Operators share their secrets for creating value through exploration.

Back before I was anointed exploration editor of this august publication, I wrote for one of E&P's predecessors and covered a variety of topics. About November of each year I found myself assigned the task of interviewing oil and gas analysts and asking them whether the current growth trend was through acquisition or through the drillbit. This had a tendency to change every couple of years, I noticed, as companies tried on and then discarded the latest craze for growth.

In the late '90s we never dreamed that we'd have sustained oil prices above US $20/bbl, let alone some of the prices we've seen in the past couple of years. So with the classic adage "buy low, sell high" ringing in their collective ears, it's likely (although no analysts were interviewed for this article) that oil companies are not in high acquisition mode at the moment.

Of course, as any drilling contractor can attest, they're not exactly using those drillbits for growth either. Seems most of the growth lately has been a result of selling existing production at higher prices.

We all know this can't last (of course, we all thought that it would have ended by now, but that's another column). Oil companies are starting to explore again. But there seem to be so many more benchmarks for success than before. It's not enough to find oil or gas. The find has to be close to existing markets, cover the costs it took to discover it (which hopefully were less than other companies were spending at the time) and more than make up for what's already been found and is coming out of the ground. It's not a cakewalk.

At the recent annual meeting of the American Association of Petroleum Geologists (AAPG) in Dallas, Texas, several speakers got together to discuss "Delivering on our Promises: Managing E&P in the 21st Century." Among the speakers were representatives from three oil companies of widely different sizes, who talked about portfolio and risk management in an era where the prospects seem to be getting smaller while expectations from the stakeholders are at an all-time high.

Robert Ryan, global exploration general manager for ChevronTexaco, placed most of the blame for his company's past exploration failures on a lack of efficiency within the process. After lagging behind its peers in the late '90s and early in this decade, ChevronTexaco instituted a rigorous process to ensure that prospects were fully studied and evaluated for risk prior to a drill-no drill decision being made.

The process begins with a technical assessment, followed by an analysis of portfolio risk and rewards. The risk is validated against the anticipated volumes, and then an economic review is performed. A peer review is followed by a decision review, and then the plan is endorsed.

The result is prospects that have undergone this process have reserves much closer to the predicted volumes than prospects that were evaluated in a more conventional manner. And ChevronTexaco went from trailing the pack

to being named best-in-class among exploration companies in 2002.

At Apache, technology plays a key role in the company's exploration success. Mike Bahorich, executive vice president of E&P technology, said Apache has moved from acquiring reserves in recent years to becoming a successful exploration company and has made significant discoveries in Egypt and Australia with the help of a focused program.

The company doesn't actually develop its own technology. Rather, it employs a strategy of being a smart shopper and purchasing the best off-the-shelf technology. It works closely with the market leaders but will also influence technology providers to deliver needed products and services.

Technologists at Apache also keep an eye on emerging technologies and attempt to adopt them just before they replace the incumbent technology as the technology of choice for that particular application. And they make it a point to be aware of "disruptive" technologies and understand the opportunities and threats they present.

Finally, Apache has a very active incentive program for its employees in which their compensation is a direct reflection of the success they achieve for the company.

Noble Energy is a small independent that has to determine the best use for its limited capital resources. Henry Pettingill, director, exploration portfolio, said being capital-constrained can be a good thing if it forces selectivity, but it becomes the enemy when it limits the number of prospects from which to select.

Additionally, he said, the role each prospect plays in the portfolio must be understood, and support of the project evaluation process is critical. While risk analysis is a critical component of the process, it does not replace solid geological, geophysical and engineering work. And finally, four forces play a role in corporate risk analysis and portfolio management: people, process, data and technology.

The bottom line seems to be that the devil-may-care wildcatter of the past has been replaced by a team of thoughtful geoscientists and engineers who hope to gather and evaluate as much information as possible prior to making a decision on a prospect. They will increasingly need technology to help them gather that information as well as to enable them to drill for and produce hydrocarbons in increasingly hostile environments. Like Apache, oil companies may find it helpful to "influence" technology providers (with cash) to develop the technology needed to get the job done. But that's probably another column as well.

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