January 31, 2019 - Nom Geo

Understanding Oil Company Announcements

This is the first of a series of Oil Company Announcements series where we can geek out on what it all means. If you like to comment or receive notifications, please use the subscribe link all the way at the bottom of this article.

The Pre-drill announcement

You will find today any number of news articles outlining a new oil and gas exploration programme. The announcements are usually accompanied by an estimate of the size of the reservoir in terms of prospective hydrocarbon volume and potential. In the pre-drill stage, the exploration company has identified a “structure” from a seismic survey. The idea is to then drill a “wildcat” well, or exploration well that could discover hydrocarbons.

Image from spee.org
Guidelines for Application
of the Petroleum
Resources Management System

Note: Any reported hydrocarbon volume must be classified under the respective regulatory authority. The US Securities and Exchange Commission (SEC) does not allow prospective resources to be reported, but Canada’s COGEH do. Usually classification defaults to the Society of Petroleum Engineers’ (SPE) Petroleum Resources Management System – 2018. Termed a “Prospective Resource”, the pre-drill reporting covers as yet “undiscovered” hydrocarbons. At the bottom of this article you will find some links to the relevant SPE online resources as at the date of this article.  

Due to high cost, the seismic survey of an area can only be justified by an assumption that the geological province shows affinities to other areas where hydrocarbons are already known to exist. This identification is based on several factors that must be present. The first and most important is the knowledge that there exists a “total petroleum system”, comprised of a hydrocarbon source, a historical temperature gradient that allows the conversion of kerogen into hydrocarbon and finally a reservoir and trap structure for storing and preserving the migrated hydrocarbons.

Nearby discoveries

As such the existence of any previous discoveries in that same system is one of the main keys to understanding the expectation that the explorer holds for that location. Descriptions of discovery potential that include phrases such as “on-trend with” mean that tectonic events such as geological compression of the crust, which tend to be omni-directional, are observable as geological features that extend along a line. To illustrate, you can visualise the same effect for a linear mountain range where mountains occur along a line. So, if the exploration block in “on-trend” with other known discoveries, it makes sense to pursue it as a potential target.

Zooming out to Nearby Basins?

The other key consideration is whether the basin being assessed for seismic work corresponds with nearby basins. This is usually based on geological history and the expected age of the sediments. The coast of Western Africa highlights this example perfectly. Petroleum systems in Angola and Nigeria are of similar age and correspond to the opening of a line of basins that through rifting eventually became the Atlantic Ocean. The logical exploration of other coastlines that shared the same geological history directly led to discoveries in Senegal, the Congo, Ghana, Equatorial Guinea and Mauritania.

Proceeding with the Seismic Survey

The decision to conduct seismic work in an area is therefore based on educated guesses. At this stage, announcements will focus on the potential of the exploration block based on other discoveries and known geology in the broader regional context.

Any estimate of hydrocarbon potential at this stage is speculative. The initial scoping is normally underwritten by specialised exploration companies and often by governments. Seismic work is typically using lower-cost, 2D seismic surveys that can serve to identify potential petroleum trap structures. Junior explorers who buy into these “frontier blocks” have an expectation that the identification of a sufficiently large structure will attract larger companies. Announcements tend to be pitched towards that goal.

A more detailed seismic survey may be undertaken and once identified, a 3D survey will be conducted, especially if the target is in a deepwater setting where drilling costs and risks are very large.

What does the pre-drill announcement tell us?

The pre-drill announcements thus inform what the company hopes will be range of discovered hydrocarbon volumes. Statements such as “best estimated prospective resource is“xxx of barrel oil equivalents” are usually based on two factors. The volumetric size of the trap structure as seen on seismic data multiplied by the “nominal” available porosity. Porosity is the percentage of that total volume that is available pore space. Available porosity is total porosity adjusted downwards on the assumption that pore spaces also contain a water-fraction.

What do the numbers mean?

Prospective resource announcements are a speculation that should hydrocarbons be discovered that they will be within a value range of Prospective Resources. They do not presume that the exploration will successfully find commercial volumes of hydrocarbons. This is often the case.

Usually a table is presented showing three values which are low, best and high estimates. Low estimates mean that there is a 90% probability that discovered hydrocarbon volumes will be higher than the low estimate. Best means that the hydrocarbon volume has an equal probability of being higher or lower (50%) than the best estimate, while the high estimate implies that there is a 90% chance that the actual volume of hydrocarbons will be lower than the stated figure.

What happens to the numbers after drilling?


Usually all three numbers are reported in a company report. These are prepared by an accredited and independent assessor (competent person). Because there is not enough data to estimate anything other than a range of values, all three are given in company reports under filing rules.

But in practice there are three scenarios that could result after drilling of the exploration well:

  • Dry, meaning no hydrocarbons,
  • Wet, signifying successful hydrocarbon discovery
  • Discovered trace hydrocarbons, meaning that there may be more hydrocarbons to be found nearby

More unknowns than knowns!

Usually regional analogues are used as the best predictor of success. The chances of success in a field adjacent to a commercially significant discovery are much greater that the chances of discovery in a frontier block, where little or no exploration has taken place.  

What you can absolutely be sure of is that the eventual discovery, should it occur. will represent a different volume to the predrill best estimates – no exceptions. Still unknown at this stage is the actual ratio of oil to gas, condensates, impurities such as sulphur and carbon-dioxide, helium and nitrogen content and very importantly, water content in the reservoir’s pore spaces.

Also unknown are reservoir conditions of pressure, permeability, actual porosity and of course, oil and gas quality, as well as pay zone thicknesses and distribution and actual depths. Adding to the unknowns is the water to oil contact depth and the gas to oil contact depth, if it occurs. In other words, very little is known and the risk of failure at this stage is very high!

To conclude

The pre-drill announcement of a potential target is merely the identification of potential size of the reservoir based on remote sensing seismic data and a “nominal” porosity assumption. At this stage the unknowns exceed the knowns by a very high factor and all estimates can only be classified as prospective.

What Happens Next?

Usually the next stage is to use the seismic data to plan the location of the first exploration well. Normally this will be situated where the structure’s topographical size is greatest (thickest), allowing the greatest intersection of potential reservoir horizons. A further factor is to place the exploration well on a direct pathway between the trap and the likely hydrocarbon source. This means that if the structure is faulted, the exploration geologist will select the most likely location for a “wet” result.

Volumetric assessment of prospective resources
pre-discovery stage by Wang and Gratto 2010

Image from spee.org
Guidelines for Application
of the Petroleum
Resources Management System

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Links

https://secure.spee.org/sites/spee.org/files/2011%20Guidelines%20for%20Application%20of%20the%20Petroleum%20Resources%20Management%20System.pdf

https://www.spe.org/industry/reserves.php

https://secure.spee.org/sites/spee.org/files/europe-2017-09-07-taylor.pdf

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