Exploration Just Isn’t What It Used to Be

Notions persist that explorationists in the oilpatch are the heirs-apparent of further advancement in their ranks and that exploration activity is the driving force in the industry. These notions, however, are myths – throwbacks to a simpler era.

By “explorationist,” include on the one hand geologists and geophysicists, and exclude on the other hand accountants and similar professionals . Explorationists’ prospects to reach the top have become the primary domain of junior- to medium-size producers, while their prospects at senior producers are marginal at best.

Two overarching factors constrain successful exploration in the Western Canadian Sedimentary Basin. First, skills in defining major traps where the distribution of oil and gas that permit extrapolation over a large number of low-risk future drilling locations are no longer applicable for much of the basin. Such finds were termed “elephants.”

A second major impact has been the advent of horizontal drilling to maximize the chances of success. Geological decision-making, enhanced by geophysical insights, in effect “sees” where the gas is. Geological insight as an unbundled commodity has tended to diminish in value over time, and with it the ability of geologists to provide the skill set necessary to run oil and gas enterprises.

Take, for example, the large integrated producers. Such companies tend to be involved in projects on an international scale in Canada with heavy oilsands and tar sands, but conventional oil and gas exploration activity will be limited at best.

Shell Canada is a case in point. The last major exploration discovery by Shell was the Caroline field 15 years ago. There is some Shell drilling activity in the foothills of Alberta, but not otherwise.

The reason for this state of affairs is twofold. First, large overheads in the integrated majors make wells under 100 BOE per day only marginally profitable, and this represents a better-than-average discovery. Second, these companies have the financial means to buy the reserves of existing companies at a lower cost and level of risk than going to the field and discovering on their own properties.

Shell has been active in property acquisition and disposition since the beginning of the 1990s, but hasn’t acquired any companies. From this it is evident that exploration activity is not key to advancement in large integrated oil companies.

Large private producers – predominantly subsidiaries of American companies – are comparatively recent players on our scene. Devon Canada Corporation is an excellent example of this category.

According to Vice-President Exploration Bob Jones, P.Geol., Devon has exploratory plays in Foothills and Deep Basin in Alberta and northeastern B.C. The company’s overall drilling pattern is 60 per cent development, 40 per cent exploratory. The current CEO, John Rachel, is a lawyer by trade, but with a strong exploration focus.

According to Mr. Jones, a strong exploration orientation is very helpful in achieving the most senior ranks at Devon.

Medium-sized producers traditionally have the largest percentage of exploration dollars as a percentage of total drilling expenditures. Esprit Exploration Ltd. and Canadian Superior Energy Inc. are examples.

According to President Steve Savidant, Esprit has several Alberta exploration plays within a 150-mile radius of Calgary, Approximately one third of annual capital expenditures are allocated to exploration drilling out of a total of $90 million, which is a high percentage by industry standards.

As far as access to the presidential chair is concerned, Mr. Savidant observes that the best management style for a firm like his is multidisciplinary, without favoring one particular discipline over another. Canadian Superior Energy Inc. also has an aggressive exploration strategy, based on its ability to attract well-funded joint venture partners.

The category of major public producers has grown as a percentage of total Canadian drilling activity in Canada and abroad. EnCana Corporation is a case in point. Approximately 10 percent of its total drilling activity around the world is exploration . Unlike its more junior brethren, the company is able to finance extensive exploratory drilling and infrastructure out of internal cash flow. The corporate culture at EnCana supports an inclusive concept of allocating credit for corporate success, including who occupies the presidential chair.

Another major explorer is Canadian Natural Resources Ltd. The company has active exploration plays in northwestern Alberta, northeastern B.C. and the Northwest Territories. The ratio between exploration wells and development wells is approximately 1:9. The company confers broad recognition on its exploration function: CNRL has three exploration vice-presidents on its executive committee.

Medium-to-small private companies represent a stable element in the overall pattern of exploration activity. Profico Energy Management Ltd. is another case in point. The company is a medium-sized private company based in Calgary. Peter Kurceba, P.Geol., is the vice-president exploration.

The company plans a vigorous exploratory drilling program in Saskatchewan – about 200 development wells and 100 exploration wells going into the present drilling season. Mr. Kurceba stated that exploration experience was definitely a plus in his organization as a path to the top.

The royalty trust concept was kick-started in Western Canada through the efforts of Marcel Tremblay with the able assistance of John Brussa of Burnet Duckworth and Palmer. This formula has become quite prevalent: at present, more than 15 per cent of total production in Western Canada is carried on by royalty trusts.

Acclaim Energy Inc. exemplifies a trend towards a broadening and an internalization of risks in drilling activity by and on behalf of royalty trusts: no “elephant” discoveries, but a steady increase in monies allocated to development and exploratory activities.

This is in stark contrast to the earlier situation of royalty trusts’ exploiting proven reserves for all they are worth. David Carey, P.Eng., vice-president of business development for Arc Energy Trust, echoes the same trend.

What conclusions, then, are we entitled to draw from these observations? With the possible exception of the integrated producers and the royalty trusts, every category of company canvassed above had some exploration activity. Most companies had between one-tenth and one-third of wells drilled as exploratory, with, as expected, integrated majors and royalty trusts at the lower end of the scale and junior-to-medium producers at the upper end.

The public belief that explorationists have some residual claim on their company’s executive chair requires some major qualifications: of 11 companies canvassed, only three – Devon Canada, a large private producer; CNRL, a large public producer; and Profico Energy Management, a medium junior – held that an exploration orientation was by itself a very important factor in choosing the respective companies’ executive ranks.

Why so? Probably because, as the Western Canadian Stratigraphic Basin matures, emphasis shifts from exploration to operations as a major source of added value, so knowledge of operations grows in weight.

Alternately, personality factors, such as an ability to induce cooperation among different aspects of the firm’s activities, weigh more heavily than any other single factor.

Majors are usually run by engineers while explorationists have an edge in running intermediates and juniors. This trend stems from to the nature of the activities undertaken by the three types of entities. A junior must explore in order to grow.

Once cash is available, acquisition of proven reserves becomes feasible. This starts the shift to development which may require more of an engineering background.

Acknowledgements

This article originally appeared in the April 2004 PEGG, and is reprinted here in a slightly modified version courtesy of APEGGA and the author.