February 11, 2010 / 12:02 PM / 7 years ago

FACTBOX-Oil exploration risks and costs escalate

6 Min Read

 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)  

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