Key exploration frontiers

In Uganda, a series of prolific discoveries has been made by Tullow and partner Heritage across three exploration blocks on the shores of Lake Albert. While these strikes have seen some 700m barrels of oil already pencilled in as proven and probable reserves, the full potential across these Albertine Basin licences is thought to be in the region of 2bn barrels of recoverable oil. Yet more drilling through the first half of this year should go a long way to firming up that potential.

Heritage has decided to sell its Albertine stakes to monetise the discoveries to date without taking development risk, and in a convoluted set of transactions Tullow has both pre-empted Heritage's planned sale to Italian oil major Eni, which will see it momentarily holding 100 per cent across all licences, and has also lined up Chinese oil firm CNOOC and Total of France to subsequently take together a 50 per cent stake across this licence package. Heavyweight capital and experience alike are indeed required to move the Albertine resources through development, as the required export pipeline will not only have to cross 1,300km to the port of Mombasa, but due to the waxy nature of the oil will also have to be heated along this length.

Tullow is also a first mover in the waters offshore of Ghana, where its Jubilee/Mahogany oil discovery is already being developed on the basis of an initial proven and probable reserve estimate around the 300m-barrel mark, but with clear potential for recoverable volumes from the field to ultimately total 1bn-plus barrels of oil. Other nearby prospects, such as the Tweneboa discovery, could add as much as another billion barrels under the upside case.

Yet Ghana is not the whole story, merely one end of what Tullow refers to as the 'West Africa Transform Margin'. The idea here is that the prospectivity that has yielded the Jubilee and Tweneboa strikes in Ghanaian waters extends along the West African littoral from Ghana through Côte d’Ivoire, Liberia and Sierra Leone. Tullow and Anadarko, the US independent partnering it in Ghana, have staked out joint offshore exploration acreages in a line cutting along the territorial waters of these countries. Success last autumn on an oil exploration well offshore of Sierra Leone, which could itself turn out to be a significant find, appeared to validate the theory - although a subsequent dry hole off Côte d’Ivoire underlined the fact that finding the right kind of rock is one thing, but finding it charged with oil or gas is another.

Bowleven

Last year was a terrible year for Bowleven; with its share price depressed, the company was almost taken over as it struggled to raise finance for its work programme and with no prospects of drilling. The company is now in unrecognisably better shape to explore and develop its highly prospective licences, in particular Etinde, offshore Cameroon. The company raised $114m last June and then in August farmed out a 25 per cent interest in the Etinde permit to oil trader Vitol in return for a gross $100m work programme commitment. Vitol also has an option, expiring in September 2010, to acquire a further 25 per cent interest subject to an additional $100m gross work programme and a $25m payment to Bowleven to be used on the Etinde permit.

With financing now in place, Bowleven has confirmed a four-well campaign in a year that chief executive Kevin Hart describes as "shaping up to be the busiest year in Bowleven's history". The first well to be drilled at Etinde should be at the IE gas field, expected in April or May 2010. Based on a regional 30 per cent recovery factor, analysts estimate that IE could hold up to 32m barrels of condensate and just over 27m barrels of oil equivalent of gas.

Attention would then turn to Bowleven's flagship IF oil discovery. The company had originally hoped that this connected with IE as one enormous gas field. This proved not to be the case, but IF provided a substantial consolation prize as an oil discovery estimated to hold 50m-80m barrels of recoverable oil. Following highly promising flow rates from the discovery well, the company is carrying out further seismic studies to determine the optimum site for an appraisal well, expected to be drilled in the autumn.

Elsewhere in the Etinde permit, Bowleven plans to drill an exploration well on the MLHP5 licence, which could hold over 500m barrels of recoverable resources. Although considered relatively frontier, Bowleven has previously drilled a discovery in this licence and several oil, gas and condensate discoveries have been made in the two blocks immediately to the south.

The Falkland Islands

Actual drill results will soon be able to replace years of speculation over the hydrocarbon potential of the Falkland Islands as the exploration groups finally start their long-anticipated drilling campaigns in the isolated waters of the South Atlantic.

Geologists believe that the distinct North and South Falkland basins could each hold vast oil and gas resources. Drilling in the North basin in 1998 confirmed the presence of hydrocarbon systems, although these were not commercial at the low oil prices that prevailed at the time and were therefore not pursued. The South basin lies under deeper water and has never before been drilled, although geologists believe the hydrocarbon potential of South basin structures could be an order of magnitude larger than counterparts in the north.

Desire Petroleum and Rockhopper Exploration will drill one well each to launch the North basin campaign, expected any day now, following which Falkland Oil & Gas is likely to be given a slot to drill a large prospect that lies in water just shallow enough for the rig to drill following some modifications.

What is crucial is the scale of any discoveries. Given the remoteness of the islands and their great distance from any markets and processing/transport infrastructure, any discoveries will need to be significantly larger to be commercial than finds in less isolated locations.

Logistics and infrastructure will be even more of a headache if the explorers strike gas rather than oil. Although challenging and expensive, oil strikes could be processed using technologically-proven floating production and storage facilities. By contrast, gas is harder to transport and usually requires pipelines to processing facilities and ultimately to market. Building a pipeline from the Falklands to any major markets isn't an option given the distances involved, which might well require any gas finds to be processed using floating LNG facilities, which have yet to be proven.

The independent re-evaluation last summer of one of Rockhopper's prospects – the Johnson structure – resulted in it being reclassified a gas 'discovery' containing best estimate contingent recoverable resources of 1.6 trillion cubic feet of gas. That's equivalent to a whopping 260m barrels of oil but is not considered commercial on its own.

Deep and ultra-deepwater

Gulf of Mexico

The shallows of the US Gulf of Mexico have been producing oil and gas since the 1950s, but many of these readily-accessible fields have now depleted. With the US’s dependence on oil showing little sign of declining, exploration of the Gulf has now pushed out into the deep (water depths to 1,200m) and ultra-deepwater (water depths to 3,000m) reservoirs, where colourfully named discoveries such as Thunder Horse, Atlantis and Mad Dog have demonstrated the vast potential of the region.

Having produced over 4bn barrels of oil in the past eight years, according to oil services giant Halliburton, the deepwater US Gulf of Mexico remains one of the world's most prolific hydrocarbon areas, with potentially tens of billions of barrels remaining to be discovered and produced.

BP is the largest player in the deepwater Gulf of Mexico, having operated there since the 1980s, and has found more than 30 per cent of the large fields discovered in the last decade. Thunder Horse, which produced first oil in mid-2008, is a key discovery in BP's plans. When it reached full production in early 2009, Thunder Horse became the largest producing field in North America after Prudhoe Bay in Alaska.

BP's success with its Tiber well illustrates the group's continued ambitions in the Gulf.

Brazil

Over the past couple of years the Santos Basin offshore of Brazil has yielded a series of large, high-quality oil discoveries with one company, UK integrated major BG, right at the heart of the action. Across a string of strikes, BG - in partnership with Brazilian state oil company Petrobras - has laid claim to multiple billions of barrels of resources from the so-called 'pre-salt' layer of the earth's crust, in other words a particularly deep terrestrial horizon.

BG's net share of recoverable resources from these fields is estimated at more than 3bn barrels currently, and despite their being located beneath both deep water and in deep rock below that, chief executive Frank Chapman recently reiterated that their oil can be produced economically at prices as low as $35-$40 per barrel. There is also gas to be produced alongside the oil, again in such quantities that BG is exploring the possibility of constructing a floating LNG plant to monetise the volumes for export.

As things stand, the Santos Basin fields will commence production around the end of this year or the start of next year – some 100,000 barrels per day (gross) from the Tupi field to start with, then in 2013 another two fields should come onstream, each pumping around 120,000 barrels per day. By 2015, BG's net share of this should be at least 150,000 barrels per day, rising to 400,000 barrels by 2020. Yet beyond these current development plans there still remains plenty of upside on the table. This year will see a string of appraisal wells drilled to firm up potential around existing discoveries, but there will also be a fresh exploration well on the Macunaima prospect.

BG is enjoying the benefits of being a first mover in Brazil, having taken on exploration licences there in partnership with Petrobras when few other companies wanted to. Now the laggards are paying the price - following BG's astounding success, the government announced tougher terms for companies seeking entrance in subsequent licensing rounds for other offshore blocks around the Santos Basin, even while guaranteeing BG's original terms on its blocks. Yet other companies still hope to join the fiesta, among them BP. Chief executive Tony Hayward recently confirmed that the company would be submitting bids in the upcoming next Brazilian licensing round.

Greenland

Despite much talk about 'opening up' the Arctic region of our planet to oil and gas exploration, to date the only real progress made has been in the far north of Russia, where Russian companies such as LUKoil have been dealing with drilling and producing significant volumes from the Arctic environment for some years now. Yet that picture could change as 2010 sees Cairn Energy, already famed for its success in first finding and now developing oilfields in Rajasthan, northern India, shift its focus to exploration licences offshore of the western coast of Greenland.

Cairn has identified some 14 prospects across its Disko West licences, which could together yield multiple billions of barrels of reserves. So keen has Cairn become to proceed there that it has both reorganised the corporate structure of its exploration subsidiary, Capricorn, such that it will not have to wait on minority shareholder cash injections to fund drilling, and significantly accelerated its programme timing. Compared with earlier indications that drilling would probably not occur until 2011, Cairn is now set to drill up to four Greenland wells this summer.

Simply from the difficulties inherent in the location, it can be inferred that a minimum prospect size to make the effort worthwhile would be at least 100m barrels, yet the company itself is remaining tight-lipped for now on target details. Analysts had hoped to get more colour on this front from the late January operational update, but were disappointed. The market is now looking for some guidance in Cairn's results, due in late March, with regard to what exactly the company hopes to find this summer.

South-east Asia

In recent years, both Premier Oil and SOCO International have made significant discoveries offshore of Vietnam and moved them through development. Yet, for the coming year, the name on analyst lips when talking about south-east Asia is Salamander Energy - many agree the exploration programme this company has lined up in the area could transform its valuation.

Among the targets are a couple of oil prospects in exploration blocks straddling the onshore and offshore areas around the Mekong Delta in Vietnam: the so-called Mermaid prospect, which could contain 41m-130m barrels of recoverable oil, and the Rock Lobster prospect, which could contain some 31m-88m barrels of oil. Both of these should be drilled by the middle of this year, and success will have wider import than just the volumes hoped for from these particular wells. The geology of these licences is seen as similar to the already-prolific Cuu Long basin nearby, so success on these initial targets will be seen as de-risking considerable further upside from other prospects on Salamander's portfolio.

Prior to this, in the first quarter the company and its partners will already have drilled the Bang Nouan gas exploration well in Laos, which will be just the third exploration well ever to be drilled in that country. Other exploration wells are also planned on licences on which the company is already producing in Indonesia and Thailand. All told, the company is targeting a potential additional 280m barrels of oil equivalent of reserves from its drilling in 2010, which, compared with its existing 68m barrels of proven and probable reserves, shows just how material this year could turn out to be.

Closer to home

The North Sea might be a mature and declining oil and gas province, but billions of barrels of oil and gas are estimated to remain to be recovered. With Britain looking to increase its energy security, and in particular reduce its reliance on imported fuels, the North Sea looks set to regain some of its former prominence.

The government recently announced that the 26th offshore licensing round will offer blocks in all regions of the UK for new licensing, including some areas of the UK Continental Shelf that have never previously been explored. To further stimulate exploration, the Treasury said it would be extending the "field allowance" announced in last year's Budget to include gas fields west of the Shetlands. It is hoped this will stimulate investment in much-needed infrastructure to allow the region to develop as a gas hub.

One company set to benefit from these developments is Faroe Petroleum, a growing company with a strong exploration track record targeting the North Sea, west of the Shetlands, Norway and the Faroe Islands. Selling its interest in the large Breagh gas project in the North Sea bolstered finances and Faroe further benefits from Norway's tax regime, which rebates 78 per cent of exploration and appraisal costs and therefore lets Faroe operate in what would otherwise be 'majors only' territory.

Faroe made two gas discoveries in late 2009 and enters 2010 with firm commitments to drill several of the most highly-rated exploration prospects in its portfolio. It has just started drilling its latest exploration well, Fogelberg in Norway, although this could be dwarfed by the Anne Marie (Faroe Islands) and in particular the Lagavulin (west of Shetland) prospects scheduled for the third quarter.

Oil companies performance

Wells to watch in 2010