The exploration of new resources is not often a top priority for Middle Eastern national oil companies (NOCs). Thanks to giant oil fields discovered between 1940 and 1970, the region’s NOCs produce 35 percent of global oil output and hold more than 50 percent of the world’s proven oil reserves. For practical reasons, these companies today focus primarily on growing or maintaining production levels. This helps to generate revenue for the region’s governments but also helps to stimulate the development and diversification of the broader economy by providing employment opportunities and supporting local companies in the oil and gas supply chain.
Undiscovered oil in the Middle East may only amount to a fraction of what has already been found. Nevertheless, exploration can unearth substantial discoveries. For example, Statoil, a Norwegian NOC, helped to discover a two-billion barrel oil field in 2010 within an area in Norway that had been explored by numerous companies over the preceding four decades. Such discoveries are made possible because of complex geological knowledge and two technological advances: seismic imaging that can identify new fields more effectively and drilling techniques that go deeper and can locate less productive, but still lucrative, reservoirs.
Redefining exploration
Despite the possible resources awaiting discovery, NOCs’ efforts in the Middle East are focused primarily on producing assets. This means that exploration is overlooked in the region, and delegated to International Oil Companies (IOCs) who work on a contract basis, and are compensated for the upfront risk and expenditure. Their work involves conventional exploration, the exploration for well-defined oil and gas fields that target known producing geological horizons at manageable depths, onshore or in shallow water. Yet given diminishing returns, exploration efforts now increasingly involve exploration in offshore deep-water areas, and on deep gas, shale gas and tight oil.
To improve their exploration performance, and to help them in managing their IOC partners, NOCs can learn from this new breed of IOCs that have combined strong geoscience and operational capabilities, with an organizational culture — focusing on people, processes and organization structure — that supports the disciplined risk-taking that is necessary for sustained exploration success.
Successful exploration companies place a high value on geoscience talent and have simple, widely understood processes that they consistently apply, with open discussions on successes and failures facilitating learning and adaptation to new situations. This is best supported by a non-hierarchical organization that fosters communication and discussion, and provides geoscience teams with open access to management, as well as offers centralized standards that are balanced with local autonomy to act.
Keys to success
The first step to establishing a strong organizational culture is securing the right people who can interpret data in new ways. They also need to ensure that IOC partners for exploration ventures are selected on criteria that include their exploration track record, and that the IOC deploys its best explorers. NOCs should structure their own exploration conversations, and their reviews of IOC-operated ventures, to specifically address the “what-if” questions that challenge conventional wisdom and generate the innovative ideas that can unlock remaining exploration potential.
The second step involves enhancing processes related to exploration decision-making. Primarily, NOCs should review the financial thresholds applied by IOCs (applied as tight contractual terms to make the largest discoveries attractive for the IOC). Upon review, NOCs should ensure that IOC partners are adequately incentivized to invest, taking into account the risk and reward profile of the exploration opportunities on offer.
Strengthening the overall organization to align with the exploration vision is the third step. NOC leaders must recognize that exploration can provide valuable additional resources to their portfolio, and thus need to ensure that it is given sufficient weight in the organization and is resourced accordingly. Re-emphasizing the role of exploration as a core function in the NOC will help to attract the best talent and build strong exploration competencies.
Production optimization is, and should remain, the key priority for NOCs in the region as the main driver of government revenue and a stimulus to the development of the broader economy. However, while there is no simple solution for exploration success, the adoption of some of the practices of successful explorers is an important step that NOCs should take to “rediscover the art of exploration”. This will go a long way to maximizing discovery volumes and ensuring that NOCs are best-placed to fulfill their mandates to maximize the contribution of the oil and gas sector to the national economy.
David Branson is executive advisor, Sean Wheeler a partner, and Asheesh Sastry and Alain Masuy principals at Booz & Company
