Turning around the failing Exploration business!

Sorry to go on about it but Exploration performance has been poor for some years.

This is a rather superficial review of merely the latest poor year, 2016, focussed on the plummeting of discovered volumes to a historic low. But this narrow beam of light has allowed some to claim that this was simply the result of a dramatic fall in exploration spend…..

To really understand what has been going on, a more sophisticated, nuanced review is needed and for this I refer you to Richmond Energy Partner’s annual State of Exploration reports, the most recent of which was released in May 2016.

Where to start: commercial volumes fell to an all-time low, commercial discovery rates were as low as 1 in 12, Finding costs rose, much geology need $60/bbl to be economic etc etc. I look forward to their May 2017 report, I do not expect a dramatic improvement.

Let me be clear – in my view, Exploration has been, and is, failing as a Business!

Are there any root causes? Let me try a few….

1.      We became hooked on Deep Water but this has run its course; discovery volumes and success rates there have collapsed – we need to find new, different, frontiers.

2.      We have also become hooked on huge 3D surveys and forgotten or mislaid the fundamentals of petroleum exploration.

3.      Geoscience interpretation skills have weakened.

4.      There are too many ‘minnow’ companies, not underpinned by strong technical skills and knowledge. And with little financial muscle.

5.      Many company boards are not equipped to run Exploration as a Business.

How can this be turned around?

Firstly, we need to recognise that:

Petroleum Geoscience and Seismic Interpretation are not the same thing!

Excellent Petroleum Geoscience integrates stratigraphy, sedimentology, structural geology, geochemistry, petroleum systems analysis, non-seismic geophysics and of course seismic interpretation. Big companies – the Majors and the bigger E&Ps - should still be able to do this. If a company is determined to stay ‘lean’, then it will need to outsource – trickier than having most of what you need in-house but good people are out there!

And…..

Senior Management/Boards need to (be able to) execute a process of “Quality through Choice”, a proven methodology for improving exploration success rates, meeting targets, whilst staying within budget.

Secondly, 'pure play’ Explorers have two further problems:

As companies they have only 'worked' when oil prices were rising so much that equity holders were willing to pump more money in.

And…..

Where do they go - new Frontiers or existing provinces?

It would be easier to raise money for a spittoon manufacturer than to raise equity funding for a ‘pure’ exploration company. So this implies a viable company needs to include production to yield the cash flow for funding exploration.

Where do I have in mind?

Well, North Africa, the Caribbean, East Africa are certainly worthy of consideration. West Africa probably not.

Possibly the North Sea though we would have to figure out how to make currently marginal fields economic…..

Unconventionals are a possible theme: could a European regional company be built that is focussed on the Kimmeridge Clay and/or the Bazenhov and/or the Domanik?

Do you travel to work in a horse and cart?

It is now almost a year since the Go computer program AlphaGo, constructed by DeepMind, beat the world Go champion, Lee Sedol .

As I understand it, a key success factor for DeepMind was that Go is a rule-based game; and machine learning from DeepMind ‘loves’ rule-driven analyses and being fed thousands of historic completed games from which to learn.

I have pointed out that geology is a rules-driven science and that machine learning could be applied to seismic (perhaps especially 3D seismic) interpretation, there being thousands of completed interpretations available for ‘learning’.

Perhaps this is a half-baked idea? I do not yet see any evidence of such disruptive transformation of seismic interpretation.

Approaching this with an inappropriate sense of humour, I suggest this leaves us in the position of ‘Art can only be done with paint brushes’ or ‘Presentations can only be done with transparencies and an OHP”!*

Perhaps this is the best analogue of the serried ranks of seismic interpreters working in our industry…..

and inclined to travel to work in one of these:

Putting  my serious hat back on, it seems to me that the current combination of humans and (interpretation) workstations is both too high cost, in an era of lower oil and gas prices, and not as effective as we need, given that there are plenty of examples of mis-interpretation – incorrect correlations, incorrect chronostratigraphy, implausible structural geology, unlikely reservoir distributions…….

Our report card would read: “Must do better! Can do better!!”

* to the first person who can 100% prove to me that they made a presentation using transparencies and an OHP in 2016, I will award a prize of a lino-cut picture, based on a scene from the petroleum industry!

Could boards of Majors or E&Ps find oil & gas or develop it?

Domain Knowledge…..

A few weeks ago I made the point that folk who are trying to sell software, technology and services into the oil & gas industry would do better if they had domain knowledge, a deep understanding of the industry acquired through personal experience.

Have you read Luke Johnson’s Sunday Times article “Could Whitbread’s bosses make a frothy cappuccino?” – remember Whitbread own the Costa brand of coffee houses?

He is highlighting the farce of many listed companies, big and small, having entire boards where nobody has (domain) knowledge of the relevant industry.

I really recommend that you read it, he makes many excellent points, including the possibility that corporate failure or poor performance may be a consequence of a board’s lack of domain knowledge.

Perhaps you think that things or not so bad in the oil & gas industry?

Well, I was going to highlight for you the lack of relevant experience of some key players in a dozen or so well-known oil & gas companies, chairmen, CEOs, CFOs…….but my first draft was getting too personal!

So let’s try something else:

Do you think that the poor performance over the last several years of:

1.      Exploration – this is a review of merely the latest poor year, 2016, and/or

2.      Development – projects are oftentimes either way over budget and/or late and/or do not deliver the promised production profile, sometimes all three,

is anything to do with the domain knowledge of boards?

Of course they perform well in taking on lots of debt and rewarding themselves handsomely but that is another topic!!

Exploration is a business!

Exploration is a business!

This is a commentary on the US shale revolution, by a participant: “Geology is a science. Geophysics is a science. Exploration is a Business”

Given that, where do we go from here, what happens next?

This quotation is usually attributed to Albert Einstein: “Insanity: doing the same thing over and over again and expecting a different result!”
…’..so let’s agree that a lot has to change?

Here are a few ideas:

Short-term (2-3 years)
Based on what the Majors appear to be saying, the focus will be on:
• Existing provinces, many of them offshore
• Exploiting discovered, or extremely low risk accumulations
• Closeness to Infrastructure
• Short times to 1st Oil/Gas
We might call this “Infrastructure-Led Exploration” but a more honest term might be “Infrastructure-Led Exploitation” or even “Infrastructure-Controlled Exploitation”……………which will not work for everyone.
And so…..

Longer-term (4+ years)
I predict that some companies (Majors) and NOCs will need new resources/reserves, requiring:
• New Ideas
• Low Cost Oil (we don’t need any more Gas!)
• Not Deep Water, not Arctic
• Onshore
• “Regional” approach
We might call this “Regional-scale Exploration”

How to do “Infrastructure-Controlled Exploitation”?
• Geoscientists as part of Exploitation team(s)
• Low overheads, low G&A; exploit cost leverage
• Technology Innovation:
      >Multi-component seismic; 4D when producing
      >Machine Learning (applied to subsurface interpretation)
      >Production Analytics

How to do “regional-scale Exploration”?
• Low overheads (especially Executive management!)
• Low G&A; exploit outsourcing
• Portfolio of opportunities (not just one play!)
• Technology Innovation:
      >Satellites
      >UAVs (manned aircraft only if no alternative!)
      >“Boots on the ground”*
      >Wireless seismic
      >Integration: seeps, gravity (FTG), “The Rocks”*, seismic (preferably 3D)

*I mean the ‘classics’ = stratigraphy, sedimentology, structural geology, geochemistry, petrophysics

E&P problems that are worth solving!

It is a contradiction that our industry has a reputation for being, and in fact is, very conservative when it comes to adopting new technologies and yet is made up of individuals (also known as consumers) who are anything but that: the latter will pick up a Blackberry like they are going out of fashion but drop it in favour of a smartphone almost overnight!

And when I talk to colleagues in the industry and ask them about their reaction to specific new technologies and to those marketing them, they will say things like “this is a solution looking for a problem; they have no domain knowledge, etc”.

In fact the phrase “solution(s) looking for a problem” seemed to me to have become a shorthand for “we ain’t going to buy it!” so the other day I googled on this phrase and came upon this interesting short article. It is worth clicking on this to get it onto a separate Tab and coming back to my article when you have read it!

You will see that he is referring specifically to entrepreneurs when he says “I have found that when they have worked in the industry and have lived the problem they are trying to solve, they have a much better shot at success.” To me this defines what the comment about ‘domain knowledge’ implies…..….the folk pitching the technology don’t understand the problem that might be solved.

So I thought I would do a couple of things.

Firstly I would write down no more than 4 or 5 problems which I see in E&P: these are my ideas and others will have different ones – a point which will I will come to in 5 or 6 lines. How do we:

1.      Explore for onshore oil?

2.      Move seismic interpretation out of the Stone Age?

3.      Solve the “cloud of points” problem?

4.      Improve Projects – they are invariably late, over budget and oftentimes do not deliver what was promised production rates?

5.      Spot equipment failures ahead of the “Aw, snap!!” message?

I will work my way through these five shortly but please feel free to tell me/us if you have another problem that you think is important to crack.

1. Exploring for onshore oil

We need to remind ourselves that we are not just interpreters of 3D or 4D (towed streamer) seismic but actually need to integrate a wide variety of data.

Exploring onshore, we might have to integrate satellite and airborne data, a significant number of well results (logs, cuttings, core, flow rates), potential field, seismic, surface geology etc.

How might satellite and airborne data help?

Well, it is fairly well documented that seepage of petroleum, and here I am talking about micro-seepage, can impact both the health of vegetation and the colour of surface-exposed rocks. Such changes should be visible both from space and from altitude, and the data available to us has mushroomed both in amount and in the variety and resolution of sensor technologies. Can we get at the meaningful patterns using Analytics?

2. Moving seismic interpretation out of the Stone Age

You may have seen the news of the resounding win by the artificial intelligence program AlphaGo (built in the UK! Hooray!! Now owned by Google…..)  over the South Korean world champion, the Go master, in the complex board game Go back in March.

AI experts had predicted – last year, I think - that a computer program needed at least 10 more years of development before it would be able to beat a Go master. However, as I understand it, any rules-based system such as Go – and see below! – is a prime target for Machine Learning.

Well-established ‘rules’ have been proven for Stratigraphy, Structural Geology, Sedimentology and describing Petroleum Systems (especially by creating GDE, CRS and CCRS maps). Nowadays these ‘rules’ are most commonly applied through seismic data, especially 3D seismic data.

The key ‘technologies’ are a) large quantities of inexpensive multi-client 3D seismic and b) commoditised interpretation workstations.

In truth, this methodology has now become completely commoditised: little commercial advantage accrues from getting it right, simply disadvantage flows from incompetent execution.

Hmmm, an interesting message there for the folks who have been telling me that it will take “a decade or more” for AI to replace Subsurface Scientists in the oil & gas industry!

How long before an AI system can actually do all of this?

3. The ‘cloud of points’ problem

Thirty years ago, a “previous employer” had an internal R&D project which rejoiced in the name of Lithology & Fluid Prediction (LFP).

Now LFP was founded on the idea that not only does seismic data show us geological geometries – folds, downlaps, onlaps, erosional truncation and the like – but that the very existence of reflections depends on rock physics, contrasts in impedances, and that we might get smart enough to predict actual lithologies and – wait for it – hydrocarbon content. And of course this notion has had some success, with AVO anomalies, flat spots etc etc.

However, I assert that we have not done as well as we might with such predictions and that this is primarily due to the relatively weak calibration that can be derived from well logs.

Who has worked in this arena and not found that well log-derived parameters such as sonic velocity, density or resistivity exhibit “cloud of points” behaviour when plotted against for example depth? A “cloud of points” through which it is a pretty brave person who fits a straight line or series of such lines, and then uses them to make lithology/fluid predictions?

Part of the problem has been selection and prejudgement. So many wells have penetrated, for example, the Kimmeridge Clay Formation in the UKCS that the problem only seems tractable if only a limited selection of them are used. And then a model is imposed – for example that the particular property will vary most strongly with depth or, perhaps, stress (if we have a way of calculating it).

Thus a sample of the available data is exposed to bi-variate analysis whereas the correct approach would be to subject all of it to a multi-variate analysis.

Maybe then we might even find some more oil in mature provinces such as the North Sea or South East Asia!