| Advancement to the top
isn’t a fait accompli for good
geologists, as the major players shift their focus away from
actual exploration.
BY ARTHUR MILNE
Notions persist that explorationists in the oilpatch are
the heirs-apparent of further advancement in their ranks
and that exploration activity is the driving force in the
industry. These notions, however, are myths – throwbacks
to a simpler era.
By “explorationist,” include on the one hand geologists, and exclude
on the other hand geophysicists, accountants and similar professionals . Explorationists’ prospects
to reach the top have become the primary domain of junior- to medium-size producers,
while their prospects at senior producers are marginal at best.
Two overarching factors constrain successful exploration in the Western Canadian
Sedimentary Basin. First, skills in defining major traps where the distribution
of oil and gas that permit extrapolation over a large number of low-risk future
drilling locations are no longer applicable for much of the basin. Such finds
were termed “elephants.”
A second major impact has been the advent of horizontal drilling to maximize
the chances of success. Geological decision-making, enhanced by geophysical
insights, in effect “sees” where the gas is. Geological insight
as an unbundled commodity has tended to diminish in value over time, and with
it the ability of geologists to provide the skill set necessary to run oil
and gas enterprises.
Take, for example, the large integrated producers. Such companies tend to be
involved in projects on an international scale in Canada with heavy oilsands
and tar sands, but conventional oil and gas exploration activity will be limited
at best.
Shell Canada is a case in point. The last major exploration discovery by Shell
was the Caroline field 15 years ago. There is some Shell drilling activity
in the foothills of Alberta, but not otherwise.
The reason for this state of affairs is twofold. First, large overheads in
the integrated majors make wells under 100 BOE per day only marginally profitable,
and this represents a better-than-average discovery. Second, these companies
have the financial means to buy the reserves of existing companies at a lower
cost and level of risk than going to the field and discovering on their own
properties.
Shell has been active in property acquisition and disposition since the beginning
of the 1990s, but hasn’t acquired any companies. From this it is evident
that exploration activity is not key to advancement in large integrated oil
companies.
Large private producers – predominantly subsidiaries of American companies – are
comparatively recent players on our scene. Devon Canada Corporation is an excellent
example of this category.
According to Vice-President Exploration Bob Jones, P.Geol., Devon has exploratory
plays in Foothills and Deep Basin in Alberta and northeastern B.C. The company’s
overall drilling pattern is 60 per cent development, 40 per cent exploratory.
The current CEO, John Rachel, is a lawyer by trade, but with a strong exploration
focus.
According to Mr. Jones, a strong exploration orientation is very helpful in
achieving the most senior ranks at Devon.
Medium-sized producers traditionally have the largest percentage
of
exploration dollars as a percentage of total drilling expenditures.
Esprit Exploration Ltd. and Canadian Superior Energy Inc.
are examples.
According to President Steve Savidant, Esprit has several
Alberta exploration plays within a 150-mile radius of Calgary,
Approximately one third of annual capital expenditures are
allocated to exploration drilling out of a total of $90 million,
which is a high percentage by industry standards.
As far as access to the presidential chair, Mr. Savidant
observes that the best management style for a firm like his
is multidisciplinary, without favouring one particular discipline
over another.
Canadian Superior Energy Inc. also has an aggressive exploration
strategy, based on its ability to attract well-funded joint
venture partners. The category of major public producers
has grown as a percentage of total Canadian drilling activity
in Canada and abroad.
EnCana Corporation is a case in point. Approximately 10 per cent of its total
drilling activity around the world is exploration . Unlike its more junior
brethren, the company is able to finance extensive exploratory drilling and
infrastructure out of internal cash flow. The corporate culture at EnCana supports
an inclusive concept of allocating credit for corporate success, including
who occupies the presidential chair.
Another major explorer is Canadian Natural Resources Ltd. The company has active
exploration plays in northwestern Alberta, northeastern B.C. and the Northwest
Territories. The ratio between exploration wells and development wells is approximately
1:9.
The company confers broad recognition on its exploration function: CNRL has
three exploration vice-presidents on its executive committee.
Medium-to-small private companies represent a stable element
in the overall pattern of exploration activity. Profico Energy
Management Ltd. is another case in point.
The company is a medium-sized private company based in Calgary.
Peter Kurceba, P.Geol., is the vice-president exploration.
The company plans a vigorous exploratory drilling program
in Saskatchewan – about 200 development wells and 100
development wells going into the present drilling season.
Mr. Kurceba stated that exploration experience was definitely
a plus in his organization as a path to the top.
The royalty trust concept was kick-started in Western Canada
through the efforts of Marcel Tremblay with the able assistance
of John Brussa of Burnet Duckworth and Palmer. This formula
has become quite prevalent: at present, more than 15 per
cent of total production in Western Canada is carried on
by royalty trusts.
Acclaim Energy Inc. exemplifies a trend towards a broadening
and an internalization of risks in drilling activity by and
on behalf of royalty trusts: no “elephant” discoveries,
but a steady increase in monies allocated to development
and exploratory activities.
This is in stark contrast to the earlier situation of royalty
trusts’ exploiting proven reserves for all they are
worth. David Carey, P.Eng., vice-president of business development
for Arc Energy Trust, echoes the same trend.
What conclusions, then, are we entitled to draw from these
observations? With the possible exception of the integrated
producers and the royalty trusts, every category of company
canvassed above had some exploration activity. Most companies
had between one-tenth and one-third of wells drilled as exploratory,
with, as expected, integrated majors and royalty trusts at
the lower end of the scale and junior-to-medium producers
at the upper end.
The public belief that explorationists have some residual
claim on their company’s executive chair requires some
major qualifications: of 11 companies canvassed, only three – Devon
Canada, a large private producer; CNRL, a large public producer;
and Profico Energy Management, a medium junior – held
that an exploration orientation was by itself a very important
factor in choosing the respective companies’ executive
ranks.
Why so? Probably because, as the Western Canadian Stratigraphic
Basin matures, emphasis shifts from exploration to operations
as a major source of added value, so knowledge of operations
grows in weight.
Alternately, personality factors, such as an ability to induce
cooperation among different aspects of the firm’s activities,
weigh more heavily than any other single factor.
Majors are usually run by engineers while explorationists have an edge in running
intermediates and juniors. This trend stems from to the nature of the activities
undertaken by the three types of entities. A junior must explore in order to
grow.
Once cash is available, acquisition of proven reserves becomes feasible. This
starts the shift to development which may require more of an engineering background.
Editor’s Note: Arthur G. Milne is a Calgary commercial
lawyer with an interest in oil and gas issues.
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