FOX, JAMES F. , Reading & Bates Development Co.

Abstract: Risk Analysis for a Service Company — Lessons Learned and Future Applications

Several recently published studies estimate that between 25% and 40% of the future hydrocarbon reserves will be found in deepwater. The players in the deepwater exploration game have changed in the last few years. No longer are the majors the only players. With the push to deepwater worldwide, other companies are aware of the creaming curve and want their share of the giant fields.

In an arena where only deepwater rigs and drillships can operate, this has caused a new problem of resource availability. Drilling companies will only construct drillships if they are guaranteed long-term cash flows. The majors with large worldwide deepwater portfolios can take the risk of committing to a drillship for a 3-5 year contract. But the small players have an insufficient portfolio to warrant commission of the construction of a drillship on their own. This has caused the rig companies to start discussions on how to provide rigs to this segment of the market.

Second, service companies' costs are up due to the continued high cost of technology, but oil prices are falling or steady. The economics of the deepwater are controlled by: uncertainty and risk, producible reserves per well, limitations of current technology, and the ultimate recovery of the accumulation. The oil companies see that they can only be successful by managing these factors, maintaining low failure costs and achieving shortened cycle time. This is most easily accomplished by getting all participants, including the service companies, involved as part of the team. Risk/reward in these cases can get very skinny - oil companies are coming to the service companies (seismic, drilling, construction) and asking them to take an equity or risk position so that they will be on the "team" of risk takers that buys into whatever it takes to be successful.

Third, as in any exploration province, small to moderate discoveries will be the most likely size of field found. With high technology and entry costs, how will the industry harvest these economically challenged accumulations? Once again, a team of all stakeholders that can bring the appropriate technologies together in a short period of time will be required.

Service companies are meeting these challenges in many ways, with one solution being the formation of small E&P subsidiaries. This is bringing new opportunities to geoscientists outside of typical major company deepwater teams. The service companies and technology providers need the geoscientists' expertise in dealing with risk and uncertainty in the oil exploration and production business. Geoscientists will need to understand the value entry points throughout the E&P life cycle to better understand and serve their shareholders in terms of this new environment.

This paper uses a case study on Reading & Bates Development Co., with emphasis on their entry into this arena and lessons learned. These lessons include:

1. The need for experienced personnel who understand the geologic risks and uncertainties of the deepwater play;
2. The need to find ways to partner with regional geology and geophysics providers;
3. Determination of where to enter the E&P cycle based on competitive advantages;
4. How to provide technological answers quickly across a broad spectrum;
5. The education of investors due to lack of knowledge of risk in exploration arena; and
6. The role of the geoscientist in this process.

Geoscientists working in these arenas will not only need to better understand the principles of risk and uncertainty, they must also be good communicators, possess a track record that others trust, work well in multidisciplinary teams, and always be open to new ideas and ways of doing their business.

AAPG Search and Discovery Article #90923@1999 International Conference and Exhibition, Birmingham, England