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Oil and gas exploration
Players in the oil and gas industry can be divided into those that prospect for, find, and produce crude oil and natural gas and those that refine and distribute the oil in the form of fuels, for example. Within Crown Energy’s segment, i.e., prospecting for and producing oil, there are four phases to the process: exploration, appraisal, development, and production. As mentioned earlier, Crown Energy operates primarily in the exploration and appraisal phase (see the image in the “About Crown Energy” section). The following section describes the exploration and appraisal phases.
Oil and natural gas resources are usually the property of the country in which the oil or natural gas is found. Each country’s government can issue permits, or concessions or licences, to domestic and foreign oil companies. In other words, the oil companies do not own the discoveries. A licence usually consists of two parts: an exploration licence and a production licence. Acquisition of a licence means that the oil companies can explore for and produce oil and natural gas in a given area during a given licence period. To obtain a permit and retain it, the oil company commits to performing work within the licence area for a certain period of time. The work mainly comprises geological and geophysical surveys and drilling. An exploration licence is converted to a production licence when commercial finds of oil or gas are discovered.
The licences may be obtained directly from the state licencing authority or the oil company can buy issued licences from other companies. It is also common for the oil companies to share projects with others in order to share the high costs of exploration. The licence holder can invite other players to take over all or part of the work that the licence owner has undertaken, such as drilling or geological surveying. In return, the invited company receives a stake in the licence and thus part of any future revenue. These procedures are called farming in and farming out. The oil company that has operational responsibility is called the operator.
By analysing geological, geophysical, and technical conditions, the oil company learns more about the discovery. To locate geological structures favourable to the accumulation of oil and natural gas, different types of studies are conducted, such as geophysical seismic surveys in which potential structures are located using sound waves. Seismic data can be two-dimensional or three-dimensional. The difference is that 2D seismic surveys provide data in two dimensions (length and depth) while 3D seismic data provides an additional dimension (width). Three-dimensional seismic data provides a better foundation but is much more expensive and usually covers smaller areas.
Only by drilling can an oil company confirm with certainty whether or not there are commercial quantities of oil (or gas). Drilling in a structure without known reserves is called exploration drilling. Drilling operations are divided into several phases: preparation, mobilisation of equipment and materials to the drilling location, the drilling phase, and finally demobilisation.
During drilling, rock and fluid from the borehole is analysed. Log programmes are run to investigate the reservoir and its properties. If the logging analyses are positive, additional extensive testing and analyses are conducted in order to obtain reliable evaluations of the well, i.e., how much oil the well may produce and at what rate.
In an oil company, oil assets are divided into reserves and resources. The difference is in how far the oil company has come in its work on the licence, if the deposits are of a commercial nature, etc. In short, resources are considered reserves when they are deemed commercially recoverable and a development plan has been approved by the local licencing authority.
Reserves are divided into proven, probable, and possible. The difference between these reserves is great. A proven reserve (P1/P90) is deemed to have a 90% probability that the estimated recoverable volumes are accurate. These are areas where testing has been done with a positive outcome as well as adjacent areas where drilling has not yet occurred but are still considered commercially recoverable based on existing geophysical and geological data. Probable (P2/P50) and possible (P3/P10) reserves have a probability of 50% and 10%, respectively. With additional work, such as expanded drilling, the probability of the discovery can be appraised upward.
Resources are divided into contingent and prospective categories. A contingent resource is one in which discoveries have been proven by drilling, but for one reason or another they have not yet met the requirements for a reserve. A prospective resource relates to a project in which everything indicates that drilling can be done, but the oil company has not yet started exploration drilling. Contingent and prospective resources are divided into three subgroups, each based on how far along in the project the oil company has come and the probability of discoveries.
The established practice in the oil and gas industry is for an independent expert to be hired to estimate and assess operational resources and reserves.
The figure below illustrates the classification model for reserves and resources used in the oil and gas industry. The model was developed by SPE PRMS 2007. (Source: Society of Petroleum Engineers Petroleum Resources Management System of 2007 [SPE PRMS 2007]).