What’s new in exploration

 Vol. 233 No. 7

In a never-ending cycle, market forces affect the desktops and jobs of explorationists. Despite cries of impending calamity from members of OPEC, oil prices have probably not slid dramatically enough to affect exploration and development efforts. According to Algeria’s oil minister, Youcef Yousfi, Brent crude prices have fallen because of decreased demand and an increased supply of almost 2 MMbopd in the past year. He attributes lower demand to the European financial crisis.

Yes, oil prices are dropping. Bloomberg-posted Merc light crude closed at $84.96/bbl on June 29, down from $94.77/bbl a year ago. Spot sour crude closed at $80.96/bbl on June 29, down from $93.37/bbl a year ago.

However, oil prices remain high enough to encourage continued exploration and are creating opportunities for oil service companies—drilling is on the upswing. Bill Gilmer, senior economist and vice president of the Houston branch of the Federal Reserve Bank in Dallas, thinks the effect on Houston is very strong. “We’re an oil-driven economy. We’re still riding that oil boom.”

Rig counts. Baker Hughes reported 1,225 rigs operating internationally in May 2012, up 74 units from May 2011 (+6.4%). In the U.S., 1,959 rigs were operating on June 29, up 73 rigs from a year ago (+3.9%). IHS Petrodata reported 75 rigs operating in the U.S. Gulf of Mexico on June 29, up from 65 rigs a year earlier. The offshore rig utilization rate is 67.0% in the Gulf, up from 53.3% a year ago.

Drilling is clearly on an upswing, and horizontal drilling is increasingly used in oil plays. Gilmer thinks horizontal drilling has “revolutionized the business.” Smith Bits reports 1,165 U.S. horizontal rigs drilling on June 29, up from 1,078 a year ago (+8.1%).

In Canada, 261 rigs were running, up 21 rigs from a year earlier (+8.8%). At the end of April, the Petroleum Services Association of Canada (PSAC) forecast an increase in drilling activity for the year. They predict that 13,150 wells will be drilled (and rig-released) across Canada in 2012, up 2% from the 12,850 wells drilled in 2011.

PSAC President Mark Salkeld said, “We are drilling longer and more complex wells now that are accessing plays once thought unreachable or fully tapped. The first quarter of 2012 saw average well depth reach beyond 2,000 m (6,562 ft), and is a sure sign that our industry now operates very differently than even just five years ago, when vertical wells were still the prominent well type and technology. We are forecasting horizontal wells to make up over half of all well types this year, which is a marked increase from the horizontal well count of 2007, which leveled out at only 13% of total wells.”

Gas. Natural gas prices have dropped more than 50% from a year ago. According to Bloomberg, gas closed at $2.126/MMbtu at the end of first-quarter 2012, down from $4.389/MMbtu at the end of first-quarter 2011. Naturally, gas drilling has dropped dramatically. Smith Bits reports 489 U.S. rigs drilling for gas on June 29, down from 875 a year ago (−44%).

Many companies overinvested in natural gas acreage, creating a land sales boom for shale gas plays and a subsequent surplus in natural gas inventories. ExxonMobil is the largest producer of gas in the U.S., but it’s the second-largest gas producer, Oklahoma city-based Chesapeake Energy Corp., that’s in the limelight. Chesapeake holds acreage in 15 plays, and low gas prices have stymied the company’s aggressive exploration and development programs. Chesapeake is replacing its board of directors and may sell as much as $14 billion in assets, including 1.5 million acres in the oil-rich Permian basin.

Morningstar analyst Mark Hanson thinks Chesapeake needs to cut assets even deeper to reduce spending, and anticipates the company will take a more conservative approach under a new board. He thinks it could better focus its exploration efforts by shrinking to just five world-class plays and that Chesapeake’s situation could improve dramatically, if natural gas prices recover.

However, continuing low natural gas prices are good for consumers, particularly in Texas, where it’s used to generate nearly half of the state’s electricity. It continues to benefit the environment, because electrical generators run (cleaner-burning) gas plants first, and use more heavily polluting coal plants second, to meet peak demand. Low prices have also inspired a spate of industrial construction to take advantage of low-cost feedstock, including new polyethylene plants.

Outside the U.S., companies continue to explore for natural gas. Norway’s Statoil ASA recently reported another large gas discovery off Tanzania, the seventh large find in the last 15 months. Statoil’s head of exploration, Tim Dodson, said limited infrastructure in East Africa means development of the 9-Tcf Lavani and Zafarani fields on Block 2 may not begin for seven years. Statoil holds a 65% stake and operates the license.

Back to oil. At Apache Corp.’s annual investor day in mid-June, Chairman and CEO Steve Farris said that production in West Texas and the central U.S. will drive the company’s growth through 2016. Apache made early investments in the oil-rich Williston basin in North Dakota and Montana. “We’re now in a position to really move the needle in the U.S.,” he said.

The company is also exploring Alaska’s Cook Inlet and submitted plans for two exploratory wells. As of April, it had completed 55 sq mi of 3D land seismic acquisition on the west side of Cook Inlet, where it plans the first well to be an onshore test. Apache will seek a permit for a marine seismic survey in the inlet and an onshore survey of the Kenai Peninsula later this year, all part of a three-year, 1,200-sq-mi seismic program in Alaska.