The Focus of Industry Lecture 1 Exploration Refining Production SLIDE 1 This unit is on the Focus of Industry How many – by show of hands - have had some interaction with an oil company – internship, research funded by, etc. Industry’s scope runs from finding oil and gas reservoirs to getting refined products to our customers Marketing Exploration Production Courtesy of ExxonMobil L 1 - Focus of Industry

A Fully-Integrated Oil Company http://www.npl.co.uk/upload/img_400/oilrig.gif SLIDE 2 Let me define what a fully-integrated company is It is one that does everything - from finding oil & gas reserves to sales to customers There are many companies that only cover certain components e.g., WalMarts sells, but does not explore or refine Examples of a fully-integrated companies are: ExxonMobil, Shell, and BP We break up the entire process into two main stages: Upstream covers everything to getting raw material to a refinery Downstream is everything from refining to sales Easy question: Where (which stage) do we employ geoscientists? Obviously in the Upstream Getting Raw Oil & Gas to the Refinery Getting Refined Products to the Consumers Refinery Upstream Downstream Courtesy of ExxonMobil L 1 - Focus of Industry

Components of the Upstream Find Oil & Gas ‘Pools’ which regions and basins? which blocks? where on the block? Exploration How to Get It Out where, in detail, are the reserves? what to build (facilities)? will it be profitable? Development SLIDE 3 The UPSTREAM can be further subdivided into 3 main parts One part is focused on finding oil & gas ‘pools’ – EXPLORATION The second part is focused on how to get oil & gas out of what has been discovered – DEVELOPMENT The mission of the third part is to get the most out of the ground and to the refinery - PRODUCTION From the Ground, to the Refinery how to manage the field? how to deliver the ‘crude’? Production Courtesy of ExxonMobil L 1 - Focus of Industry

Exploration Finds  Volumes Produced Oil Company Targets To maintain a healthy petroleum company, one would want to: Replace production (what you take out of the ground) with new reserves Exploration Finds  Volumes Produced Keep finding costs below $1 per barrel  Exploration Costs  New Barrels SLIDE 4 Oil companies, and each of their departments, establish certain targets For example, these might be some targets within an exploration group/company, To replace production with new reserves on a yearly basis – like a bank account where to be financially healthy you want deposits > withdrawals To keep the finding costs below a target, such as $1/barrel – sum of all exploration costs divided by total number of discovered barrels on a yearly basis Development and Production departments would have similar targets < $1/barrel Courtesy of ExxonMobil L 1 - Focus of Industry

Well placement and well path can be critical to success So ….. We Need to Drill Wisely Wells can be very expensive, some > $200 million, a lot even for a major oil company Well placement and well path can be critical to success So ….. SLIDE 5 We always need to drill wisely Wells can be very expensive - some exceeding $200 million. That is a lot of money, even for ExxonMobil or Shell We want to place each well in the best possible location - we can’t afford to trust in ‘dumb luck’ Many times the oil & gas occur at several depth levels. We are not limited to drilling straight holes So we also need to carefully design the well path so that we can tap into several ‘pools’ in the best possible locations Much of the technical work done in the upstream is directed towards determining where to drill and predicting what we will find BEFORE we start drilling This leads to the need for all types of scientists and engineers working in the Upstream Their goal is to image and interpret the subsurface so we can maximize oil & gas production while minimizing costs How can we determine where to drill and predict what we will find BEFORE we start drilling? This leads to the need for geologists, geophysicists, and other specialists focused on imaging and interpreting the subsurface Courtesy of ExxonMobil L 1 - Focus of Industry

G&G in Exploration Geoscientists are needed to answer questions such as: Which basins throughout the world offer the most promise? Which blocks in those basins should we bid for? Where on the block should we drill? What should we expect from a particular well? What type of HC: oil, gas, or condensate? What amount of HC will we recover: # barrels? What sort of flow rates can we expect? How risky is this well? etc. SLIDE 6 In exploration, geoscientists are needed to answer questions such as: Which basins ………… Which blocks ………. Where on ……………… What should …………. What is a condensate? Temperatures & pressures in subsurface reservoirs are much higher than at the surface We can have a hydrocarbon that is in a gaseous phase in the reservoir, but as it is brought to the surface, the temperature & pressure drops and the gas CONDENSES into a liquid. In terms of value, oil is supreme, condensate is second, and gas is third, but gas is still a viable target in many parts of the world Courtesy of ExxonMobil L 1 - Focus of Industry

Exploration’s Task Identify Opportunities Capture Prime Areas Acquire Seismic Data Process Seismic Data Drill Wildcats Interpret Seismic Data SLIDE 7 This is a simple flow chart of the work done in exploration We will talk about much of this in subsequent units Briefly: First we have to identify opportunities – areas with high potential that we can get rights to – like in a lease sale We have to capture those opportunities – win bids on blocks we want to explore Once we have a block, we may want to acquire better seismic data Those data have to be processed and then interpreted As we interpret the subsurface, we will see ‘features of interest’ – places where HCs may be reservoired More detailed work on some of these features may give us a prospect – a target we want to drill We have to assess each prospect – predict what we will find – e.g., at 10,234 ft we expect a 200 ft thick channel complex holding 10 million barrels of oil We convince management to drill a wildcat – the first well in the area to test our predictions If we find HCs, we may need to drill one or more confirmation wells – to verify there is enough HC for it to be an economic success If we have enough HC, we call it a field and pass it to the Development or Production department It goes to Development if a lot of money is required to build facilities, e.g. a huge offshore platform and a long pipeline If the new field is in an area with a lot of facilities already, it would go to the Production department – e.g., a new field in South Texas that only needs a ¼ mile extension to an existing pipeline Assess Prospects Failure Success Confirmation Well Uneconomic Success To Development Or Production Drop Prospect Courtesy of ExxonMobil L 1 - Focus of Industry

An Exploration Success The Bonanza Basin, offshore Somewhereia, was deemed to have high potential. SLIDE 8 We will consider a hypothetical example – The Bonanza Basin We have done regional analyses which indicates that this basin has high potential for HCs 8 blocks are being offered in a lease sale Block 1 5 4 3 2 8 7 6 Somewhereia Bonanza Basin Courtesy of ExxonMobil L 1 - Focus of Industry

An Exploration Success The Bonanza Basin, offshore Somewhereia, was deemed to have high potential. We leased the two highest- ranked blocks in the last licensing round. Block 1 5 4 3 2 8 7 6 Somewhereia Bonanza Basin SLIDE 9 Our company won the bidding on two of the blocks that we wanted – block 7 and block 8 Courtesy of ExxonMobil L 1 - Focus of Industry

An Exploration Success Bonanza Basin The Bonanza Basin, offshore Somewhereia, was deemed to have high potential. We leased the two highest- ranked blocks in the last licensing round. 8 leads were identified, 3 passed economic screening and were matured into prospects. Lead C Lead A Lead B Block 7 Block 8 SLIDE 10 We acquired good quality seismic data, had it processed and interpreted The interpreter(s) saw 8 features of interest – what we call leads All 8 leads were worked in more detail and an estimate of the volume of oil and gas potentially in each was made Out of the 8, only 3 were predicted to have enough HC that they could be economical – value of HC > total cost We have ‘matured’ 3 leads into PROSPECTS The best is the Alpha Prospect, predicted to have a gas cap (red) and an oil leg (green) A major fault cuts the NE portion of the prospect Alpha Prospect Block 7 Block 8 Courtesy of ExxonMobil L 1 - Focus of Industry

An Exploration Success The Bonanza Basin, offshore Somewhereia, was deemed to have high potential. We leased the two highest- ranked blocks in the last licensing round. 8 leads were identified, 3 passed economic screening and were matured into prospects. We drilled a wildcat at the Alpha Prospect & found oil. Alpha Prospect Block 7 Bonanza Basin Discovery Well 8 Salt Diapir SLIDE 11 Our company drills a wildcat on Alpha – and we find oil down to 4500 m Why did we NOT drill on the crest of the structure? Expect gas and perhaps gas is not what we would produce from this region May need to have oil at least this far down from the crest to be economically viable May want to be sure to hit the oil/water contact so we know how much oil is present There is at least 1 main source of uncertainty about how much oil we have in Alpha How much oil is on the NE side of the fault? There could be NO oil if the fault seals and the oil came in from the W, SW or S There could be oil down to 4500 m – as in the well – HC ‘in communication’ across the fault on a geologic time scale There could be oil below 4500 m To answer this, the exploration department may have to drill a confirmation well Courtesy of ExxonMobil L 1 - Focus of Industry

An Exploration Success The Bonanza Basin, offshore Somewhereia, was deemed to have high potential. We leased the two highest- ranked blocks in the last licensing round. 8 leads were identified, 3 passed economic screening and were matured into prospects. We drilled a wildcat at the Alpha Prospect & found oil. A confirmation well proved that there are significant volumes of oil. Alpha FIELD Block 7 Bonanza Basin Discovery Well Confirmation 8 Salt Diapir SLIDE 12 A confirmation well was drilled in the NE portion of the prospect Oil was found down to 4500 m – there is pressure communication across the fault zone (on a geologic time scale) We were able to get an EUR of 200 million barrels of oil and 0.95 trillion cubic feet of gas This is BIG enough to pass the Alpha FIELD to the development department EUR = 200 MBO .95 TCF Our estimate of ultimate recovery is 200 MBO. Courtesy of ExxonMobil L 1 - Focus of Industry

G&G in Development Exploration has drilled a discovery and a confirmation well. The ultimate recover for Alpha is estimated to be 200 MBO, which greatly exceeds the economic threshold of 100 MBO Questions: Can we refine our picture of the distribution of oil at Alpha? Is the reservoir a single unit, or is it segmented (separate regions to drain)? How many wells/where should they be drilled? What sort of facilities (platform?) will we need? How can we speed-up time to first oil? What uncertainties remain? SLIDE 13 The EUR for Alpha is twice the economic threshold – the minimum needed to cover costs Therefore the field is turned over to the development department In development, geoscientists are needed to answer questions such as: Can we ………… Is the reservoir ………. How many ……………… What sort …………. How can we ……………… What uncertainty remains Courtesy of ExxonMobil L 1 - Focus of Industry

We Need More Detail Reservoir Map at the end of Exploration SLIDE 14 To answer development questions, we need more detail on the reservoir, its properties, and the distribution of oil & gas We want to understand where to place wells to get the most for the least cost For exploration, we can live we a ‘broad brush’ picture of the reservoir For development, we need considerably more detail As shown on the right, we may drill some more wells during development – before placing a production platform Why might they have drilled the western development well? Confirm the oil-water contact See if reservoir quality changed (better or worse) at the western edge of the field Why might they have drilled the eastern development well? The oil is isolated from the rest – probably have to develop as a separate compartment Is there enough oil to merit producing it – or is it cost-prohibitive See if reservoir quality changed (better or worse) at the eastern edge of the field Reservoir Map at the end of Exploration Reservoir Map at the end of Development Courtesy of ExxonMobil L 1 - Focus of Industry

Reshot for Development We May Need Better Data Data Reprocessed or Reshot for Development And Production Data Used for Exploration SLIDE 15 Data quality that was adequate for exploration may not be adequate for development issues The seismic data may need to be reprocessed – using more sophisticated, expensive, time-consuming methods We may have to reshoot a new survey to get acceptable data quality Data on the right is ‘sharper’ and has better verticl resolution (red & black bands are thinner -> more stratigraphic detail) Courtesy of ExxonMobil L 1 - Focus of Industry

G&G in Production Production has begun at Alpha. The initial production rates are as expected. Questions: How should we manage the field so as to maximize our investments? Can we monitor how oil is being swept out of the reservoir? What about injection wells and enhanced recovery? Is there more oil in the vicinity – either at deeper depths or in nearby traps? Can we build a computer model of the field that matches existing production data? If so, we can test future recovery with different drilling scenarios. SLIDE 16 The development department has a platform built, installed, and start to produce oil at Alpha The initial production rates (barrels/day) are about what they predicted Now the field is turned over to the production department In production, geoscientists are needed to answer questions such as: How should we ………… Can we ………. What about …….. Is there …………. Can we build Courtesy of ExxonMobil L 1 - Focus of Industry

Reservoir Simulation FEEDBACK INPUT Geologic Model Time Oil Production Time HISTORY MATCH FEEDBACK SLIDE 17 A very useful tool for production people is a reservoir simulation A detailed geologic model of the reservoir is built – rock type/lithology, porosity, permeability, etc. Then fluids are placed within each cell of the geologic model along with fluid properties The reservoir simulator models how the fluids move through time Until recently, the first simulation would be run after about 5 years of production time The simulation would be calibrated by doing a history match - comparing the simulated production (red curve) with the actual production data (blue boxes) If a reasonably good history match is obtained, the model is taken to be fairly accurate Then we can simulate future production – 10, 20, 30 years into the future We can do some ‘what if’ scenarios – e.g., if we placed 3 additional producers at these locations and 5 injectors at these locations, how much additional oil would we produce? If the cost of these 8 wells is less than the value of the additional oil, we might do it Obviously if the cost of the 8 additional wells would not be recovered, we would not do it – look for other ‘profitable’ scenarios We can also look for portions of the reservoir that are not swept of oil (in the simulations) and target these locations with additional wells – if profitable INPUT Reservoir Simulation Courtesy of ExxonMobil L 1 - Focus of Industry

The Value of G&G to an Oil Company G&G work is done to add HC reserves (volumes) New discoveries More from discovered producing zones Additional producing zones Get the most reserves at the lowest cost Invest in the right basins Drill in the optimum locations Correctly assess what can be recovered Avoid unnecessary wells SLIDE 18 So geoscientists can have great value to an energy company They can: Do work that leads to added HC reserves – making new discoveries, getting more from producing zones, or finding additional zones to produce They can get more reserves at lower costs Investing in …… Drilling in ……….. Correctly assessing ……… Avoiding ……. For example, say that: I am on a team of 4 working production at the Alpha field The initial plan was to drill 10 wells Average cost for a well is $75 million Through our team effort, we determine that we can get the same amount of oil with only 8 wells drilled in optimum locations The team of 4 saved the company $150 million (cost of 2 wells) That would be enough to pay each person for 50+ years – they have certainly earned their keep! Courtesy of ExxonMobil L 1 - Focus of Industry