HGS President: Let’s Load Up Our Plate

President’s Letter for February


By Steve Earle


Let’s Load Up Our Plate


I've spent much ink on these pages to talk about the new unconventional plays. Indeed, we have the Applied Geoscience Mudstone Conference scheduled this month and I hope you have signed up. This conference is the ultimate venue in which to learn about cutting edge geoscience technology in shale plays. I want to recognize Frank Walles' fantastic Conference Committee who include Bruce Martin, Dave Tonner, Jim Schuelke, Bruce Hart, Kathy McDonald, Mike Cameron, Mike Van Horn, Randy Lafollette, Rachel Osmos, Steve Macalello and Simon Hughes. Thanks to this outstanding group.


Unconventional plays are new, hot and exciting, and truly a critical part of our energy portfolio going forward. Ignore them at your peril. However, this month I'd like to examine what the role of conventional exploration might be in our energy mix. I’m going to argue that conventional plays still matter. Here’s why.


Majors’ exploration for and development of giant fields in the deepwater and other remote areas is necessary in order for them to continue in the style to which they have become accustomed. The size of the majors simply requires that they find these large reserves to replace their production. And new giants are more likely to be discovered in areas that were not accessible before. So while deepwater trends are one important area that has blossomed, the Arctic is another area that shows big promise. Once it became apparent that unconventional reserves also held significant quantities of hydrocarbons, the majors took notice and are buying their way in. In my mind though, remote areas are a better fit for major oil companies because the competition will be less due to the large upfront costs and long startup times required, elements which exclude most independents who don't have deep pockets.


The technology required to access these remote areas is just incredible. Consider a recent article about a new deepwater record set by Shell Oil. Their Tobago Field development well, tied into the Perdido Platform in the Deepwater Gulf of Mexico, is the deepest subsea completion at 9,627 feet water depth. Perdido holds the current record for water depth of a production platform at about 8000 feet. Perdido can handle up to 100,000 barrels of oil and 200 million cubic feet of gas production a day from the Tobago, Silvertip and Great White fields. These are significant reserves and it is really too bad that a story like this does not get the broader press coverage it probably deserves. In many ways, deepwater exploration is a modern-day equivalent to the space program in terms of the technological innovation required to work in these extreme environments.


The large upfront costs required to develop these giant discoveries means that companies are willing to invest considerable effort in reservoir simulation studies that require information ssuch as detailed seismic mapping, descriptions of the reservoir from cores and geological facies models that integrate the two. Shell's Upstream Americas Director, Marvin Odum, said, “Shell has applied its advanced seismic and drilling technologies at Perdido to produce additional sources of oil and gas.” This speaks to the important role that geoscientists have in both exploration for and development of these frontier discoveries.


Beyond the search for giants though, there is still plenty of running room for conventional plays in more mature areas. While individual prospects will probably be more modest in size, they should be very attractive for smaller operators. With majors chasing giants and most everyone rushing into shales and other unconventional plays, many of these traditional prospects will enjoy significant advantages such as reduced competition in the current environment, relatively low costs assuming minimal overlap with unconventional plays, ready access to infrastructure generally already in place so projects come online quickly, and quick payouts given success.


While the chances of success are significantly less than for unconventional plays, the costs can be significantly lower and successful wells typically have much better returns. There should be some real opportunities for small to moderate-sized companies with capital to test some very good conventional prospects. The NAPE prospect expo this month should be a good place to check the quality of such prospects currently on the market.


Given the scope of the unconventional resource, their development ties up tremendous amounts of capital in terms of cash, steel and manpower. The pursuit seems to have squeezed out most mature, conventional prospect generation to the dismay of many. I will point out that there are advantages to being counter-cyclical and companies that chase these mature plays largely “fly under the radar.” I think the successful companies that adopt this strategy may realize above average returns.


For all these reasons, I believe that conventional exploration should continue to be relevant for a long time. Given the sheer volume of the worldwide energy consumption, I would agree with Scott Tinker that we will need to pursue every available avenue if we hope to supply this demand.


So I say, no matter whether you work on conventional or unconventional plays, “Let's get out there and find some grease!”



Steve Earle
Friday, January 27, 2012
From the President