Chapter 1 – Introduction

1.01 Overview Part 1 (20 min.) Sample Lesson
1.02 Overview Part 2 (16 min.)
1.03 Practical Approach & Tools to Get Crackin' (22 min.) Quiz: 1.03 Practical Approach & Tools to Get Crackin'

Chapter 2 - Methodology & Tools

2.01 Reconnaissance (17 min.)
2.02 Analogs (17 min.)
2.03 Selecting Project Area & Coordinate System (10 min.)
2.04 Project Setup Live Demo (10 min.)
2.05 Industry Activity (4 min.)
2.06 Industry Activity Demo (13 min.)
2.07 Regional Assessment (6 min.)
2.08 Regional Assessment Demo (13 min.)

Chapter 3 - Lease Analysis, Drilling and Production History

3.01 Drilling & Production History (4 min.)
3.02 Drilling & Production History Demo - Part 1 (11 min.)
3.03 Drilling & Production History Demo - Part 2 (4 min.)
3.04 Drilling & Production History Demo - Part 3 (9 min.)
3.05 Lease Analysis (3 min.)
3.06 Lease Analysis Demo (11 min.)

Chapter 4 - Wireline Logs & Geologic Correlations

4.01 Wireline Logs - Part 1 (7 min.)
4.02 Wireline Logs - Part 2 (13 min.)
4.03 Wireline Logs Demo (17 min.)
4.04 Geologic Correlations (6 min.)
4.05 Geologic Correlations Demo (13 min.)

Oil & Gas Exploration and Development: A Practical Approach / Chapter 1 – Introduction

Lesson 1.01 Overview Part 1

Access All SAGA Wisdom Training content Subscribe

Already a member? Sign in

Access All SAGA Wisdom Training content Subscribe

Already a member? Sign in

Transcript

01. Oil & Gas Exploration: A Practical Approach - Lesson 1.01: Overview Part I 02. Overview 03. The Thrill of the Chase 04. Reality 05. Factors that influence the origin or genesis of the discovery 06. Where Producers Plan to Source Capital in 2019 07. Who Owns America's Oil & Gas 08. Mid-Size Independent - Penn Virginia Corporation 09. Large Independent - EOG Resources 10. Large Integrated - ExxonMobil 11. Risk 12. Risk & Rewards for Various Plays 13. The Idea Diffusion Cycle 14. Expertise 15. Recap 16. Tutorial Topics

01. Oil & Gas Exploration: A Practical Approach - Lesson 1.01: Overview Part I

Hi, welcome to the opening presentation of the Oil & Gas Exploration series. My name is Jerry Gilmore and I'll be presenting A Practical Approach to Exploration & Development using proven tools and methods. In these first few short episodes, I'll describe the complete E&P cycle, which will provide a broad overview of the process.

02. Overview

We'll start by talking about the "why we do what we do?" from a geoscientist's perspective. What some have called "The Thrill of The Chase". And then we'll discuss the origin of a discovery. Who makes it all happen? How does it get started? And the where, what dictates where exploration will occur? We'll follow that with an outline for a practical methodic approach to oil and gas exploration. And then we'll get crackin', so to speak, with a real-world example of the complete process. That'll conclude the overview section. And beyond that, the E&P series focuses on the how to details using specific tools and methods to explore and develop oil and gas. With that said, let's get crackin' by starting with the thrill of the chase.

03. The Thrill of the Chase

Now, the thrill of the chase has been around probably since the beginning of man. For sure, it's been in my blood since birth. When people ask me what I do for a living, I usually start by telling them that I'm a treasure hunter. I identify clues, I piece together a puzzle, and then I test the theory by convincing someone to drill a well. It has been an exciting career, no doubt, with lots of ups and downs. Within the last couple of hundred years, we've seen lots of examples of this thing we call "the thrill of the chase", starting with the discovery of gold in California in the 1840s. The carpenter by the name of James Marshall, noticed a shiny metal in the Sutter River while he was working at the mill. His discovery set off the California gold rush. Later, before the turn of the century, George Carmack found gold in the Canadian Yukon. That discovery set off one of the largest gold rushes in American history, with more than 100,000 prospectors migrating north to the Yukon. What happened in the oil industry just after the turn of the century was no different. In 1901, Anthony Lucas discovered black gold at Spindletop in Beaumont, Texas. His discovery created the same kind of stir. Men and women were dropping everything to chase the riches promised by oil, or as The Beverly Hillbillies called it "Texas tea". A more recent example is that of an armchair treasure hunt that was published in a book in 2010 by Forrest Fenn. The book was appropriately titled "The Thrill of the Chase" and it captured the spirit of more than 350,000 people from around the world. They spent countless hours and dollars searching for a treasure chest. Now, that chest was filled to the brim with precious stones and artifacts that were, by some estimates, worth more than $2 million. All you had to do was solve a short poem that had 9 clues in it. If you solved them, you'd find the exact location of that treasure chest, which is hidden somewhere in the Rocky Mountains. You may have noticed the backdrop on this slide is the symbol for a well, but it's not just any well symbol. It's a symbol for dry hole. Reality of the oil and gas business is that although there's much to the thrill of the chase, there will be dusters along the road. When I talk with others about our industry and my job, I like to mention a question that was asked on the final day of class by a geology teacher in grad school:

04. Reality

How does it feel to know that you're about to enter an industry where you will be wrong 90% of the time? That question should be food for thought for anyone who's considering a career as an explorationist. The reality is that the probability of success, what we call "the peace abyss", can be 10% or less for pure wildcatting. What I mean by that is the likelihood of finding oil or gas that's economic to develop is often very small. Risk is always a factor in determining what gets drilled where and by who. On this next slide, you'll see a list of factors that influence the origin or genesis of the discovery.

05. Factors that influence the origin or genesis of the discovery

Risk, expertise, E&P companies and capital or investors. Those are 4 things that determine whether a project is pursued. Now, Einstein was not a geologist, but he did like pie in more ways than one and he certainly was an expert in nuclear physics. Sufficient expertise is critical to success in any endeavor, and it's the expertise that dictates where a company explores for oil and gas. The backdrop on this slide's a moneybag, which is the impetus for all exploration and development. E&P is capital intensive, but it can reward investors in ways that no other investment can in terms of upside potential and tax write-offs. Those are 2 forces that drive investors to put money to work in our industry. The investors have financial metrics that they use when they're screening for opportunities. At the top of that list would be a return on investment (ROI). There's also, there's required capital commitment, and a host of other factors that go into that screening process. Investors are looking for oil and gas companies that can deliver their desired returns. For instance, some of these investors are looking for a guaranteed moderately high return, say, in the 10% range. There are portfolios of E&P companies out there specifically designed to consistently generate those kinds of returns. Next on the list, from the bottom up, oil and gas companies. They are working hard to attract that capital, which is going to help them grow shareholder value. So they set objectives that are specific to attracting that capital. At the top of the moneybag is risk. There's always a tradeoff between risk and reward. Higher risk can bring more reward, but that's not always the case. Investors and the companies they invest in have risk profiles specific to their desired exposure to both upside and downside. In summary, then, investors provide capital to oil and gas companies in exchange for expected returns. Those E&P companies set objectives that generate the desired returns for their investors, and the geoscientists provide the expertise to choose projects that meet corporate objectives and the investors' goals. It's our responsibility as geoscientists to identify and profile the risk and reward for a variety of projects. Now, for a couple of remarks about the capital providers.

06. Where Producers Plan to Source Capital in 2019

As in many industries, there are multiple sources for capital. This pie chart covers companies of all sizes, but it's specifically for oil companies that are already producing oil and gas. So the possible sources of capital are equity and debt from the public markets; that would be the stock and. Debt from the banks; taking on loans. Equity and debt from private firms. Cash flow from operations producing wells or joint ventures with other industry partners. Issuing stocks and bonds in the public markets are two ways that larger companies secure investment capital. That represents about 10 - 15% of the pie. In this case, it's the shareholders and the bondholders who are the investors. Similarly, producing companies sometimes dilute company ownership by issuing stock to, and they'll leverage their production to obtain funding. They'll take out loans with them. That represents about 22% of the pie. A company that has producing assets may have the option to take out loans from banks against those assets, using them as collateral. And depending on market conditions, it will be some percentage of the value of the proved asset; that accounts for 21% of the pie. Companies with production often have capital available from that cash flow that they will reinvest in more exploration and development; that represents 26% of the pie. And lastly, about 18% of available capital comes from joint ventures. For instance, with a DrillCo venture, a drilling company may supply the rig and the drilling expertise while the exploration company provides the land and the geologic expertise.

07. Who Owns America's Oil & Gas

This next slide shows more detail on the ownership for oil and gas companies. These are the individuals and fund managers for groups of individuals who have taken equity positions in oil and gas companies. In other words, these entities have provided cash to the companies and exchange for equity in the companies. Pension funds account for about 29% of the pie; IRA's about 18%; individual investors, including high net worth individuals, friends, family, relatives, 19%; asset management companies about 25%; corporate management, these are the folks that are running the corporations, they represent about 3% ownership. The remaining 7% is coming in from other institutional investors.
Now, looking at this slide again with the investors - capital to work with, funded companies are challenged with providing the returns demanded by their investors. To accomplish this, they set corporate objectives. These objectives will vary depending on the type of company, and the companies come in all sizes, but they fall into 3 basic categories: the independents, the integrated, and the semi-integrated.

08. Mid-Size Independent - Penn Virginia Corporation

This next slide shows some metrics for a medium-sized independent oil company Penn Virginia Corporation, which is a publicly held corporation. These metrics here are a measure of how well Penn Virginia is doing in meeting its objectives, which are to increase production volumes, reduce operating expenses, decrease the debt, and increase net income on a per share basis. We can see here also that Penn Virginia is mitigating product price risk with a hedging strategy. What that means is they are under contract to sell oil at a certain price, no matter how low the price of oil might fall in the open market. Notice also the highlight in red showing the portfolio mix. Penn Virginia has chosen a very focused strategy. They are chasing only unconventional, so they're considered a pure play oil company. That strategy tends to work well when theand the opportunities in the play are attractive and abundant. But it falls apart if the economics are poor for that single target or if the opportunity set evaporates due to increased competition. Now, larger companies with adequate capital resources can reduce risk by diversifying their portfolios.

09. Large Independent - EOG Resources

EOG Resources is a large independent involved in multiple plays across major US oilbecause of their access to capital, and they're able to mitigate risk and gain exposure to opportunities that offer more upside potential. They also are able to adjust their production of oil or gas to optimize revenue depending on fluctuations in the price of oil or gas. And by participating in multiple plays, they're at less risk of failure from the deteriorating economics of a single play. Each of the different geographic locations of these plays offers a different set of challenges and rewards.

10. Large Integrated - ExxonMobil

Taking it one step further, the largest companies are typically integrated or semi-integrated. This means they have downstream or midstream operations or both, as well as the upstream operations. This example shows ExxonMobil and that they are invested in E&P and the upstream, but also in chemicals, gas stations, and pipelines for the downstream and midstream operations. So they are a fully integrated company. Capital available to a company this size gives it the ability to further reduce product price risk since they operate refineries and sell the products from those refineries. So any drop in the price of oil at the wellhead works to their favor downstream where their margins will see improvement. Large integrated companies typically have broad exposure domestically and internationally, as can be seen on this map with ExxonMobil.

11. Risk

Now, returning again to the moneybag slide, risk is at the top of the heap. It's intimately tied to project economics and gets factored into expected returns when investors compare investments, but the significance of risk merits even more detailed discussion. It's the geoscientists' responsibility to assess the risks and rewards of prospective plays and to recommend entry or exit from those plays. As this slide says, when we consider risk, we tend to think in terms of the probability of finding hydrocarbons. The problem with that thinking is it doesn't take into account that we still need to make money. The cost of finding hydrocarbons is tied to risk. Just because we found a 100,000 bbl oil field does not mean that we will make money when all costs are considered. It may take 10 wells at a cost of $100 million to find and develop it. The charts on the next page show the risks and rewards of various plays and the capital required to invest in these plays.

12. Risk & Rewards for Various Plays

So the charts are broad, they're very generalized. But for the chart on the left, capital requirement is increasing upwards on the y-axis. And each blue bar represents a range of capital required to participate in a particular geologic play. For the chart on the right, relative risk is shown in red and relative reward is shown in green and both are increasing to the right on the x-axis. So risk and reward are intimately tied to the capital constraints of a corporation which is why these two charts are shown side by side. On the left, we see that small independents, which are typically more capital constrained, are unlikely to participate in these deepwater, expensive deepwater international projects unless it's a very small percentage participation. You see that the chart on the right is labeled economic risk. And this is again, because finding hydrocarbons is one thing, but finding them economically is what matters most. In that same chart, you can see that although the reward for international deepwater projects is quite high or can be quite high, the economic risk is also high on a relative basis. Likewise, domestic onshore conventional plays can be very low risk, but the margins and the upside to such plays is also low. Available funding is what dictates which of the opportunities are available to a company and the necessary returns and the acceptable risk is what determines which of the plays companies can target. Lastly, the profile position for these plays has evolved over time. For instance, onshore domestic conventional used to look a lot more like offshore or onshore international in terms of risk and reward. But what's happening is that the opportunity set is diminishing with time for any of these plays. We can think about the opportunity set in terms of something called the idea cycle, as can be seen on the next slide.

13. The Idea Diffusion Cycle

So the bottom axis of this graph shows time increasing to the right and the y-axis indicates the opportunity set for a play. And what that means is the total remaining number of opportunities within that play. Early on, when a newis identified, the opportunity set is at its max, 95% in this example. That's the stage where we would see early entrants or wildcatters. They are the innovators, so to speak. Companies that are risk-averse and short on capital, they're not going to be comfortable being the first into a new play like that. And the opportunities are going to decrease both in abundance and in size as time goes on and the play matures. Conservative companies and pragmatists, they're going to delay entry into a play until sufficient testing has been done to prove up the economic viability. Cost of entry becomes higher as time passes, so the skeptics who wait until the very end are going to see lower margins they're going to be very, very tight. Companies following that course are implementing what's called a herd mentality strategy. That's a strategy that is doomed to fail. I qualify that statement by saying larger companies with sufficient capital and resources could use that strategy to come in late after bankruptcies have decimated the industry, they can leverage their capital, buy assets at below market price, and then use technology to reduce operating expenses and improve their economics. An example is with the implementation of assembly line optimization processes. These are now being used in many of the plays.

14. Expertise

We discussed the roles that investors and corporationsin determining which projects will be pursued. We also talked about how risk affects those decisions. Last on the list is expertise.
To emphasize the importance of this component, this slide was modified, moving expertise up to the top of the heap of the moneybag. As the slide reads, this is an industry where people truly are the most valuable asset. Geoscientists identify and profile the risk and reward associated with projects, and we have to consider the corporate resources and choose the plays that meet investor criteria. And finally, we use our expertise to come up with an approach to evaluating oil and gas projects.

15. Recap

To recap, during the first part of the overview, we discussed a portion of the E&P cycle, including who the players are and what their motives are. We showed how risk plays an integral part of the E&P cycle.
In the next part to the overview, we bring expertise to bear by presenting an outline of a proven methodology, a practical approach to oil and gas exploration.

16. Tutorial Topics

Beyond the short overview episodes, the E&P series focuses on the how to details using specific tools and techniques. These are some of the topics that we plan to cover with the series. The emphasis and timing for each of those may shift depending on industry feedback.
My contact information is in the lower right. Feel free to provide feedback as to topics of most interest and don't hesitate to reach out to me by the phone or email for questions about the tutorials. I'm also available to provide G&G consulting services or for in-house instruction.