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RPT-After Alaska flop, Shell's search for oil moves closer to home

Published 2016-12-14, 02:00 a/m
© Reuters.  RPT-After Alaska flop, Shell's search for oil moves closer to home
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(Repeats Tuesday item)

* Shell focuses on exploration near existing fields

* Strategy effective in unlocking new resources and cash

* But comes at expense of larger, frontier resources

* GRAPHIC: Oil & gas exploration spending http://tmsnrt.rs/2gw0XBm

By Ron Bousso

LONDON, Dec 13 (Reuters) - In the waters off Malaysia, Royal Dutch Shell RDSa.L is finding gas quickly and cheaply to replenish depleting fields where only a few years ago geologists had lost hope of discovering any new reserves.

The Anglo-Dutch group is combining the latest technology with the wisdom of industry veterans to unlock new oil and gas deposits where it already operates, usually within 20 km (12 miles) of existing platforms.

The result has been a string of finds which, while modest in size, can generate cash rapidly to suit an era of drastically reduced exploration budgets across the energy industry.

After a costly flop in Alaska, Shell has turned away from giant "frontier" projects, focusing instead on exploring closer to home, such as in Malaysia where it has been producing oil for more than a century. Many of its rivals are following suit.

"With new data, new seismic and new brain power you can find extraordinary amount of hydrocarbons for the future," Ceri Powell, Shell's head of exploration, told Reuters.

Analysts say the industry will still need large discoveries in areas where the risk of failure is greater, but the cheaper and easier approach is paying dividends in the short term.

State-of-the-art technology such as 3-dimensional seismic imaging enabled Shell to unlock new prospects that quickly led to a string of discoveries, transforming the region off the Malaysian state of Sarawak into one of its most prolific basins.

Breaking with decades of traditional drilling techniques which used rudimentary technology, Shell combined the use of sonar waves with satellite images and super computers to pinpoint oil and gas deposits beneath layers of salt in rock.

This has proved so effective that Shell moved from holding only one exploration licence in shallow waters off Malaysia in 2013 to nine now, searching at greater depths and further offshore than ever.

Today, it is exploring 27,000 square km (10,500 square miles) off Sarawak for oil and gas. It has made 16 discoveries in the last 28 months that unlocked one billion barrels of oil equivalent. Shell and other oil companies, including state-run Petronas PETR.KL , now plan to map geologically the entire Malaysian coast.

Shell, like many of its peers including BP BP.L and Exxon Mobil (NYSE:XOM) XOM.N , have been forced into such strategies as the chances of finding new and huge reservoirs in hitherto unexplored frontier areas has diminished.

Per Magnus Nysveen, head of analysis at Oslo-based consultancy Rystad Energy, said the average distance of exploration wells to the closest fields fell from 113 km (70 miles) in 2015 to just 29 km in 2016 and is set to drop further next year.

Hugely expensive and risky frontier projects are often falling from favour due to the sharp decline in global oil prices since mid-2014 - which has made energy firms slash their exploration budgets - and the new supplies from cheaper sources ranging from U.S. shale deposits to the Malaysian discoveries.

Last year, Shell angered investors when it wrote down $7 billion after failing to find any oil or gas in the pristine Chukchi sea off Alaska's northwest coast. This followed years of complex work and a rig accident that drew heavy criticism from environmental activists.

The rate of successful exploration has dropped sharply in the last decade, with the proportion of projects finding any oil or gas down from around 40 percent to about 30 percent, according Andrew Latham, vice president of exploration at consultancy Wood Mackenzie. Fewer than half of the finds go into commercial production.

Across the industry, exploration budgets have sunk to $40 billion in 2016 from $95 billion two years earlier. Shell's spending dropped to less than $2 billion from around $5 billion.

"In the last two years, intense focus on new seismic and relooking at the basins that we have in our portfolio already is really paying dividends," said Powell, a geologist who joined Shell in 1990 and became head of exploration three years ago.

She is now applying the techniques used in Malaysia to other hubs such as Brunei and Egypt, where seismic imaging, advanced rigs and super computers are giving them a new lease of life.

Falling costs in some areas are also helping to stretch the tight exploration budgets. The cost of hiring vessels for seismic surveys has dropped around 60 percent from late 2013 to around $140,000 per day, according to Shell, which is using this to expand and accelerate its seismic plans into 2017 and 2018.

DOGMAS

It's not only technology that has helped to turn around the fortunes of the exploration business. Several times a year Powell brings industry veterans, some of them retired, together with the new generation of geologists.

The idea is to combine the experience and instincts of the old-school explorers with the younger generation's technological know-how to come up with ideas on where to find new reserves and how to unlock them.

"You put them all in one room and they look at the dogmas. They think about the wells they would have drilled in 1972 but didn't and why, and it has been astonishing." In Oman, where Shell has been exploring for 60 years, this exercise helped to identify six new geological prospects in a week, she said.

These brainstorming sessions have only one rule: to concentrate minds, no computers are allowed.

But while drilling closer to home is attractive in the short term, it comes at the expense of huge discoveries such as Exxon's Liza field in Guyana and Eni's ENI.MI Zohr in Egypt. These are crucial for replacing a natural decline of oil and gas reserves that in some reservoirs can reach 10 percent a year.

"Lead times are shorter and the value per oil equivalent is higher, but the cons are that discoveries are smaller. In general we would expect the largest discoveries to be coming from new plays and new frontiers, as has happened in recent years," said Latham.

Wood Mackenzie expects global exploration activity to accelerate in 2017 as oil prices recover.

RAPID CASH

While the Alaskan project failed, Shell added huge resources in Brazil, Australia, Egypt and southeast Asia to its reserves by buying BG Group in February for $54 billion.

This means it can now allocate around 80 percent of its exploration budget to areas up to only 20 km from existing platforms. In some cases, such as in Brunei, an exploration well can be completed and linked to production within days.

"Those will not necessarily be giant discoveries but (will be) very efficient and very rapid to get to production, and therefore to cash," Powell said. In the past six years exploration has added 6.5 billion barrels of oil equivalent to Shell's reserves, which reached 11.75 billion at the end of 2015, while the time from exploration to production has come down significantly, she added.

Other oil majors have adopted similar strategies. BP has begun drilling hundreds of metres below a reservoir produced by the Ravenspurn ST2 platform in the southern North Sea, searching for a new gas resource that could transform a basin first exploited 50 years ago and extend the life of infrastructure.

For Shell, the success of the new strategy and the Alaskan failure mean it will not return to frontier areas in the near future, but Powell still sees opportunities for big discoveries in the likes of west Africa, Namibia, South Africa, Uruguay, eastern Canada.

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http://tmsnrt.rs/2gw0XBm

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (editing by David Stamp)

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