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How Kosmos Energy is one of the world's top explorers

Tuesday, June 5, 2018

Kosmos Energy is one of the world's biggest oil and gas exploration success stories, involved in 2 out of the 3 major deepwater cretaceous basin discoveries over the past 10 years. Paul Dailly, SVP exploration, explained how it does it.

Kosmos Energy is one of the world's biggest oil and gas exploration success stories, involved in 2 out of the 3 major deepwater cretaceous basin discoveries over the past 10 years.

Those were the transform margin where the Jubilee discovery offshore Ghana was made and the Tortue discoveries to the North, up in Mauritania. Kosmos has been involved heavily in both. (The third discovery was in Offshore Guyana).

Kosmos has been focussed on the area since its formation in 2004, and drilled all of its 21 exploration wells in the area. It also has 2 blocks in Suriname (South America), adjacent to the giant Lisa discovery, on the basis that geology and plays are similar.

The company is taking a lot of lessons from the exploration in that part of the world which are useful in understanding the transform margin further north, said Paul Dailly, SVP exploration with Kosmos, speaking at the Finding Petroleum forum in London on September 2017, 'Finding Oil and Gas in Sub Saharan Africa.'

Kosmos background

Most of the original Kosmos management team met in the 1990s while working at a company called Triton Energy, which was acquired by Hess in 2001. Triton Energy had been one of the first companies to see the potential of the late cretaceous play, Mr Dailly said, finding oil in Equatorial Guinea, the first 'real transform play.'

When the team started Kosmos in 2004 to 2005, they tried to extrapolate some of this understanding to other areas of the transform margin.

The Jubilee field, offshore Ghana, discovered in 2007, was the second big transform play discovery. It led to a big increase in oil industry activity. It was followed by successful exploration offshore Mauritania and Senegal, by both Kosmos and Cairn Energy.

During 2017, as the oil price has started to recover, there has been a 'bit of a frenzy of activity to pick up acreage in these basins,' he said. There have been 400 wells drilled around NW Africa, which is 'really not a lot of wells for an area of that size'.

There has been a low commercial success rate, although it has improved since 2000.

Kosmos has drilled 20 exploration wells in North West Africa, and made 8 discoveries, so a success rate which is 'pretty good in these frontier plays,' he said.

The company has aimed to not follow oil price cycles but instead to 'stick to our knitting through highs and lows,' he said. It has also kept a geographical focus. 'I think that's an important reason for us continuing to be successful.'

The size of the discoveries basically comes down to the 'extent of these basin floor fans,' he said. Kosmos has been mainly exploring 'slopes' for the past 5-10 years, but now it is doing more exploring in basin floor fans, where the reservoirs can be much larger.

In April 2015, Kosmos Energy made a play-opening gas discovery in Mauritania's offshore Block C-8 with its Tortue-1 well. The Tortue field is a giant deepwater gas field straddling the border of Senegal and Mauritania.

Kosmos has discovered about 8bn barrels of oil equivalent, and a lot of that is gas. The gas resources are big enough to be commercially attractive.

Kosmos' business

Kosmos Energy is entirely focussed on the exploration and early development side of the E&P business, where it believes that most value in the industry is created.

The value is only monetised if the fields can be developed, 'but that requires a scale of organisation that we don't have and don't particularly want to have,' he said.

'We've taken a conscious decision to have a relatively small company which focusses on the front end, and just make sure we get very good strategic aligned partners to execute on the second part of it.'

In the Jubilee field, Tullow became the 'production operator', coming in to run all the operations, while Kosmos was the 'development operator', and alongside the other partner's, GNPC & Anadarko, the group worked together to bring the field onstream in 42 months.

At Tortue, 'our hope is that with our partners BP we can do the same thing in gas terms,' aiming to get on stream in 6 years.

The Tortue discovery is 'probably about 8 bn barrels of oil equivalent, 20 TCF,' he said. 'We've only drilled 3 or 4 prospects out of an inventory of 20 prospects.'

The business model is driven by maximising value creation. 'That drives us to certain basins and certain portfolio shapes,' he said. 'We only go into basins where the fiscal terms are good enough that if we find something we're going to create a lot of value. You can't really go to technically lower risk basins such as Angola or Nigeria, and create the same amount of value because of the terms.'

'If you are going to go to frontier emerging basins, you've got to do it in a way where you can manage the risk. [But] you get the terms, so that in the case of success, it will work even at a low oil price.'

'We keep that risk low by having the right people. Exploration excellence is how we think about that.'

The Tortue discovery is a big gas province, but it is so large that 'we think, even in today's LNG world, it will be competitive when it comes to market, in the early to mid-2020s. The breakeven cost is relatively low and the resource is big enough.'

The company has a 'clear and consistent strategy,' based around 'generating new ideas in old basins and places which haven't been focused on in the past.'

The company only has 4 or 5 'positions' around the world. 'That's about all we can manage technically,' he said. 'There's about 30 people in the exploration department, about 25 geoscientists. We don't want to get too much bigger than that.'

'It is important that the leadership knows the portfolio and is calibrated to the risk of that portfolio.'

With higher risk positions, you need big footprints (a larger license area), in case you discover that a prospect or even a play is slightly different to where you thought it was. 'What we'll tend to do is try to build 4 or 5 big footprint positions - independent petroleum systems where we think we can manage the risk.'

The company has drilled 25 wells over 10 years with a play opening rate of about 1 in 3, a good success rate in frontier and emerging basins. Typically they drill 2-4 exploration wells per year. 'That's about the level of activity that the balance sheet can stand,' he said.

The company needs to make sure there is 'parity between the technical side and the financial side' of the business.

After the Jubilee discovery in Ghana, 'this play became too hot for us to participate in,' he said. We didn't feel very comfortable with that. So we stepped out of the area and tried to leverage our understanding of that part of the world into other places.'

'Over the life of the company we spent about $1.4bn dollars, to find net reserves of about 1.5bn boe. So discovery costs of about a dollar a barrel. So we've had a good commercial success rate, which is obviously critical.'

The company continues to build its position in the transform margin, including the transform margin of Latin America. In 2011, the company took a position in Suriname, in northern, South America, which has similar geology to North West Africa because the two areas were joined together until 140mm years ago when the Atlantic started to open. However following Jubilee a lot of unsuccessful drilling resulted in many companies leaving the transform margin, despite this it remains a core area for Kosmos.

Processes

With a small team of people, the company's processes can be kept simple.

'Having the right people is the key thing,' he said. 'We started off with an experienced set of explorers. We've got about 5 or 6 people who worked together for 20 years in this geography. Then we slowly introduced additional people, brought in younger people. We are still a tight knit group.'

'The important thing is to try to leverage knowledge gained from one idea into the next idea.'

In that way, the concepts originally developed with the Ceiba discovery) could then be used in the Jubilee discovery, and that should also help find resources in Sao Tome or Suriname. 'One of these plays will allow us to introduce the next stair step in the evolution of the company,' he said.

The company needs to continue to develop new frontier play concepts, 'Otherwise we will get trapped in following other people's success. That is a very difficult thing to sustain and create a lot of value in.'

Although there was a lot of failure in the transform margin after the Jubilee discovery, there are a number of lesson we can learn from that. 'As an industry we can learn as much from the things we don't do so well to leverage into the future,' he said.

'We try to stick very much to basins we've committed to and try to make the most out of investments we've made,' he said. 'As an industry we are guilty, especially in high oil price cycles, of being opportunity driven and exploring in an ad hoc fashion.

'We did see, and occasionally still see, a lot of ephemeral exploration with companies not really committed to the basin, drilling a couple of wells and leaving without really digesting the results of the drilling they have done. We think that can be a real problem.'

Most important consideration

Mr Dailly was asked what is the most important consideration when analysing a new basin.

He answered it is the 'geologic fundamentals really,' the company puts a lot of emphasis on putting together source rock models, trying to understand the thermal history and crust as well as possible. 'We just keep in mind that while we may have a couple of basin models - there may be many other basin models that are also possible. We don't get too hung up on that stuff.'

A critical point is the integration of data and trying to understand where the sweet spot may be, and determining what size position to try to take. 'Quite often it is difficult to do that in a basin where there's lot of people looking,' he said. 'We try to do it in basins where we can pick up a good position and to help us manage the risk.'

Also, early in the evaluation Kosmos doesn't focus on trap definition, because 'you don't tend to see them on older, poorer quality 2D or old 3D surveys. We put more emphasis on play elements and tend to look for are the sorts of structural elements that might make traps down the road,' he said. 'We are prepared to take more trap risks than a proven basin explorer would, who is used to seeing traps and flat spots.'

The company will spend money on a high-resolution 3D seismic survey upfront.



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