COMMENT WOOD: U.S. EXPLORATION INDUSTRY FACES THE CHALLENGE OF CHANGE

P.W.J. Wood
President
Energy Exploration Management Co.
Houston

Adapted from a speech to the Gulf Coast Association of Geological Societies annual convention Oct. 17 in Houston, the theme of which was "The Winds of Change."

In the mid-1950s I was working as an explorationist in western Canada for Imperial Oil Ltd.

Home Oil Ltd. had made a major discovery in an upper Devonian reef at Swan Hills in western Alberta. Imperial controlled several townships of Crown lands some 20 miles to the south, but seismic definition of reflectors was even worse in the Beaverhill Lake section than in the shallower Leduc to the south, where Imperial itself had made the big reef discoveries that kicked off the Canadian oil boom in 1949.

The ensuing Imperial Oil discovery south of Home Oil's Swan Hills, Judy Creek, was the first in my experience of the recognition of a prospect via the perception of what we called in those days a "character change" in the seismic record. That character change, by the way, was not contourable. All we could do was put an outline on the map to encompass the limits of the change on the seismic lines which expressed it.

Fortunately, Imperial's management was prepared to back the judgment of their explorationists as we wrestled with the early use of character changes in the seismic record. Judy Creek was a major discovery.

As this story shows, sometimes the successful application of a new technique is not very sophisticated. And sometimes it requires a leap of faith.

Shortly after the Judy Creek discovery, industry struggled with the possibility of digital recording of seismic signals rather than analog recording.

When we bought into the black box of digital recording, we took an enormous leap of faith. If we had to quantify that leap, as we sometimes are forced to today by the nonexplorationists who run our companies, if we had to promise an improvement in our discovery rate from 12.5% to 19.8%, the expense of the change from analog to digital recording could never have been justified.

Today, of course, digital recording and processing have enabled us to analyze what we used to call character change in a dozen different ways-from amplitude and frequency variation to seismic inversion techniques and prestacked depth migration, refraction statics, and so on.

CHANGES NEEDED

The point is this: Technology is one of three key areas in which we must capture changes in order to make the upstream sector of the oil business perform economically again.

We must take some risks with unproven technologies even before their performance can be quantitatively guaranteed.

If they don't work, we should cut our losses but publish the results for the benefit of everyone else. If they do work, we should pass the problem on to someone skilled in exploitation and move on to find another untried idea.

The harvest of ideas and technological enhancements that have resulted from our leap of faith to digital recording and processing is still being gathered.

As we employ and manage new technologies, we also must change the way we handle the two vital economic variables over which we can exert come measure of control: risks and costs.

The first risk management step my company likes to take is to restrict our exploration programs to selected plays. We might identify several prospect leads on a play before we drill the first one. If only one prospect is available as a result of land considerations or competitor interest, we will almost certainly move on and work somewhere else.

We like to identify plays that have been neglected in the past because the technology to explore them efficiently was not available when industry moved over them years ago.

Such plays in a particular basin may simply be deeper than we have generally drilled before-say 13,000-14,000 ft or more in the Gulf Coast basin. Or the neglected play might be in a part of the country in which some near surface phenomenon such as difficult topography or the irregular occurrence of near surface high velocity beds used to make exploration too risky.

Working in exploration plays rather than on individual prospects enables the explorer to apply the adage of the successful financial investor to cut losses and let profits run.

CONTROLLING COSTS

Like risk management, control of costs is fundamental to ultimate satisfactory economic performance. It's necessary to develop a culture of cost control.

Go after waste with a meat axe. Eliminate parts of organizations that fail to help move the ball down the field. Their direct costs are only a small part of the problem. I worry more about their drag on the performance of the productive units.

But do not save money foolishly any more than spend it foolishly. Spend it wisely on good people and good technology, and economic performance will surely follow.

One type of cost deserves special attention: the various systems of "takings" called "taxes." The incredibly destructive Tax Reform Act of 1986 has played a major role in bringing the upstream oil and gas industry in the U.S. to its knees.

This brings up the third area where we need to make change: the hot air of politics and public opinion, itself molded by a sensation-hungry media.

Unfortunately, we have not yet found a way to make a news item out of the fact that our reserves to production ratio for gas in the U.S. has declined from over 30 years' supply in 1950 to less than 10 today.

It should be obvious that our society needs a stimulated natural gas exploration effort, not a crippled one.

When I was a young man-until I turned 65, in fact-I was one of those who became a bit impatient with our industry being a whipping boy for every political hack who felt like grabbing a headline by maligning us.

When one of them lied I was strongly in favor of standing up and calling him a liar. I thought at least we would be heard. Now I have matured, and I have thought of a better way.

RUNNING FOR OFFICE

The answer is very, very simple. Some of us must run for high political office. It hardly matters whether we win or lose. As candidates, we will command attention, and our message must be heard.

We need to challenge incumbents in the Senate and House in the primary process at least. Pick a Democrat or Republican and maybe a Libertarian as well. Use the political process to cause all candidates to address energy issues in a meaningful way.

I am a supporter of the snail darter and the spotted owl. But in our present system of media focus, so-called endangered species get more attention and protection than does an industry that drives our economy and sustains our society.

Technical and economic changes will challenge us always. Ultimately, however, the change that we must harness is political.