Non-Technical Guide To Prospecting for Oil and Gas

1. Non-Technical Guide To Prospecting for Oil and Gas

2. Basic Fundamentals – Geologic Considerations • Science of the Earth – requires specialized study • Geologists : study the origins, history, composition, and structure of the earth and its life as rocked in rocks etc. Two of the best known : Harrison Schmitt (Planetary geologist) and James Hutton (Father of Geology) • Most companies require entry level geologist to have B.S. and M.S. degrees from an accredited university • Geophysicists : scientists that study the earth via physics. This educational and experience path generally requires some fundamental knowledge of the earth and its processes.

3. Basic Fundamentals – Oil/Gas Formation and Migration • Where do fossil fuels come from? • The first thing that comes to mind is that oil/gas came from dinosaurs. Unfortunately this is not the case. • There are 2 theories as to how crude oil and natural gas were formed: • Organic (Biogenic) : remains of small microscopic plants/animals that lived in prehistoric rivers/seas. As they died, they combined with mud/slits etc to form source rocks (typically shales). These sediment layers were then compressed by additional layers to form sedimentary rock. The combination of depth/burial, heat, pressures and bacterial/chemical reactions generate the oil/gas being used today. • Inorganic (Abiogenic) : oil/gas were actually produced during the formation of the solar system and the earth. This is sometimes used as an explanation as to why oil/gas are found in unexpected places and differences in composition.

4. Basic Fundamentals – Oil/Gas Formation and Migration • Where do we find oil and gas? • Unfortunately, oil/gas does not exist as liquid pools in caverns that lie beneath the earth. In fact, most of the rock that we deal with here in the U.S. is so tight that you would not readily recognize a rock as being productive of oil/gas. • 2 Critically Important Reservoir Attributes • Pores : Rock must have areas for the oil/gas to be stored. Pores are not readily visible to the naked eye. Specialized equipment is used to measure the size. • Permeability – the ability of oil/gas to move through a reservoir rock. • Migration – after formation • Oil/gas/water will migrate into reservoir rocks which have pores large enough to handle these fluids. • Oil/gas are lighter than water; will rise upward to the surface. • If there is nothing to trap the hydrocarbons, they will escape thru surface seeps. • If there is impermeable rock, they become trapped. Finding these traps are a big challenge for geologists. • Collection (Trapping) • Permeability of rocks has allowed the generated oil/gas/water to flow through it as long as it had pore space over millions of years. A simple example is a sponge. You can add water/oil to a sponge. Until it exceeds its ability to “store” the fluid, it will not drip out. If the “sponge” is put in a container it will stop dripping and the fluid will be trapped.

5. Basic Fundamentals – Oil/Gas Traps • Trap Types : can either be structural or stratigraphic • Geologists call barriers that hold oil/gas, traps. A trap prevents the oil/gas generated from rising to the earths surface. Traps usually consists of a layer of rock that oil/gas cannot penetrate above a porous/permeable layer that holds the oil/gas. • Anticline : Structural. Long upward arch of reservoir rock in the subsurface – formed by rock deformation (rocks are plastic at depth and pressure). Normally associated with carbonate reservoirs • Fault : Structural. Break in the subsurface rocks along which the rocks have moved. • Normally found in tectonically stressed areas and can be associated with • either carbonate or sandstone reservoirs.

6. Basic Fundamentals – Oil/Gas Traps • Trap Types : can either be structural or stratigraphic • Reef : Stratigraphic. Occurs during the deposition of the reservoir rock • Mainly associated with carbonate reservoirs • River Channel : Stratigraphic. Occurs during the deposition of the reservoir rock • Mainly associated with sandstones either deltaic, estuary or submarine

7. Basic Fundamentals – Oil/Gas Traps • Trap Types : can either be structural or stratigraphic • Wedge/Pinchout : Stratigraphic. Could occur during the deposition of the reservoir rock • and / or from erosional unconformity. This can occur in either • sandstone or carbonate reservoirs.

8. Basic Fundamentals – How Oil / Gas are Found • Methods • Geomorphology : scientific study of landforms and processes that shape the surface of the earth. One of the earliest methods used to find oil/gas accumulations. • 1st commercial well drilled in the world was based on an anticline feature that was found 69’ below the surface

9. Basic Fundamentals – How Oil / Gas are Found • Methods • Surface seeps : simply put – place where natural liquid and/or gaseous hydrocarbons escape to the earth’s atmosphere. Significance of this is that in some areas seeps will occur in areas of known petroleum accumulations – they can escape • Along geologic layers • Naturals fractures/fissures in the rock • Thru outcrops • In 1878 the USGS issued a publication “Creekology” simply the search for above ground indications of oil/gas. This publication detailed surface “streams” that were coated with oil and /or devoid of growth.

10. Basic Fundamentals – How Oil / Gas are Found • Methods • Subsurface Geology : use of available data from previously drilled wells to project the potential reservoir rocks into an area that is either structural or stratigraphic in nature. Base tool used in this method are electric well logs that are used to construct structural maps, pay thickness maps and cross sections. • Type electric log Generalized x-section based on log data

11. Basic Fundamentals – How Oil / Gas are Found • Methods • Subsurface Geology : cont’d • Isopach of Barnett Shale : Fort Worth Basin

12. Basic Fundamentals – How Oil / Gas are Found • Methods • Seismic : Seismic surveys are used to generate a map of the underground layers and / or structure • How does it work? • Energy is directed into the surface of the earth and is reflected off the layers at different depths, the energy is returned to the surface and captured (explosives and / or “thumper” trucks). • Path the energy takes will be different depending on the shape and density of the surface of the layer is penetrating

13. Basic Fundamentals – Economics • Economics – this will be the single most important part of finding/developing oil/gas reserves. Multiple sources are used to help arrive at the investment model and results. • Geoscience : provide mapping to support a prospect and/or idea. • Reservoir Engineering : providingrate/reserves estimates. • Completion & Drilling Engineering : provide plans and costs for the project. • Land : verify and secure the ownership of rights the depths being targeted for development. • Key Economic Components • Product prices • Taxes • Operating Expenses • Royalties • Economic Analysis – the results will provide management with the following information • Future cash flow from the project • Estimate of profit or loss and return on investment of the project • Allow for the ranking of a project relative to other projects that a company may have in its inventory • Finding and/or development costs • Economic Runs will yield the following indices • Net present value • Internal rate of return • Return on investment • Payout • Investment criteria – each company will have their own “hurdle” rates with respect to how much risk they are willing to undertake for a specific project

14. Basic Fundamentals – Economics • Economics – multiple ways to evaluate a project – all typically handled by some type of software package (Aries, Merack, PEEP, OGRE, PHDWIn etc) • Single well economics – this is what most companies will use for their investment decision. • Full prospect evaluation – expected value analysis for a large scale prospect