Andrew Slessor
Andrew Dymond
Rhodri Thomas
Wood Mackenzie
Although exploratory drilling in the North Sea has declined steadily during the last five years, new government and industry initiatives may provide the impetus to reverse that trend.
The primary cause of reduced exploratory drilling has been the relative lack of exploration success, as documented in the recent "Value Creation Through Exploration" study by Wood Mackenzie.
Despite relatively high oil prices in recent years, which historically are significant in stimulating exploration, activity has failed to rebound. This does not mean that the trend must continue, however, and the reason for the low level of activity and its possible recovery includes factors other than oil price.
Perhaps more relevant than the number of wells drilled is the number of discoveries made and the reserves that those discoveries replaced. In the last four years, only an average of 26% of produced reserves have been replaced. As the North Sea matures, operators have gathered more knowledge of the subsurface and have advanced technology. Success rates would be expected to be more encouraging. At the same time, the level of discovered reserves has been disappointing, although there have been a few notable exceptions, such as Buzzard in the UK, Ormen Lange in Norway, Halfdan in Denmark, and a number of significant Dutch discoveries in 2001.
The trends portray a similar picture for all countries, although a variety of factors influence exploration activities such as fiscal conditions, licensing options, and geological prospectivity.
Exploration activity in the UK has declined significantly from the levels in the late 1980s and early 1990s, when an average of around 100 exploration wells per year were drilled. Prior to the 1998 fall in oil price, activity remained relatively healthy with over 50 exploration wells per year. This slump in oil price caused companies to re-assess their E&P budgets, and exploration was dramatically cut. Although oil prices have recovered, increased global competition for exploration capital and the maturity of the UK sector have not resulted in a substantial recovery in activity. An average of 25 exploration wells per year has resulted over the last five years. The 17 exploration wells completed in 2002 represent the lowest number since the earliest days of exploration in the sector.
The UK has become viewed as a relatively low risk/low reward exploration environment. The frontier west of Shetlands sector has proved disappointing since the discoveries of the Foinaven and Schiehallion fields in the early 1990s. The North Sea is dominated by near-field, satellite exploration.
While discoveries are still being made on the UK continental shelf (UKCS) and success rates remain relatively constant at around 25-30%, the average discovery size continues to trend downward. A notable exception to this view of the UKCS came in 2001 with the Buzzard discovery. The relatively high-risk well proved that there are significant discoveries still to be made on the UKCS.
The low level of exploration has prompted a number of encouraging government/industry initiatives such as:
- The introduction of the Promote License plan, which creates the opportunity for interested parties to acquire acreage for geological and geophysical analysis at significantly reduced rates. The challenge for smaller companies and the government will be to ensure that sufficient sources of funding are available to drill identified prospects
- The Progressing Partnership Work Group's Fallow Block initiative already is encouraging companies to re-examine their acreage by implementing a "use it or lose it" approach. This voluntary plan will facilitate the transfer of acreage to companies wishing to drill exploration wells and encourage those in possession of Fallow Blocks to firm up plans
- The shortening of the 20th-round license to two four-year terms will encourage companies to explore and allow a more rapid relinquishment of acreage if they don't.
While exploration activity is unlikely to return to the levels seen in the early 1990s, these positive initiatives should ensure that exploration does not decline further and they could result in an increase in the level of activity back to the level prior to 1999.
The mature UKCS has been extensively explored, however, with over 2,500 exploration wells drilled, and much of the prospective acreage has already been licensed (albeit a significant amount has since been relinquished).
As mentioned above, the sector is now struggling to attract the exploration spend in companies' global portfolios. Despite attracting exp- loration spend second only to the deepwater Gulf of Mexico, only two of the 22 companies examined in the study created value through pure exploration in this time frame.
Norway exploration
In Norway, exploration activity has seen minor fluctuations in the recent past. One exception was in 1997, which saw a significant increase in activity and discovered reserves when the giant Ormen Lange field was found. To a great extent, this find contributed to the value created on the Norwegian continental shelf (NCS) from 1996 to 2002.
In 1998, following a year of sustained low oil prices, exploration activity dropped significantly. Although oil prices recovered, oil companies remained cautious, and we have not yet seen the same level of activity.
Poor results from licenses awarded in the 16th round have accentuated the disappointing results seen over the last few years. This sequence of poor results has led companies to reassess the subsurface model off mid-Norway. It is the area with the greatest remaining potential, and this reassessment may further inhibit near term recovery.
Norway's controlled release of exploration acreage has delivered a reliable licensing system that has proved effective for companies to pursue an exploration program. However the 17th round was disappointing for the size and potential of the areas licensed. Notably, Total and ExxonMobil chose not to participate in the round, demonstrating a certain lack of company interest. Pressure is mounting from industry to address the problem of access to acreage, which could be a major step in increasing the number of wells drilled on the shelf.
Successive licensing rounds have gradually opened up acreage in the Norwegian and Barents Seas in remote, relatively unexplored regions where larger prospects are believed to exist. In the past, these provinces have yielded some oil and gas discoveries, although the Norwegian Petroleum Directorate recently announced a 30% decrease in its estimate of the undiscovered gas reserves in the Norwegian Sea. This reduced evaluation adds to uncertainty over the potential for a near term exploration recovery.
One of the Norwegian government objectives from the Storting White Paper No. 38 is to "lay the basis for continued development of the petroleum sector by ensuring that the NCS remains an attractive area for investment." To date, the government has introduced a number of measures to help meet this commitment:
- A transition from centrally controlled company-based gas sales, which removes uncertainty in the gas markets and should allow companies to better coordinate their activities
- An extensive assessment of the impact of petroleum activities in the Barents Sea and some areas of mid-Norway, which could ease environmental concerns and pave the way for opening more extensive tracts of Norway's remaining acreage
- A progressive evolution of the existing licensing system – including the recent introduction of the Pre-defined Area concept that allows for open licensing of acreage in the North Sea and some parts of the mid-Norway shelf.
For a future in Norway and for the government to achieve its often stated, long-term production scenario, both the government and the oil companies must execute a rigorous and committed exploitation program. To this end, the authorities have begun a consultation process to look at the possible impact of altering aspects of the fiscal regime.
This initiative is partly in recognition of the increasing maturity of the North Sea area as an exploration province and the lack of materiality of most recent discoveries to the companies involved. The aim must be to produce a more attractive climate for the sort of companies suited to exploit the significant remaining opportunities that undoubtedly exist.
The Netherlands exploration
Exploration offshore The Netherlands has traditionally focused on the Permian Rotliegendes play that has yielded the vast majority of discoveries to date. However, other plays that have successfully been tested (albeit to a much lesser degree) including the Carboniferous, Triassic, Jurassic, and shallow Tertiary sequences. The recent 400-bcf Q/1-B discovery (made during 2001 in the Triassic Bunter sandstone formation) is proof that significant potential for sizeable discoveries still remains in plays beyond the Rotliegendes formation.
Exploration activity recovered somewhat during 2001 and 2002. Looking to the near-term future, these rates are now expected to remain at least at this level. A particularly successful year occurred in 2001, with the significant F/16-3 (F/16-A), K/15-16 (K/15-FK), and Q/4-10 (Q/1-A) discoveries, along with a number of smaller structures.
The Netherlands is a mature province, but government and companies alike have worked to keep interest in the Dutch part of the southern North Sea alive. Some of the major steps taken to date are:
- Small fields policy – Gasunie gives more favorable production terms for marginal gas fields in The Netherlands. From 1994, the definition of reserves for a small gas field for the purposes of the new policy was increased from 149 bcf to 224 bcf for offshore fields, and depletion rates were increased. The lower swing requirements associated with the small fields has meant that lower capacity provision with regard to equipment, and pipeline transportation is required for small gas developments
- During 1995, the open door licensing policy was introduced in the Dutch sector, whereby all unlicensed acreage was made available to explorers without a formal licensing round. This adjustment to the licensing process allowed companies greater degrees of freedom in deciding where and when to drill and also ensured unimpeded access to the full remaining potential of the Dutch shelf
- Having identified the need to provide additional incentives for exploration and development, the Dutch authorities introduced depreciation at will during 1998. This action was followed by a period throughout 2000 and 2001 that saw the abolishment of offshore royalty payment. For the first time, the state (via EBN) assumed participation and associated share of costs throughout the exploration phase on licenses it selected to opt in to
- In the wake of robust oil and gas prices, effective from start 2003, the authorities removed the right to depreciate at will expenditure incurred on new developments. The immediate impact of this move will only be felt at the margins, but could dampen future development activity. It is not clear what impact it might have on future exploration activity, but recognizing that there is still considerable value to be gained from the drill bit, it may ultimately deter exploration of smaller prospects that may have relied on this benefit
A significant proportion of future exploration drilling will continue to target near-field prospects in an attempt to prolong the life of existing infrastructure. Additionally, a steady level of drilling of larger targets is likely, particularly in the Carboniferous and Triassic plays of the area. Despite the removal of depreciation at will, exploration activity in The Netherlands is anticipated to remain relatively constant over the near term, although it is not thought likely to recover to the level of the mid 1990s. Underpinning this is a relatively constant stream of new discoveries, coupled with a well-developed and extensive infrastructure that provides a cost-efficient export solution for even small discoveries.
Denmark exploration
Compared to other exploration provinces in the North Sea, the Danish sector remains the least densely drilled, with activity dominated by the Dansk Undergrunds Consortium companies (Mærsk, Shell, ChevronTexaco).
The key Danish play tested to date is the Upper Cretaceous/Palaeocene in the Central Graben area. More recently, a Tertiary sandstone play has offered some potential, as has the deep Jurassic/Triassic. Since a peak in drilling activity during the mid 1980s, the trend in Denmark has been that of a number of small to medium sized discoveries maintaining a consistently modest discovery rate per well. The exception to this was the 1999 Halfdan oil and gas discovery, which following a series of reserves upgrades is now estimated to yield some 500 MMbbl of oil and 375 bcf of recoverable gas.
For more information, contact Andrew Slessor: email, [email protected].
