FACTBOX-Oil exploration risks and costs escalate

Feb 11 (Reuters) - Finding and extracting oil and gas is
becoming riskier as companies push the frontiers of exploration
into areas previously considered too difficult or too dangerous.

As the "easy oil" is used up, oil companies are drilling
wells that are deeper, longer, further below the sea or in more
remote areas. They are working in some of the most inhospitable
regions on earth, where political, physical, geological,
geographical and contractual risks are high.

The new wave of exploration is having huge success, finding
oil and gas in the most unexpected places, but these successes
come at a price. Discovery costs are soaring and this could lead
to a supply crunch unless oil prices rise dramatically.

For a table showing the escalating cost of discovering new
oil and gas reserves, click on [ID:nLDE61A16Z]

MATERIALS AND SERVICES

Despite a decade of relatively low inflation, some key
ingredients for oil and gas exploration have risen sharply.

* The price of oil CLc1, fuelling upstream activity, shot
up to a high of almost $150 per barrel in mid-2008, from around
$30 in 2000, and has since come back to about $70.

* Steel, needed for drilling rigs and other infrastructure,
has more than doubled in price over the last decade. Hot-rolled
steel has risen to $550-$600 per tonne from around $250 per
tonne a decade ago after averaging close to $900 in 2008,
figures from Steel Business Briefing show.

* The race for new reserves has tipped the balance of cost
negotiations between oil companies and contractors in favour of
providers of services and equipment such as rigs. As oil
reserves are depleted at between 5 and 15 percent a year,
companies are under increasing pressure to replace them,
allowing exploration service and rig companies to charge more.

DEEPER, HOTTER, COLDER, FURTHER

* As unit costs rise, so do the quantities of materials
used: up to half of exploration spending is now deep or
ultra-deep offshore, which can involve drilling in oceans more
than 3 km (1.88 miles) deep and in remote positions up to 5
miles (8 km) from the rig. Total (TOTF.PA) has new wells in
oilfields 140 km (87 miles) off the coast of Angola at depths of
up to 1.2 km beneath the surface of the Atlantic Ocean. The Tupi
oilfield in Brazil, 4-5 km below the floor of the Atlantic,
needs 100 wells estimated to cost at least $100 million each.

* Oil companies increasingly use very expensive new
techniques to find and pump oil such as very high-pressure
high-temperature (HPHT) wells, which can operate in temperatures
above 425 degrees F (218 degrees C) and in pressures over 15,000
psi. The number of these new types of wells is increasing
rapidly all over the world, including in the North Sea, the Gulf
of Mexico and in Asia. These new techniques involve significant
new dangers and risks and need to be operated very highly
trained and expensive staff.

* Up to a fifth of the world's undiscovered, recoverable oil
resources -- around 90 billion barrels -- are estimated to lie
within the Arctic Circle, an area that has competing claims from
the United States, Russia, Canada, Denmark, Iceland and Norway.
So, in addition to intense cold and storms, the Arctic has
contractual challenges to oil explorers.

POLITICAL, SECURITY, CONTRACTUAL RISKS

* Resource nationalism pushes up costs as countries extract
a better deal. Britain, Russia, Venezuela and Algeria have all
raised their take from oil companies in the last few years,
either by imposing higher taxes or renegotiating contracts.

* More and more oil and gas is coming from areas previously
considered hostile, either because of physical and security
risks or as political volatility raises contractual risks.

* Terms of negotiations between companies and governments
shift dramatically in favour of national negotiators as soon as
oil is found, according to a model developed by economist Ray
Vernon called the Obsolescing Bargain Cycle. The terms of an
upstream contract reflect the relative bargaining power of the
parties involved, but oil is identified and starts pumping, the
government can squeeze the company on terms.

* Ghana is at loggerheads with Exxon Mobil (XOM.N) over its
proposed purchase of a $4 billion stake in the offshore Jubilee
oilfield from Kosmos Energy. Jubilee, with up to 1.8 billion
barrels, is due to start pumping in Q4 2010. Ghana National
Petroleum Corp wants the stake and has threatened to block
Exxon's deal, raising questions over the integrity of contracts.

* Uganda has at least 2 billion barrels of oil reserves,
according to Tullow Oil (TLW.L), but negotiations on production
have been slow, partly due to a government demand that oil
companies build a refinery to meet domestic fuel needs, a
requirement that oil companies say has recently been imposed.

* Royal Dutch Shell (RDSa.L) may sell assets in Nigeria
after years of bombings of its facilities in the Niger Delta.
Militant attacks have stopped Nigeria from producing two thirds
of its 3 million barrels per day of capacity, analysts say.

For an analysis of the escalating cost and risks of finding
new oil reserves, double click on [ID:nLDE6191WK]
(Reporting by Christopher Johnson; editing by Sue Thomas)