NEWS Technical skills bolster success rate for U.S. independent operators

Sept. 18, 1995
A.D. Koen Senior Editor-News Independent oil and gas producers are applying new technical skills to achieve hefty rates of U.S. exploration success. Operators report strong showings in exploration despite or perhaps because of economic challenges. Lackluster wellhead prices in the U.S. continue to squeeze upstream economics, discouraging drilling of any kind. U.S. producers, meantime, continue to lose ground on domestic crude oil markets, while competition intensifies on U.S. gas markets.
A.D. Koen
Senior Editor-News
Independent oil and gas producers are applying new technical skills to achieve hefty rates of U.S. exploration success. Operators report strong showings in exploration despite or perhaps because of economic challenges. Lackluster wellhead prices in the U.S. continue to squeeze upstream economics, discouraging drilling of any kind. U.S. producers, meantime, continue to lose ground on domestic crude oil markets, while competition intensifies on U.S. gas markets. But with U.S. rig counts languishing around post World War II lows, U.S. independents have played key roles in surprisingly effective domestic exploration. By combining improved technological competence, especially in 3D seismic, with finely tuned exploration strategies based on high graded prospects, independents as a group have managed to match major companies exploration results. A handful since January 1994 have remained among the countrys most active, efficient explorationists.

High success rates

Petroleum Information Corp. (PI) (21706 bytes), for example, puts United Oil & Minerals Inc. (UOM), Austin, atop its list of most successful new field wildcat (NFW) drillers. UOMs 86.1% discovery rate was highest among companies reporting 20 or more NFW wells from Jan. 1, 1994, through Aug. 25, 1995. The company logged 29 gas discoveries in 36 NFWs. Operating units of major integrated companies have been similarly effective. PI data rank Exxon Corp.s U.S. operating unit as the most consistent among the most active U.S. oil and gas explorers. Since the first of 1994, Exxon Co. U.S.A. has achieved an overall exploratory success rate of 89.5% in the U.S., with 34 discoveries in 38 exploratory wells of all types. That was tops among companies completing 20 or more NFWs or 20 or more other exploratory (OEX) wells. Exxon completed 22 gas wells and eight oil wells in 32 OEX wells, a success rate of 93.8%. As expected, independent producers dominate PIs tally of operators attempting 10 or more NFWs or OEX wells since January 1994. But independents also score well in exploratory success rankings of companies with the most active U.S. exploration programs:
  • Achieving the five highest NFW well success rates and seven of the top 10 among operators attempting 20 or more NFWs.
  • Claiming the three spots following Exxon among operators attempting 20 or more OEX wells.

Replacement costs sliding

Applying new technical skills in the search for oil and gas is yielding positive effects. Earlier this year, Arthur Andersen LLP, Houston, estimated in its yearly oil and gas reserves disclosure study that U.S. reserve replacement costs from all sources in 1994 averaged about $4.62/bbl of oil equivalent (BOE), down from $4.67/BOE in 1993. Arthur Andersen estimated the cost in the U.S. last year of replacing reserves with exploratory additions at $5.59/BOE, 10% less than a year earlier. Arthur Andersen bases its yearly study on information taken from financial reports by 216 U.S. public companies holding about 60% of the countrys oil and gas reserves. The study includes data from 23 oil and gas companies headquartered outside the U.S. Victor Burke, managing director of Arthur Andersens oil and gas industry services, said lower finding costs in the U.S. and abroad reflect producers efforts in the past few years to reduce costs and apply advanced technology at the wellsite.

These accomplishments enable companies to expand their reserves at cost levels appropriate for the uncertain oil and gas (wellhead) price environment, he said. New exploration technology is improving the ability of some U.S. oil and gas provinces to compete with imports for domestic markets. Companies included in Arthur Andersens survey in 1994 boosted spending in the U.S. by 11% to $16.1 billion, while foreign spending amounted to $14.6 billion. The increase in domestic spending was driven by independent oil and gas companies...who increased domestic spending 27% to $7.5 billion, Burke said.

Statistical vagaries

Statistical trends can change with each batch of new data. For that reason, exploration statistics at any time are skewed by the reporting practices of individual companies. In the case of U.S. oil and gas exploration data, the extremely low levels of recent drilling activity set the stage for some statistical quirks. For example, only 11 companies qualified for PIs lists of companies attempting either 20 or more NFWs or OEXs. As a result, some large companies heavily focused on low risk development prospects turned up on one list or the other because of the sheer size of their overall drilling programs. Another key factor influencing basic oil and gas statistics are definitions used to sort and relate data. To define NFWs, PI follows state determinations based on final classifications. OEX wells include new pool tests in existing fields and outpost wells extending old fields. Consistent definitions and data handling procedures are essential to building a functional data base. But oil and gas statistical data dont perfectly reflect operators realities because not all wells fit neatly into statisticians categories. No two operators or oil field data companies likely would reach all the same decisions when sorting marginal wells. Similarly, as improved wellsite technology alters wellsite operations, well characteristics and the significance of much reported data are altered as well. For example, because of new wellsite technology, one major oil field service company estimates it is averaging 212 completions on each contracted development well. That factor, if not accounted for, could lead to unrealistic conclusions about development drill- ing. A modern horizontal well might have several laterals, each with several completions. To try to recover the same volume of reserves a few years ago, an operator might have had to drill several vertical wells with a couple of completions each. Statistical analyses based on reported data in either case could reach different conclusions. Many U.S. operators have yet to use new development wellsite capabilities on exploration prospects. But as producers become more technically adept and new technologies better known, effects will spread to and among exploratory projects. Reporting agencies will be challenged to track, compile, and interpret the more complex data.

Exploration overview

Whatever the vagaries of reporting, PIs exploration data have a few surprises. As expected, the data generally reflect dwindling interest and declining participation in exploration programs. Since peaking in 1981 at 18,758, PIs yearly count of all exploratory wells in the U.S. has declined (15291 bytes) 10 of the past 13 years. PI for 1994 counted 3,953 exploratory wells of all types, unexpectedly the second straight yearly increase but still puny compared with activity for the past half century. While the yearly count of U.S.

exploratory wells has been dropping, the share of NFWs among the totals also has been sliding. PI data show that NFW wells in 1994 accounted for 43.8% of all exploratory wells reported, compared with 58.6% in 1980. OEX wells, by contrast, accounted for 56.2% of all U.S. exploratory wells in 1994 but only 41.4% in 1980. Exploratory wells each year since 1980 have accounted for 15-20% of all oil and gas wells drilled in the U.S. Declining U.S. activity also is reflected in the count of operators attempting exploratory wells. Overall, fewer operators are drilling fewer such wells. In 1981, 3,210 operators attempted NFWs, nearly 200 more than the 3,012 that spudded an OEX well. By 1994, the emphasis had shifted, with 790 operators spudding at least one NFW and 1,011 spudding OEX wells. In the meantime, the total number of operators in PIs statistical universe declined to 3,433 from 12,381. Based on that record, PI calculates that about 25.9% of operators of record in 1981 drilled at least one NFW well and 24.3% at least one OEX well. Last year, 29.4% of all U.S. operators drilled a U.S. OEX well and 23.0% an NFW. The number of exploratory wells attempted by each U.S. operator also reflects increased emphasis on OEX activity. In 1994, each U.S. operator of record drilled an average 2.19 NFWs and 2.2 OEX wells. Comparative totals in 1981 were 3.35 NFWs and 2.66 OEX wells.

Improving results

U.S. exploration activity since the early 1980s has been declining because of low wellhead prices that reflected glutted markets. But operators have keyed on the tight economic environment to ramp up overall exploratory efficiency. PI data show that U.S. operators in 1994 discovered oil or gas with 38.5% of all exploratory wells drilled, up from 29.7% in 1981. Most of the gain came from higher success rates among NFWs. Producers in 1994 logged discoveries with 25.4% of all NFWs attempted, including 189 oil discoveries and 251 gas discoveries in 1,733 NFWs. OEX success rates showed less improvement, increasing to 48.7% in 1994 from 45.8% in 1981. After Exxon, TransTexas Gas Corp., Houston, since January 1994 compiled the highest success rate among U.S. companies drilling 20 or more domestic NFWs or OEX wells. The company completed 17 of 23 NFWs and eight of 10 OEXs, by PIs count, for an overall success rate of 75.8%. Because UOM strongly emphasizes wildcat prospects in its exploration program, the Austin independent since Jan. 1, 1994, has completed more than 72% of all its exploratory wells. Other independents achieving especially high rates of exploratory success since January 1994 include Meridian Oil Inc., Enron Oil & Gas Co., and Anadarko Petroleum Corp., all of Houston; Snyder Oil Corp., Fort Worth; and Enserch Exploration Inc., Dallas.

Leading success rates

Meridian was one of the few U.S. companies independents or ma- jors to appear on both PI lists of the top NFW and OEX well drillers. PI reported Meridian since January 1994 has drilled 27 NFWs and 38 OEX wells. The company with its NFW activity reported eight oil discoveries and six gas discoveries for a success rate of 51.9%, third best among NFW leaders. Its OEX drilling program amassed 17 oil completions and 13 gas completions, a success rate of 78.9%, second only to Exxon among companies drilling 20 or more OEX wells. Enron, with seven oil discoveries and 45 gas discoveries in 30 NFWs and 65 OEX wells, made both lists with an overall success rate of 54.7%. Enserch made both lists with a combined 15 oil discoveries and five gas discoveries in 57 exploratory wells of all types. Snyder placed fifth on PIs list of companies with 20 or more NFWs, reporting 15 gas discoveries in 31 NFW wells. Had it successfully drilled two more OEX wells, the company would have edged out Exxon for highest discovery rate among companies drilling 20 or more OEXs. As it was, Snyder topped PIs list of companies attempting 10 or more OEX wells since January 1994, with 17 gas discoveries in 18 wells. The companys overall success rate of 65.3% was fifth best among companies drilling either 20 NFWs or 20 OEXs. Better exploration technology and more exploratory drilling combined in 1994 for one of the strongest recent U.S. yearly reserve replacement efforts. The Energy Information Administration this summer reported U.S. producers in 1994 found 572 million bbl of oil, only 78% of U.S. production (OGJ, Sept. 4, p. 112). However, that held the U.S. crude oil reserves decline to 2.2%, the smallest decline in 4 years. EIA said new field discoveries accounted for about 64 million bbl of the oil found last year in the U.S. That was a huge drop from the 319 million bbl added with new field discoveries in 1993 but not as alarming as the 8 million bbl of new field oil added in 1992. Companies booked about 397 million bbl of oil through field extensions and 111 million bbl in new reservoirs in old fields.

Emphasis on gas

Much upstream activity in the U.S. in the past couple of years has focused on gas prospects, and recent U.S. exploration statistics reflect that trend. According to PI, gas discoveries in the U.S. outnumbered oil discoveries in 1993 and 1994, the first time since 1990. Gas finds in 1994 accounted for 57% of NFW discovery wells and 56.4% of successful OEX wells. EIA estimated that U.S. operators in 1994 discovered more than 12.3 tcf of dry gas, an increase of nearly 3.5 tcf from the year earlier total. That volume, plus adjustments and revisions and less production, boosted U.S. gas reserves at yearend 1994 to 163.84 tcf, an increase of more than 1.42 tcf. Total U.S. gas discovered included:
  • New field discoveries of 1.89 tcf, up 111% from 1993.
  • Field extensions amounting to more than 6.94 tcf, up 14%.
  • New reservoirs in old fields with reserves of 3.48 tcf, up 86%.
Texas and federal acreage in the Gulf of Mexico accounted for almost two thirds of U.S. total discoveries of gas in 1994. The volume of gas added to U.S. reserves with new reservoirs discovered in old fields was the largest by that method since 1979, EIA reported. PIs data show most U.S. exploration has focused in regions where the largest reserve additions have been reported. Drilling in Texas or along the Gulf Coast since January 1994 accounted for nearly 57% of all U.S. exploratory wells. Permian basin operators since January 1994 reported 258 oil discoveries, while onshore exploration along the Gulf Coast netted 460 gas discoveries. Operators in the Anadarko basin paced U.S. exploration outside Texas and the Gulf Coast, completing 138 oil and 147 gas discoveries with 707 exploratory wells of all types, PIs data show.

3D seismic

Most of the companies identified by PI as the most active, most successful U.S. explorationists attribute their consistency to yields from 3D seismic surveys. Anadarko earlier this year conducted its first onshore exploratory 3D seismic survey. The shoot generated data over Nome field, near Beaumont, Tex., in Jefferson County for Anadarkos exploration play focused on Eocene Yegua reservoirs.

Since joining the Yegua activity in 1991, Anadarko has drilled or participated in 19 wildcats and four development wells in the area. The company in 1994 had interests in 10 Yegua wells and plans to drill six more wells in the play this year. UOM was formed in 1984 as a unit of United Co., Bristol, Va., to focus on low risk drilling, mostly in the Austin chalks Giddings field. But the company last year sold most of its chalk production to Union Pacific Resources Co., Fort Worth, and began laying plans to expand its exploration program. Mike Peays, UOM president, said company officials became convinced that 3D seismic data would be a valuable tool for finding stratigraphic gas reserves along the Texas Gulf Coast. So UOM bought a 3D workstation, began developing 3D expertise, and leased and seismically surveyed a 20,000 acre leasehold in Wharton, Jackson, and Lavaca counties. With its first 3D based drilling program in the area, UOM achieved a 90% success rate in finding Yegua and Oligocene Frio gas reservoirs. The company presently is expanding its activity to explore the lower Eocene Wilcox. Defining Wilcox prospects requires more interpretative work, but the effort can yield large discoveries, Peays said. Like many independents, UOM bases its operating strategy on finding niches where it can compete effectively. Weve created that niche by finding a slice of technology that works and applying it as quickly and frequently as possible before the competition moves in, Peays said. In the chalk, it was horizontal drilling, and on the Upper Texas Gulf Coast it has been 3D seismic data.

Revising strategies

Evolving technology and economic limitations are prompting most companies to change their exploration strategies. Meridian in the past several years has sharpened its focus to pursue mainly prospects with moderate risks. The company historically emphasized finding and developing low cost reserves in technology driven plays. Its most active exploration areas include the Gulf of Mexico and the Gulf Coast of Texas and Louisiana. The company also is exploring Mississippian Lodgepole and Ordovician Red River carbonates in the Williston basin, as well as selected plays in the Midcontinent region and Permian basin. Meridians favored exploration tool has become 3D seismic. But the company focuses on prospects where technologies such as horizontal drilling or advanced reservoir stimulation techniques are effective. It generates most of its own prospects but also screens and participates in externally developed prospects. Exploration spending at Meridian in the past couple of years has increased sharply. The companys exploration outlays in 1993 amounted to $28 million, or about 10% of its internal capital. That percentage in 1995 is expected to be about 20%, as exploration outlays approach $100 million. Meridian this year expects to drill 44 exploration wells, most in areas where favorable markets and good reservoir characteristics will allow it to produce at high rates. It is focused on prospects where 3D can boost success rates. Even though this exploration focus is in its early stages, we are confident our finding costs will approach our historic costs to add reserves, which are in the range of 65/Mcf of gas equivalent (Mcfe), a Meridian official said. Meridian also uses 3D data extensively in its development program.

Using more 3D data

Mark Papa, president of North American operations at Enron Oil & Gas (EOG), said the biggest recent change in EOGs exploration program has occurred onshore, where the company is implementing 3D based projects across the U.S. and Canada.

Papa estimated EOG as recently as 3 years ago used 3D seismic data on only about 15% of its OEX prospects. The company today bases about 60% of its onshore exploration drilling on 3D data and in 5 years expects to increase that share to as much as 75%. Because of 3D seismic data and better drilling technology, were generally drilling fewer wells but finding more reserves per well on average than we did 4-5 years ago, Papa said. So the fact that the U.S. rig count is down is not a meaningful barometer to us. We think U.S. companies on average are finding more reserves per well than 3-5 years ago. EOGs exploration strategy is to drill a lot of moderate risk, relatively small prospects at moderate depths instead of seeking a few giant discoveries. Depths of most of the companys exploratory wells range from 6,000 to 12,000 ft, and a typical target would have 5-35 bcfe of recoverable reserves. We think its more economic to shoot for smaller targets with higher probabilities of success than to spend a lot of exploration money on large targets where there generally are low probabilities of success, Papa said. We have not had to resort to going elephant hunting because our base load program generally has been consistent enough to achieve repeatable results. With division offices in most major North American hydrocarbon basins, EOGs exploration program has no excessive emphasis in any one region. Within each area, EOG focuses on reservoirs in which 3D data are most useful, mostly in structural plays. Papa said EOGs operating philosophy for almost the past decade has been to grow by drilling for new reserves, as opposed to producing lease acquisitions. The company in the past 6 years has found more reserves with the bit than it has produced. In 1994, EOG replaced 151% of production reserves through drilling.

Competitive strengths

Snyder concentrates its activity on low risk prospects, mostly gas targets in the Rocky Mountains in depositional settings where it has developed significant competitive strengths. Snyder officials built the company mainly by developing Wattenberg gas field in the Denver-Julesburg basin of Weld County, Colo. It has drilled 1,053 wells in the field to Cretaceous Sussex, Niobrara, Codell, and J sands pays. All are tight sand formations at 4,500-8,000 ft. Expertise developed to find and exploit Wattenbergs tight sand hydrocarbons forms the backbone of Snyders exploration program. Field operations make heavy use of equipment and technology developed for tight sand wells, including mud motors, polycrystalline diamond compact drill bits, clear water drilling systems, downhole logging instruments, and fracturing fluids and techniques. Once Snyder confirms that a prospect meets its qualifying criteria, the company ensures that it understands the plays economics, has the tools to high grade the prospect, and control enough acreage to allow development. If all that is a go, we next tackle proof of concept by drilling several wells across the area to test our original economic model, said Charles A. Brown, Snyders vice-president of emerging assets. If certain expectations are met, the project is funded, and a drilling program is designed. Snyder has applied its exploration strategy successfully in other plays in the Rockies. The company has drilled enough proof of concept wells in southern Wyomings Washakie basin to define a large exploration area. The company in the next 11 years intends to drill as many as 1,200 gas wells in the basin to the fluvial Cretaceous Mesaverde Almond formation at depths of 8,000-11,000 ft.

Snyder also is funding Rockies exploration programs at various stages in the Piceance, deep Green River, and Uinta basins. In addition, the company is assimilating large projects in the Big Horn and Wind River basins for initial proof of concept wells in fourth quarter 1995 and first quarter 1996. Higher costs always are incurred on the front end of any project, particularly when testing concepts, new technologies, and new step-out areas, Brown said. However, when including all finding and development costs, we expect the costs of reserves from these projects to be in the range of 40/Mcfe.

Balanced program

In the past few years, Enserch has reduced the number of plays in which it is active to focus on projects where it can apply technical advantages. The company tries to balance its exploration program by including low risk prospects capable of generating immediate cash flow and large projects that require several years to place on production. A good example of the former is Enserchs activity in North Texas, where it is pursuing Mississippian dolomitic Chappel zones at about 8,000 ft. The latter is characterized by the companys deepwater Plio-Pleistocene development on Garden Banks Block 388 in the Gulf of Mexico, where production is to begin later this month after nearly a decade of preparation. Defined by 3D data, the Chappel formation is a stratigraphic buildup that shows up structurally as a reef. Chappel reservoirs are relatively small. Only one or two wells are needed to develop many reservoirs. But the wells are prolific, and Enserchs rates of success have been high enough to generate a steady return, much of which helps support the companys deepwater activity in the gulf. Chuck Erwin, Enserchs offshore and international regional director, credited 3D seismic data with most of the companys recent drilling success. But he said the data can be too good, defining many marginal prospects that might not be economic to develop. Only a few years ago, an independent company likely would not have been successful following Enserchs strategy. Exploration tools were not up to the task of finding oil or gas with high rates of consistency. But to Enserchs credit and despite recent wellhead prices it has achieved enough exploration to consistently generate cash flow to help fund its big projects offshore. Most oil and gas regions in the U.S. are mature and require low cost operations without mistakes to be economically successful, Erwin said. An independent company has to do a lot of planning just to decide where it wants to be. With the narrow margins these days, it cant make serious mistakes. Copyright 1995 Oil & Gas Journal. All Rights Reserved.