(Repeats Tuesday item)
* Shell focuses on exploration near existing fields
* Strategy effective in unlocking new resources and cash
* But comes at expense of larger, frontier resources
* GRAPHIC: Oil & gas exploration spending tmsnrt.rs/2gw0XBm
By Ron Bousso
LONDON, Dec 13 In the waters off Malaysia, Royal
Dutch Shell is finding gas quickly and cheaply to
replenish depleting fields where only a few years ago geologists
had lost hope of discovering any new reserves.
The Anglo-Dutch group is combining the latest technology
with the wisdom of industry veterans to unlock new oil and gas
deposits where it already operates, usually within 20 km (12
miles) of existing platforms.
The result has been a string of finds which, while modest in
size, can generate cash rapidly to suit an era of drastically
reduced exploration budgets across the energy industry.
After a costly flop in Alaska, Shell has turned away from
giant "frontier" projects, focusing instead on exploring closer
to home, such as in Malaysia where it has been producing oil for
more than a century. Many of its rivals are following suit.
"With new data, new seismic and new brain power you can find
extraordinary amount of hydrocarbons for the future," Ceri
Powell, Shell's head of exploration, told Reuters.
Analysts say the industry will still need large discoveries
in areas where the risk of failure is greater, but the cheaper
and easier approach is paying dividends in the short term.
State-of-the-art technology such as 3-dimensional seismic
imaging enabled Shell to unlock new prospects that quickly led
to a string of discoveries, transforming the region off the
Malaysian state of Sarawak into one of its most prolific basins.
Breaking with decades of traditional drilling techniques
which used rudimentary technology, Shell combined the use of
sonar waves with satellite images and super computers to
pinpoint oil and gas deposits beneath layers of salt in rock.
This has proved so effective that Shell moved from holding
only one exploration licence in shallow waters off Malaysia in
2013 to nine now, searching at greater depths and further
offshore than ever.
Today, it is exploring 27,000 square km (10,500 square
miles) off Sarawak for oil and gas. It has made 16 discoveries
in the last 28 months that unlocked one billion barrels of oil
equivalent. Shell and other oil companies, including state-run
Petronas, now plan to map geologically the entire
Shell, like many of its peers including BP and Exxon
Mobil, have been forced into such strategies as the
chances of finding new and huge reservoirs in hitherto
unexplored frontier areas has diminished.
Per Magnus Nysveen, head of analysis at Oslo-based
consultancy Rystad Energy, said the average distance of
exploration wells to the closest fields fell from 113 km (70
miles) in 2015 to just 29 km in 2016 and is set to drop further
Hugely expensive and risky frontier projects are often
falling from favour due to the sharp decline in global oil
prices since mid-2014 - which has made energy firms slash their
exploration budgets - and the new supplies from cheaper sources
ranging from U.S. shale deposits to the Malaysian discoveries.
Last year, Shell angered investors when it wrote down $7
billion after failing to find any oil or gas in the pristine
Chukchi sea off Alaska's northwest coast. This followed years of
complex work and a rig accident that drew heavy criticism from
The rate of successful exploration has dropped sharply in
the last decade, with the proportion of projects finding any oil
or gas down from around 40 percent to about 30 percent,
according Andrew Latham, vice president of exploration at
consultancy Wood Mackenzie. Fewer than half of the finds go into
Across the industry, exploration budgets have sunk to $40
billion in 2016 from $95 billion two years earlier. Shell's
spending dropped to less than $2 billion from around $5 billion.
"In the last two years, intense focus on new seismic and
relooking at the basins that we have in our portfolio already is
really paying dividends," said Powell, a geologist who joined
Shell in 1990 and became head of exploration three years ago.
She is now applying the techniques used in Malaysia to other
hubs such as Brunei and Egypt, where seismic imaging, advanced
rigs and super computers are giving them a new lease of life.
Falling costs in some areas are also helping to stretch the
tight exploration budgets. The cost of hiring vessels for
seismic surveys has dropped around 60 percent from late 2013 to
around $140,000 per day, according to Shell, which is using this
to expand and accelerate its seismic plans into 2017 and 2018.
It's not only technology that has helped to turn around the
fortunes of the exploration business. Several times a year
Powell brings industry veterans, some of them retired, together
with the new generation of geologists.
The idea is to combine the experience and instincts of the
old-school explorers with the younger generation's technological
know-how to come up with ideas on where to find new reserves and
how to unlock them.
"You put them all in one room and they look at the dogmas.
They think about the wells they would have drilled in 1972 but
didn't and why, and it has been astonishing." In Oman, where
Shell has been exploring for 60 years, this exercise helped to
identify six new geological prospects in a week, she said.
These brainstorming sessions have only one rule: to
concentrate minds, no computers are allowed.
But while drilling closer to home is attractive in the short
term, it comes at the expense of huge discoveries such as
Exxon's Liza field in Guyana and Eni's Zohr in Egypt.
These are crucial for replacing a natural decline of oil and gas
reserves that in some reservoirs can reach 10 percent a year.
"Lead times are shorter and the value per oil equivalent is
higher, but the cons are that discoveries are smaller. In
general we would expect the largest discoveries to be coming
from new plays and new frontiers, as has happened in recent
years," said Latham.
Wood Mackenzie expects global exploration activity to
accelerate in 2017 as oil prices recover.
While the Alaskan project failed, Shell added huge resources
in Brazil, Australia, Egypt and southeast Asia to its reserves
by buying BG Group in February for $54 billion.
This means it can now allocate around 80 percent of its
exploration budget to areas up to only 20 km from existing
platforms. In some cases, such as in Brunei, an exploration well
can be completed and linked to production within days.
"Those will not necessarily be giant discoveries but (will
be) very efficient and very rapid to get to production, and
therefore to cash," Powell said. In the past six years
exploration has added 6.5 billion barrels of oil equivalent to
Shell's reserves, which reached 11.75 billion at the end of
2015, while the time from exploration to production has come
down significantly, she added.
Other oil majors have adopted similar strategies. BP has
begun drilling hundreds of metres below a reservoir produced by
the Ravenspurn ST2 platform in the southern North Sea, searching
for a new gas resource that could transform a basin first
exploited 50 years ago and extend the life of infrastructure.
For Shell, the success of the new strategy and the Alaskan
failure mean it will not return to frontier areas in the near
future, but Powell still sees opportunities for big discoveries
in the likes of west Africa, Namibia, South Africa, Uruguay,
(editing by David Stamp)