Exploration PDF
Exploration PDF
Exploration PDF
How geologists divine oil and how todays techno- couldnt nd more oil under the ground by spying on rock
logical miracles help narrow it down signicantly formations under the Earth. It is more complicated because
the process now relies on mind-boggling seismic imaging
Not all rocks are equal: What explorers are really
technology and massive supercomputers in many cases to
looking for
compute and analyze the massive amounts of data brought
How potential prospects are evaluated to the surface. Its easier because the new technology can
pinpoint a potential drilling site with much more accuracy,
Onshore versus offshore exploration: pros, cons
saving explorers a lot of money at the end of the day and
and where to look
often avoiding the many dry holes that led up to the Spin-
Exploration well nuances: Exploratory, wildcat and dletop gusher. The new technology also takes us much
appraisal wells deeper underground, and even into the ultra-deep waters
offshore, opening up vast new possibilities for discovery
The exploration terms that can trip investors up
and production.
Weighing risk with reward; when to take the plunge
Exploration remains an exciting adventurebut despite the
technological advances, it is just as risky as it always has
Introduction: The Metamorphosis of Exploration
been. The only way to reduce risk is to understand how it
Spindletop gushed forth oil in 1901, ushering in the rst all works as much as possible without a degree in petro-
Texas oil boom. The exploration story then was very similar leum geology.
to the story today. It was an anxious time for investors, as
oilprice.com I 02
The Oilprice.com Investors Guide to Oil & Gas Exploration
Going Deeper:
Oil & Gas Exploration Is...
The process of nding viable prospects to drill a com-
mitment to spending large amounts of risk capital for
an uncertain outcome
oilprice.com I 03
The Oilprice.com Investors Guide to Oil & Gas Exploration
scenario. The trick is nding the right juniorand there are offshore is the purview of the larger companies, or the
hundreds and hundreds of them out there. supermajors who can afford the cost.
Picking a Shore For onshore exploration, mobile drilling rigs are used to
drill into the Earth to locate oil and gas reserves. For
Searching for oil and gas onshore and offshore are vastly
offshore exploration, a drill ship, jack-up drilling rig or oat-
different processes with vastly different price tags, time-
ing drilling rig is used to locate oil and gas reserves under
frames and levels of commitment.
the seabed.
Much as onshore exploration can range from few hundred
Pros and Cons: Offshore exploration is not for the faint of
meters below ground to up to 6,000 meters beneath the
heart, and this is a very different type of game even if the
Earths surface, offshore oil and gas exploration has many
technicalities of exploration remain the same as on land.
faces, from shallow water exploration to ultra-deep-water
While the skys the limit now that we are moving into
exploration - and everything in between. The deeper you go,
ultra-deepwater exploration, were talking about massive
the more expensive it is, and the more remote the location, the
capital investments, long-term commitments and a very
more that cost compounds - along with potential political risks.
high level of risk coming at you from all over the place.
For this reason, the smaller, or junior, companies typically
Consider this: In early 2015, analysts were trying to
lead onshore exploration these dayshoping to be bought
convince oil and gas explorers in Africa to rethink
out by a bigger player once they nd oil or gasand
their capital expenditure on exploration activity and
Pros Cons
A higher-reward potential, higher prot margins, higher A very high-risk environment in terms of natural and
return on investment over a longer period of time man-made disasters
Absolutely massive untapped resources Political risk in cases of maritime boundary dispute
Lots to choose from: shallow water exploration, deep Huge capital investment & long-term commitment
water and ultra-deep water, with exploration costs rising Slower return on investment
in tandem with depth and complexity
Oil and gas reserves are much more difcult to access,
Particularly in deepwater and ultra-deep water, your so even in the event of a discovery there are fewer guar-
investment will be with a large, integrated company, antees of extraction
which provides more stability
Lots of oversight and regulatory hurdles (particularly in
Potentially less vulnerable to a volatile oil market due to the US following the 2010 oil spill in the Gulf of Mexico)
long-term project nature (but only if the company is Increasing complexity as we get deeper and deeper
playing it right) under the seabed
oilprice.com I 04
The Oilprice.com Investors Guide to Oil & Gas Exploration
move onshore in the wake of a major drop in oil Subsea production systems are wells located on the sea
prices. This is a major facet of the offshore explora- oor rather than the surface. Petroleum is extracted at the
tion game: Gambling on exactly how long oil prices sea oor, and then 'tied-back' to an already existing produc-
will remain up or down. tion platform. The well is drilled by a moveable rig and the
extracted oil and gas is transported by riser or undersea
Still, the lure of offshore is strong, and its never been stron-
pipeline to a nearby production platform. The real advantage
ger than it is today. But that lure is really in the ultra-deep
of subsea production systems is that they allow you to use
waters, not the shallow waters under 1,000 feet. The interest
one platformstrategically placedto service many well
in shallow-water exploration has waned over the past 10
areas. And as the cost of offshore production rises, this
years, largely because after being hugely successful, theyve
could represent signicant savings.
been drilled to their max. The very nature of offshore explo-
ration is about going deeper and deeper.
So, if youre looking for that ultimate, long-term investment global onshore and offshore oil and gas production,
and can handle the high risk, welcome to the ultra-deep. respectively. Of that 30% of offshore production, subsea
This is the nal frontier-and its a huge one. oil and gas production represents 9%
oilprice.com I 05
The Oilprice.com Investors Guide to Oil & Gas Exploration
If you want something easier, faster and smaller, onshore locations. If oil prices are low and the expense of exploring
is where you need to look. for and then extracting shale oil cannot be supported,
diversifying your portfolio with some conventional explora-
The onshore game is a faster-paced one, and due to the
tion may be a safer bet.
lower capital investment requirements, you can diversify
your investment by focusing on various types of Heres where the shale and tight plays are in North America,
playsconventional and unconventionaland various so watch where your explorer is exploring .
Selected North
American Tight
Oil & Shale Gas
Plays
oilprice.com I 06
The Oilprice.com Investors Guide to Oil & Gas Exploration
Globally, the
unconventional
set-up looks
like this:
In terms of conventional plays, there are a number of plays to low as $500,000 (which is extremely attractive when oil
consider in North America, and this is certainly not an prices are low)
exhaustive list:
The giant Permian Basin in Texas has always been the
Western Canada, with most conventional output currently conventional oil poster child, and while horizontal drilling
coming from the Western Canada Sedimentary basin, and fracking for shale oil and gas is gaining speed here,
which covers most of Alberta, Northeast British Colum- the conventional vertical is still a major player
bia, southern Saskatchewan, and parts of Manitoba and
The Green River Basin--which includes the Great Divide,
the Northwest Territories.
Vermillion and Washakie Basins in Wyoming and the Sand
The Willison Basin, Saskatchewans portion, has some Wash Basin in Coloradohas a number of conventional
junior explorers promising to drill conventional wells for as oil and gas plays. This also includes the conventional
Southern and Northern Uinta Basin plays.
oilprice.com I 07
The Oilprice.com Investors Guide to Oil & Gas Exploration
Pros Cons
Lower geological and engineering risks Lower potential awards
Faster return on investment Theres not that much laft to explore (particularly in
Lower environmental risks Its harder to assess the value of junior companies
and much is dependant on managment capabilities
Fewer uncertainties
All About the Rock Pores and porosity alone are still not enough to
Oil is a rather elusive thing. We wont nd pools of it waiting determine which rock is the best rock. The pores in
for extraction under the surface of the Earth. Its all about the rock must also be connected to allow for the ow
rock, and even then, it is not visible to the human eye. So of oil and gas.
what do we look for in a precious rock?
Permeability is what represents this connectivity that
First of all, we look for pores. allows oil and gas to ow from the rock
Pores are storage areas for oilwithout pores, there can Low permeability will mean that oil and gas is more challen-
be no oil ged in its ow, so what we are looking for is high permea-
bility
Pores are invisible to the human eye, and cannot be seen
without the aid of a microscope Permeability is measured in millidarcys (thousandths of
darcy). Darcy units have dimensional units in length.
The more pores in a rock, the more oil or gas can be
contained within: so, the more pores, the better
Did you know...
A rocks porosity is the key to unlocking the mystery:
More than 90% of original recoverable oil and gas
Porosity is the volume percent of the rock that contains reserves in the world has come from source rocks of
six stratigraphic intervals:
open space. Porosity of a rock is typically from 5% to 30%
Silurian (9%) Upper Jurassic (25%)
The greater the porosity, the more oil and gas potential of
Upper Devonian- Middle Cretaceous
the rock
Tournaisian (8%) (29%)
Porosity does not instantly mean there is oil and Pennsylvanian-Lower Oligocene-Miocene
gasthe pores could be lled with water instead Permian (8%) (12.5%)
oilprice.com I 08
The Oilprice.com Investors Guide to Oil & Gas Exploration
The best rocksthat is, the most porous and perme- While not all rocks are equal, the shale revolution
able rocksare sandstone and carbonate. has made it clear that low-permeability and difcult
accessibility doesnt always mean were out of luck.
Sandstone is a sedimentary rock made up of sand-sized
This is where shale rockand unconventional oil and
grains of mineral, rock or organic material, with the addi-
gas--comes into play.
tion of a material that binds the grains together. Not only
can sandstone serve as oil and gas collectors, but it can Shale is a ne-grained sedimentary rock made up of
also serve as a groundwater aquifer. It can form under mud (clay minerals and tiny fragments of other minerals,
sea or land. Think of it as a hard sponge that can hold oil largely quartz and calcite. In geological terms, shale is a
and gas. mudstone, which is thinly layered.
Carbonate rocks are another type of sedimentary rock Black shales contain organic material that is often broken
made up of carbonate minerals and classied either as down to form oil or natural gas. When this oil and natural
limestone or dolostone. Carbonate can also form under gas has moved through the shale sediment due to low
sea or land. density and become trapped in the rock above (such as
sandstone), we have been given our conventional reser-
voirs. But all the oil and gas that remained trapped deeper
down within the black shale was inaccessible to us prior
to the technological revolution that led to the shale boom,
ushering in the rush to extract oil and gas from unconven-
tional shale plays. The revolution debuted in Texas, at the
Barnett shale, where the rst major natural gas eld in a
shale reservoir rock was developed.
oilprice.com I 09
The Oilprice.com Investors Guide to Oil & Gas Exploration
Unconventional oil and gas includes shale oil and gas, tight oil and gas and coalbed methane, or coal seam gas. The
key difference between conventional and unconventional is the method by which they are extracted and the cost of
extraction, with conventional being considerably cheaper and easier to extract.
Conventional oil and gas is usually trapped in small, porous zones in natural occurring rock formations such as sand-
stones and carbonates. For 100 years, until the advent of directional drilling and hydraulic fracturing that led to the shale
boom, exploration and production were all about the conventional. The technological revolution made it possible to
access commercially viable volumes of tight oil and gas and shale oil and gas. These are resources that are trapped in
very low-permeability rock and ultra-compact structures that limit the ability of the hydrocarbons to migrate upwards.
The revolution turned the unconventional into the conventionalbut in times of falling oil and gas prices, the conven-
tional again becomes attractive.
Oil and gas are held in traps within the source visible indications on the surface that an area contains oil
rock. The traps vary in complexity, from dome- and gas deposits. These visible surface indications include:
shaped bumps to creases in the rocks or other mani-
Oil and Gas Seeps
festations.
These are the most visible signs of oil and gas. Oil and
A structural trap holds oil and gas due to a deforming of
gas seeps are natural springs where liquid and gaseous
the Earth. In other words, the Earth has been bent in
hydrocarbons leak out of the ground, fed by the natural
some way that that has formed a structural trap holding
underground accumulations of oil and natural gas.
in the oil and gas.
When it leaks through to the surface of the Earth, clear
A stratifographic trap is one that has formed in place uid oil turns into asphaltuma tar-like substance. In
when sandstone or limestone has become enclosed in this natural transformation process, the lighter compo-
shale, which in turn keeps the oil and gas trapped within. nents of the oil evaporate and what remains is a heavier
oil that is sticky and black and often resembling pave-
Now that we know WHAT to look for, we will move on to the
ment. Onshore, oil and gas seeps are immediately
other adverbial aspects of exploration: WHERE, HOW and
visible, but once we move offshore, nding them
TO WHAT EXTENT
becomes extremely complicated. Combing an entire
Collecting the Clues: The Old-Fashioned Way. ocean for oil and gas seeps is not possible, but new
In the past, visible surface features provided initial clues to remote sensing technology can help pinpoint potential
the location of hydrocarbon deposits. Geologists looked for seeps and targets for exploration.
oilprice.com I 10
The Oilprice.com Investors Guide to Oil & Gas Exploration
Underwater seeps see oil ow slowly up through And if they cant see from where theyre standing, satellite
networks of cracks in the seabed, with the lighter com- images and aerial photography are basic tricks of the trade.
ponents of the oil rising to the waters surface and evap-
Satellite Images: A geologist will notice certain topograph-
orating, becoming caught up in ocean currents or falling
ical features on the surface of the Earth that will indicate
to the seaoor.
what could lie beneath the surface.
Pockmarks
Using aircraft to measure the gravitational pull over a
Pockmarks are craters created by escaping oil or gas on specic area: Gravitational differences can be indicators
the seabed. More specically, they are caused by gas of rock density and in turn of the potential for oil and gas
and liquids erupted and streaming through the to be trapped beneath the surface
sediments, leaving a crater on the oor of the water. This
The Technology Behind Todays Exploration
is traditionally a visible sign only offshore, while such
pockmarks are very rare on land. Today, oil and gas exploration is all about geological map-
ping by way of some very advanced technology that
That was the 19th Centurythe beginnings of the American
provides key geological data and analyzes that data in order
oil industry. Weve come a long way since then, and now
to identify potential source rocks as prospective oil and gas
geologists do not have to rely on their own ability to divine oil
deposits.
and gas. Now we have seismic imaging and unbelievable
supercomputersthe miracles of modern technology. While seismic surveying is the primary method of
exploring todaydue to massive advancements in
If visible surface indications were the Genesis of exploration,
this eldoften a rst step will be to conduct gravity
new technology is the Revelation. Nonetheless, all explora-
and/or magnetic surveys over areas that are thought
tion starts out with what the geologist can actually
to contain hydrocarbons.
seeeven if the end game is seismic and one for the
geophysicist. Gravity Surveys: Highly sensitive gravity meters can mea-
sure miniscule changes in the Earths gravitational eld
Geologists & Geophysicists and these changes sometimes indicate that oil is owing
Geologists examine what rocks are made of what Magnetic Surveys: Highly sensitive magnetometers can
the formations they have created in the Earth. also measure miniscule changes in the Earths magnetic
Geophysicists use physical characteristics to de- eld, again possibly indicating the ow of oil
termine the type and shape of rocks beneath the If gravity and/or magnetic surveys detect large-scale
Earth's surface. Those physical characteristics would features indicative of oil and gas deposits, then more
include gravitational and magnetic properties, detailed seismic surveys will follow.
among other things.
Seismology/Seismic Surveys: This is the process of creat-
Both are vital to the exploration process.
ing shock waves that are sent through unseen rock layers.
oilprice.com I 11
The Oilprice.com Investors Guide to Oil & Gas Exploration
When those waves are reected back to the surface, they Seismic imaging, the pictures that come from seismic
tell a story about the oil and gas that may be trapped in surveys, have seen signicant advances over past
the rock. They tell a story because the reections travel at decade. Not only do we have normal 2-dimensional
different speeds and angles depending on the type or seismic images to aid in the hunt for oil and gas, but
density of rock layers. The reections are then detected we now have 3D and even 4D seismic imaging.
through microphones or vibration detectors.
2D Seismic
The shock waves can be created by compressed air guns
Imaging showing width and deptha single slice of the
for offshore exploration, in which pulses of air are shot into
Earth
the water. They can also be created by thumper trucks,
which slam heavy plates into the ground for onshore Indicates types of rock, their relative depth and whether
exploration. Finally, explosives are often employed for an oil trap is present
creating shock waves in both onshore and offshore explo-
ration. Onshore, the explosives are detonated after being
drilled into the ground, while offshore, they are thrown
overboard. The seismic readings reected back are then
analyzed by seismologists to determine whether they are
looking at oil and gas traps.
es and records the electrical signal. Is the preferred method today for seismic surveying
Seismogram: The pictures produced by the seismo-
For large companies which explore in ultra-deep waters or
grapha 2-dimensional picture of the subsurface
pre-salt conditions, 3D seismic imaging has transformed
oilprice.com I 12
The Oilprice.com Investors Guide to Oil & Gas Exploration
4D Seismic
the industry and has almost sidelined 2D seismic over the of an oil and/or gas eld
past decade Decodes a variable that allows oil and gas companies not
This is one advancement that has formed part of the foun- only to determine the geological characteristics of a
dation of the hydrocarbon boom potential source, but also provides insight into how a
reservoir is changing LIVE, in real time
Most of the larger, integrated supermajors have their own
proprietary seismic imaging technology
Dening The Staging Ground
For larger companies who can afford it or who have their
Dry hole: A well bore comes up dry; i.e. does not
own technology at hand, 3D seismic has signicantly
contain commercial hydrocarbons
lowered the costs of exploration and narrowed the time for
making new discoveries Lead: A potential accumulation that remains poorly
dened and requires additional data acquisition or
It used to take years to process all the data obtained from
analysis before it can be classied as a 'prospect'
a 3D seismic image; now sophisticated supercomputers
analyze the data in a fraction of the time Prospect: A lead which has been evaluated to the
extent that it can be considered a viable oil and gas
They can be conducted pretty much anywhere
accumulation venue
Obtaining 3D seismic imaging on a single square mile can
Play: An area in which hydrocarbon accumulations
cost anywhere between $40,000 and $100,000; but while
or prospects of a given type occur. Basically, a large
3D is more expensive, the costs are offset by the reduc-
area of prospects.
tion of drilling risk. Today, there is much less risk of drilling
a dry hole.
oilprice.com I 13
The Oilprice.com Investors Guide to Oil & Gas Exploration
The Final Phase: From Seismic Road to Discovery For the purposes of this report, we are not talking about an
Once a prospect has been identied through the collection exploration well drilled solely for the purpose of gathering
and analysis of seismic data, the next step is to drill an additional geological data, and we will refer to this going
exploration well. This is where exploration nds its conclu- forward as an exploratory well.
sionand where the investor level of anxiety reaches its Drilling an exploratory well involves sinking a drill string into
maximum. This is where you nd out whether all the money the ground and injecting mud that allows fragments of rock
spent on exploration was worth it. and samples of gas to be brought to the surface. Boreholes
The term exploration well can be confusing for both veter- are drilled in multiple locations in order to delineate the
an and new investors. It is often used as a generic term to potential oil or gas deposit.
refer to two other varieties of well: wildcat wells and apprais- Until the exploratory well is drilled, there is really no way of
al wells. knowing with 100% certainty that there is oil or gas at a
This is an extremely important distinction for the investor. An specic site under the surface, though seismic imaging will
appraisal well may be a secondary well used to further have narrowed it down signicantly.
Special Report we will tell you everything you need to a core sample
know about wildcatting). 2. Geologists analyze the core sample for signs of
extent and size of a discovery made through seismic 3. The exploratory drilling rig will typically drill sever-
imaging; in other words, to assess the characteristics of a al temporary wells, each taking a few months to
proven hydrocarbon deposit. complete
Exploration wells can also be used to denote 4. A positive nd ("a show") is followed by more
A well drilled to nd oil or gas in an area that was previ- exploratory wells to verify the quality before taking
A well drilled to nd a new reservoir in a known eld 5. The next step is drilling a much more elaborate
production well
A well drilled to extend the limit of a known oil or gas
reservoir
oilprice.com I 14
The Oilprice.com Investors Guide to Oil & Gas Exploration
Drilling in the deep takes a lot longer, so we are looking You need source rock. There are no hydrocarbons without
at long-term contracts here that cannot simply be source rock. Source rock is what you get when organ-
canceled due to uctuating prices. ic-rich rock (oil shale or coal, for instance) undergo natural
high pressure and temperatures over a long period of time,
Geological Cheat Sheet: What to Look for
in the process forming hydrocarbons. In other words,
If you want to bet on an exploration gig, there are ve key source rock is a rock with organic materials that if heated
things you will want to consider in terms of the geology of sufciently will produce hydrocarbons.
oilprice.com I 15
The Oilprice.com Investors Guide to Oil & Gas Exploration
4. Trap
The oil and gas have to be trapped within a structural or
stratigraphic trap in order, otherwise they can never be
pinned down and found or extracted.
Green
= high condence
Red
= low condence
oilprice.com I 16
The Oilprice.com Investors Guide to Oil & Gas Exploration
Part III: Risk & Reward where infrastructure will already be in place in the event of
a discovery, thereby reducing costs (this is what the
In terms of risk, this is what you need to know before you
juniors will do, while the supermajors can afford to risk
take the plunge:
exploration in remote areas and offshore, but for bigger
Oil and gas exploration is a high-risk investment potential rewards
Requires making decisions under a great deal of uncertainty When To Take the Plunge
There is no way to know whether oil and/or gas is there You dont have to invest in an oil explorer at the start of the
without an exploratory well game; you can size up how things are going and with basic
Though the exploration prospects may sound exciting, knowledge of how it all works now, you can decide when it
keep in mind that the industry average is for 1 in 7 explora- would be best to invest. Timing is everything; still, no one can
Even if a company spends $1 million plus on exploration, With junior companies, it usually works like this:
they may not have the funding the drill production wells 1. The explorer foots the bill to shoot seismic imaging
and get the oil and gas out of the ground
2. If that seismic indicates the area could be an oil and gas
Companies can spend millions of dollars to purchase a prospect, the company will start looking for investments in
lease and then explore and develop it, only to nd that it order to fund the drilling of an exploratory well
does not contain oil and natural gas in commercial quanti-
3. If the exploratory well in turn shows high potential, the
ties. It is not unusual for a company to spend in excess of
modus operandi of a junior company is to look for a bigger
$100 million only to drill a dry hole
company to buy it out. The bigger company producers,
In some cases, if exploration is successful there may be while the junior company moves on to another exploration
lengthy delays in developing/producing a prospect if there project, as we noted in our previous special report
is any difculty in obtaining the necessary permits, environ-
There is no simple mathematic equation to help you make
mental studies or in building the necessary infrastructure
the decision as to when to jump in on an exploration project.
Companies reduce exploration risk by Hindsight will tell you that it was best to get in on the ground
Not putting all their investment into a single prospect oor, when they are just shooting seismic, if a prospect turns
into a great discovery. But hindsight is hindsight and all we
Sharing prospects with other companies through multiple
have is a gamble. With an industry success rate of only 1 in
joint ventures
7 exploration wells, the safe way to play it is to wait for a
Reducing capital expenditures through farm-in agree- company to strike commercial quantities of oil. But by then,
ments, which allow other companies to buy into the joint its really too late. The deal time is over.
venture in return for a drilling commitment
The road to riches, unfortunately, is the one less taken. For
Exploring very close to existing, producing oil elds, junior explorers, this means nding a new play before it
oilprice.com I 16
The Oilprice.com Investors Guide to Oil & Gas Exploration
becomes exciting. This is where the money is made, and a balance-sheet vigilance, and a knack for nding new
for the investor, it means putting your money out there long exploration opportunities that stand out. These will be the
before a discovery is made. kind of people who are intuitive: identifying trends before
they are trends.
Exploration Management
Without exceptional management, exploration will be a op
There are hundreds and hundreds of junior oil and gas
regardless of the geology.
explorers out there. They are all competing for the next best
play, and they are all trying to nd it before the supermajors Coming up next
sniff it out. The only ones who will succeed are those with
Our next Special Report will be a guide to DISCOV-
exceptional management.
ERYa road littered with highly nuanced catch phras-
As an investor, almost before anything else, you should es meant to throw an investor off track and lure him
look at a companys management, individual by individual. into the fold without knowing what hes really getting
Make sure they have a solid track record that shows explo- into. When a company announces a discovery, read-
ration potential. What youre looking for are individuals who ing between the lines and understanding the terms
can demonstrate a keen ability to balance risk with reward, for what they really mean dictates your bottom line.
Copyright 2015, all rights reserved by Oilprice.com. No portion of this report may be published or reused in any way
without the explicit consent of Oilprice.com.
oilprice.com I 16