Oil and Gas Exploration Business Processes Lesson consists of the following topics:

• Learning Objectives
• Typical E & P Organization
• Typical Exploration Organization
• Exploration Technical Disciplines
• Managing Exploration Risk
• Lease Sale – Acquisition Strategy
• Exploration – Staging the Project
• Decision Feedback and Improvement
• Managing Seismic Expenditure
• Managing Projects
• Managing Reserves Reporting – Four Step Process
• Managing the Property Portfolio

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The Typical E&P Organization

Most E&P organizations are divided into two high level structures:

• One to manage core assets, which is usually a complex existing portfolio, with many mature prospects.  Execution usually involves hundreds or even thousands of existing wells and field locations. The primary measures of this function is drilling and production efficiency
• Another is to manage growth assets which can include unconventional and international (non-host country) prospects. Here, execution is a handful of very expensive prospects. The primary measures of this function is risk management, wildcat success and on time project delivery.

Finding and obtaining oil and gas reserves is the responsibility of the Exploration department.  Explorationists operate on both core and growth assets, and include the following activities:

• Scouting for and evaluating mineral interest exploration opportunities.
• Buying or leasing the relevant mineral interest and surface rights (a lease, concession, or license) used for exploration and production.
• Performing geological and geophysical exploration (G&G) and prospect evaluation.
• Maintaining an inventory of high-quality exploration drilling prospects.
• Supervising the site selection and drilling of exploratory wells, often called ‘wildcats.’

Exploration Technical Disciplines

An Exploration Department is usually a globally centralized function which includes the following key technical disciplines and roles:

A Geophysicist uses surface methods to measure the physical properties of the subsurface, in order to detect or infer the presence, position and concentration of hydrocarbons. Typical studies include physical techniques (such as magnetic, 3D and 4D seismic) to measure the properties of subsurface rocks.  The key objective is to detect the measurable differences between those rocks that contain hydrocarbons and those that do not.  Geophysics is considered an indirect method for assessing the likelihood of hydrocarbon accumulations.  The only direct method is to drill a well.

An Exploration Geologist identifies exploration opportunities that will contribute to the long-term established reserves replenishment goals of the companies.  A primary role is to initiate the bid process to acquire new exploration licenses.

A Geologist applies scientific methods to assure that all geologic factors affecting the location, design, and construction of the exploratory well are recognized.  Typical studies include: geologic construction, geotechnical analysis, material properties, and seismic investigations and interpretations.

A Landman (in the US and Canada) is an individual who begins the process of establishing an E&P project. The typical activities include:

• Determining ownership of mineral rights through researching public and private property records.
• Reviewing the status of title associated with ownership of the mineral rights.
• Negotiating for the acquisition (or divestiture) of mineral rights.
• Negotiating the initial business agreement (called a lease) to develop the minerals.
• Managing ongoing ownership rights and/or obligations.
• Unitizing or pooling of the ownership interest in the hydrocarbons.

Managing Exploration Risk

Most progressive exploration departments implement and manage their exploration project portfolio as a risk capital, business venture using four key processes;

• Inventory and portfolio management – choosing which prospects should be included in the annual capital drilling program budget to find additional reserves, consistent with the company’s risk tolerance.
• Operations — effectively carrying out the business operations of leasing, seismic data acquisition, wildcat drilling and completion, and delineation of any new discoveries.
• Acquisition strategies— determining the terms under which the E & P operator would commit to explore and develop the prospect.  Acquisition can be by sealed bonus-bidding, oral auction, performance contract, serial contract negotiations, private treaty or contract renegotiations.
• Divestment strategies – continuously reviewing the existing portfolio to eliminate those properties that do not fit the long term strategy and may have a higher value to another E&P operator.

Lease Sale-Acquisition Strategy

E&P operators seek to acquire rights to invest in prospective exploration areas throughout the world. These rights are often acquired by successfully participating in licensing rounds of leases offered by the owner of the mineral rights, such as a host country government in a foreign location or the MMS for offshore properties in the US.  The multi-million dollar scope of a large sale is described in the chart.

Oil leases are most often awarded by an auction system, especially offshore properties. The question for the operator is what to bid for the lease to win the prospect.

Often when the results of licensing opportunities are analyzed, one of the main features observed is the amount of “money left on the table.”  This is the difference between the highest (winning) bid and the second highest presented in one specific licensing round. The objective of all investing companies is to minimize this excess of money paid to win the property.

Leases for good properties can be expensive, and joint bidding for offshore oil tract leases is common to:

• reduce risk by spreading ownership across tracts,
• share technical expertise, geological and geophysical information, and
• increase capital resources to win the acreage.

Exploration – Staging the Project

To reduce risk to the operator, major exploration decisions would ideally be staged, with the probabilities of success of each outcome identified.  A decision tree model – similar to the chart – is often used by exploration departments to help clarify the decision stages in bringing a play from concept to reality.

Progressive investments would be closely timed to the ongoing acquisition of necessary geotechnical, economic, and political information, improving the decisions and thus minimizing unnecessary expenditures.

However, the form of many existing international contracts prevents such prudent investing, increasing the risk.  For example, large up-front or signature bonuses are often required even before the explorationist can assemble critical geological and geophysical data that are needed to evaluate the prospect potential.

This is one of the major factors today that makes oil and gas a truly risk capital type of endeavor.

Decision Feedback and Improvement

The After Action Review (AAR) process outlined in the chart is used by a number of progressive E&P operators to help improve exploration decisions, wildcat well and development success.

In an AAR, the entire well planning and execution team (geologists, geophysicists, drilling, production and reservoir engineers, etc.) meets in a series of facilitated sessions.  Here they review the well plan and results of the wildcat – whether negative or positive – to understand what happened and why, generate new ideas and improve future results.

The process shown above is very structured but can be customized to fit the needs of the specific project. For example, if all of the participants already have a complete understanding of what happened and why, the main focus of the AAR would be to document best practices and generate ideas for improvement.

Managing Seismic Expenditure

Seismic shooting is costly, and E&P operators manage the process using four discrete stages, summarized below:

Survey Design and planning:  Before a survey begins in a new area, there should be a review of the local geology, past seismic surveys and well-log data, and seismic interpretation objectives, to leverage and not duplicate existing records.

Data Acquisition: The key parameter in seismic data acquisition is called line spacing, determined by the type of survey and the nature of the structure under examination. For example in 3D surveying, the line spacing is required to be as little as 25 meters which adds to the survey cost.

Data Processing: To go from sound waves to desired digital representations, powerful computers and complex mathematics are needed. Vendor reliable and model accuracy are two key factors to consider.

Data Interpretation. Today’s interpretation projects must cope with massive amounts of data. There are definite advantages to suppliers that provide interpretation tools that combine seismic results with geology, reservoir modeling, and reservoir engineering.

These steps gives the exploration department ability to rapidly interpret seismic data and compare the results across all aspects of an exploration or development project.  They can eliminate the need for resurveying can be prohibitively expensive.

Read more about the difference between Upstream and Downstream

Managing Exploration Projects

The most common tool for managing exploration & development projects is called an Authority for Expenditure (AFE).   A layout for a typical (AFE) is shown in the chart and key terms are defined as follows:

AFE –  A budgetary and approval form used during the prospect planning process for the test well to be drilled.  It is also used for most other projects in an E&P organization. The form represents a budget for the project against which actual expenditures are compared.  AFE’s are also used in joint ventures as evidenced by the joint interest owners of their expenditure approval and participation in the project

Tangible Costs – The cost of assets that in themselves have a salvage value.

Intangible Costs  or Intangible Drilling Costs (IDC) –  The term used in income tax determination that refers to any cost needed to drill and complete a well and which in itself has no salvage value.

Dry Hole Cost – The (primarily drilling) costs associated with an exploratory or development well that does not discover oil or gas in commercial quantities.

Managing Reserves Reporting

The following are four steps oil and gas companies can take to restore confidence in how E&P operators report the most important asset they have: hydrocarbon reserves.

Step 1: Define -The first step in formalizing a process for reserves estimation and reporting is to define and record clearly how the external reporting rules (SEC-IFRS) will be interpreted and applied in the company.

Step 2: Assign – Unlike other key functions in oil and gas companies, there is often little consistency in who is responsible for estimating reserves.  More companies are now forming dedicated teams using a consistent, centralized process to prepare estimates for all of the company’s reserves

Step 3: Train – Companies are now requiring formal education in the appropriate technical field (petroleum engineering, geophysics, or geology); a minimum number of years of industry experience; and a certain amount of training specific to reserves evaluation.

Step 4: Document – Documenting all work is the first step in developing a process that mitigates risk and makes reserves-estimating more efficient and repeatable.

Managing the Property Portfolio

The E & P business has traditionally been defined by differences in its various technical disciplines, basin geographies and prospect risk profiles.  As indicated in the chart, two key exploration activities are not usually mentioned in the same breath as drilling and production:

• The first is the decision to negotiate and acquire assets versus finding oil and gas by drilling for it.
• Another is when to divest assets to a company that values them more highly.

Acquisitions and divestments (A&D) are important in determining ultimate exploration success. These two activities are core skills of most E & P operators.  These activities, while “softer” than seismic interpretation, drilling or production skills, are fundamental to adding value to a company’s portfolio.  They require careful and continuous evaluation of a company’s portfolio, its competition and/or potential buyers and sellers.

Uncertain times are often the best times to invest.  Low prices often give better valuations on those E&P companies with good assets and profitable operating results, making it easy for them to attract capital for acquisitions.

Related Resources:

What is Upstream?

What is Midstream?

What is Downstream?

What is Refining?

What is Petroleum?

What is the difference between Upstream and Downstream?

Drilling Wells for Oil and Gas and Offshore Drilling

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I would like to thank you for a brilliant interactive 101 materials. I did use to prepare for the recruitment process is Royal Dutch Shell, and I managed to take a new role in a new oil and gas industry.:)