Posted on 10/01/2015 5:55:54 AM PDT by thackney
Shell’s $7 billion flop in the Arctic Ocean stands out as one of the industry’s costliest missed bets, even for an industry used to gambling big.
“There are few $7 billion zeros in the industry, so it’s fairly unique,” said Dave Pursell, head of securities at Houston energy investment bank Tudor Pickering Holt & Co.
It’s even more unusual for a single well to take down an entire exploration project.
On Monday, the company said that it was walking away from Arctic drilling after a just-finished well in the Chukchi Sea turned up indications of less oil and gas than the company needed to justify continued development.
But Shell is far from alone in making a big bet on an offshore play only to end up with disappointing results. From the Gulf of Mexico to the shores of Angola, offshore exploration has yielded plenty of dry holes.
“It’s hard to find oil and gas — that’s the bottom line,” Pursell said. “It doesn’t matter how much technology you throw at it, you have to put a drill bit in to see what’s there.”
Onshore, these days, it’s a different scenario. With hydraulic fracturing, energy companies are plumbing dense shale formations and pulling oil out of the rock itself, not drilling wildcat wells hoping to hit hidden reservoirs thousands of feet below ground.
“With the unconventional resource plays (on land), there is no hydrocarbon risk,” Pursell said. “You know it’s there. The risk is do you have the technology to extract it.”
University of Texas petroleum geologist John Snedden insists that Shell’s Burger J well “should not be characterized as a mistake.” Rather, he says, it’s “an illustration of the risk and uncertainty of exploration.”
The success rate for wildcat wells — measured by whether hydrocarbons are found and not whether there is enough to be commercially viable — range wildly worldwide, Snedden notes.
In some frontier basins, wells find oil or gas less than 5 percent of the time, he said. By contrast, in the early 2000s, oil companies targeting the Paleogene trend in the Gulf of Mexico were scoring more often than not, with a success rate of about 70 percent.
Sophisticated seismic research — and computer modeling that helps interpret it — can limit, but not eliminate, the exploration risks.
Statoil learned that the hard way last year at its Martin prospect, about 43 miles from the Louisiana coast.
Excited by initial seismic research, the company bid a record-setting $157 million for a single, 5,760-acre lease at the site during a government auction in June 2012 — with the sealed bid five and a half times that of its nearest competitor.
The company moved swiftly to begin work on the well, and then spent about $1.1 million per day to drill it. But some 31,400 feet down, Statoil didn’t find what it was looking for. Although the company said it made a discovery at the site, it wasn’t commercially viable.
There’s another cautionary tale just a few hundred miles from Shell’s failed Burger J well.
There, in the Beaufort Sea, a consortium of companies invested nearly $1 billion in the 1980s drilling a well named Mukluk.
They were confident they’d find oil. At the time, geologists boasted that it was an incredibly low-risk venture, in part because the formation appeared to mimic the massive Prudhoe Bay oil field on Alaska’s North Slope.
But their bullishness was misplaced. In December 1983, it was revealed the well contained nothing but salt water and traces of long-gone oil.
Decades later geologists armed with new data theorized that the oil actually had been sucked out by BP from an existing site onshore on the North Slope.
For decades, Mukluk has been considered the industry’s most expensive dry hole — a case study in what can go wrong below ground, even when everything else operationally goes right.
Shell’s Burger J well might give it competition.
A single hole exploration has a lot more to do with EPA artic rules shutting down Alaska and facing than a lack of oil. When I worked on the slope, you could get a 100 dollar fine and get written up for pouring bottled water on the ground. Horrible pollution doncha know...
well at least the supply glut won’t be prolonged?
I remember the hype around Mukluk. Seems like that was the one that an island was built for.
When you need a little duck pond to fill the truck with diesel...
They also built an island for Northstar. That one paid off.
Mukluk might have already had the oil produced elsewhere:
...recent petroleum system computer modeling by scientists from computer services company Schlumberger suggests that the Mukluk oil may have in fact drained south into the Kuparuk River field. If that is correct BP, with a 39 percent ownership interest in Kuparuk, could unknowingly have been producing oil originally from Mukluk...
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