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The recent crisis in America’s subprime mortgage market sent ripples through stock markets across the globe. The ensuing panic-selling by jittery investors resulted in a worldwide slide of share prices and the threat of serious economic consequences. This, alongside several interest rate cuts from the US Federal Reserve Bank, has sent the dollar sharply lower.

A widespread loss of investor confidence in the banking system and traditional investments has led to a ‘flight from risk’, where investors look to a safer investment option, such as gold, which has proven itself to be a safe haven in times of financial crisis.

This is the conclusion of recent research commissioned by the World Gold Council (WGC) which examines the performance of gold compared with other mainstream assets during the current credit crisis as well as during significant periods of financial distress in recent history.

The WGC analysis looked at gold’s performance in the aftermath of 11 September, 2001, the bursting of the dot.com bubble and the Asian currency and rouble crises, showcasing gold’s role as a portfolio diversifier and safe haven cushioning investors against losses.
2007 credit crunch

The current credit crisis saw gold initially underperforming as it was liquidated to cover losses in other assets. However, as tensions mounted, investors looked to gold as a ‘safe haven’ investment and it has since been the best performing asset in all major currencies, apart from oil.

The WGC report tracked gold’s performance against the major bond and equity markets, the G-6 trade-weighted dollar and oil for two significant periods in the financial markets in 2007 – 25 February to 25 June and 26 June to 26 September.

In the first period gold underperformed as investors remained unconcerned about growing tensions in financial markets (See Chart: Gold vs other asset classes, ‘credit crunch’ 2007). However, as the threat of financial crisis became more evident in the June to September period, gold outperformed the major equities and bonds, overshadowed only by oil. Gold also gained 9.6% in trade-weighted dollar terms in this period.

From September onward, gold has been the clear outperformer as investor nervousness has ebbed and flowed and the dollar has been under heavy pressure. Gold has also been shown to be the strongest performer in all major local currencies.

Gold after 9/11
In the weeks following the terrorist attacks of September 11, 2001, shock waves were sent through stock markets worldwide. Heightened political tension and panic-selling in the immediate aftermath saw the gold price fall from $287 to $279. In the following weeks, investor interest in gold increased, with people viewing it as a safe haven that would cushion portfolios against further losses. A flight into gold followed as equity markets and the oil price lost ground.

After the attacks, the world’s markets continued trading and it took Wall Street only one week to become fully operational again, providing a great boost to investor confidence. This new-found confidence was the reason for gold’s underperformance in October 2001, as investors took an optimistic view of the medium term and sought out value in the equity markets.

In the three months from September 11 onward, the bond markets were the strongest performers in the UK and eurozone, and equities were strongest in the US and Japan. Gold was the second best performing asset in three of the four regions.

The dot.com bubble bursts
Spring 2000 saw the burst of the technology equity bubble, with the overall market decline lasting from 10 March to 14 April. The technology-heavy NASDAQ dropped 34 percent over the period; while the S+P and gold fell by just three percent. The immediate investor reaction to the dot.com bust was a flight to gold and bonds, although, over ensuing weeks, the bond market was the primary beneficiary of investor nervousness.

It took until the end of June for investor confidence to filter back into the markets. From March to June 2000, equities were the strongest performer in the US, while gold was the strongest in the UK and bonds the strongest in Europe and Japan.

There were a number of reasons for gold not being the strongest performer in dollar terms over this period – including the independent strength of the dollar, central bank gold sales and earlier investment activity that had taken place in 1999 as investors became concerned about possible ramifications of Y2K at the turn of the millennium.
Asian currency and rouble crises

The close of the 1990s was a time of financial upheaval. It began with the crisis in the Asian economies, followed by the rouble crisis in Russia and problems at Long Term Capital Management (LTCM). The period of stress spanned from July 1997 to April 1998 and during this time gold’s performance was mixed.

During the Asian crisis, gold found itself under pressure, but this can be seen as confirmation of gold’s role as a safe haven, rather than an argument against it. The Korean government found itself in particular difficulty. After the fall of the Korean won, the country’s government offered to buy gold from the populace, which was subsequently sold on the international market to raise much-need dollars to meet Korean international debt obligations.

In the spring of 1998, the rouble crisis developed as the government in Russia worked to maintain the rouble’s exchange rate steady against the dollar despite increasing internal strain. The government was forced into devaluation in August and the rouble subsequently floated in September.

Gold’s immediate response in September was minimal, but the metal’s comparatively low volatility over this period reinforced its use as a stabiliser in investment portfolios.

Golden days
Gold cannot be considered a panacea for all ills. The performance of the price depends heavily on the nature of the external problem. Where geopolitical tensions are involved, the price tends to rise as investors use it as a hedge against risk and for its portability and universal acceptance as a currency. For the gold price to rally in the wake of a crisis there generally needs to be an element of financial tension that could have an impact on the smooth running of financial markets.

The report also stressed that while dollar weakness has been an important element in contributing to the rally in the dollar gold price during the recent credit crisis, it is not a necessary condition. It also highlighted that gold has acted as a safe haven for investors across the globe, and worked as a hedge against both equity weakness and tensions in the bond markets, although the relationship with equities was generally found to be stronger.

A combination of a growing worldwide demand for power and a shortage of top-level staff has created a highly competitive market for the people with the right talent. “It’s a very good time to be an engineer,” says Tony Ward, a director in the energy, chemicals and utilities group at Ernst & Young. The flip side of the coin, though, is that it is not such a great time for the companies doing their best to retain or recruit suitably qualified staff to drive their projects forward.

The scale of the problem was brought sharply into the spotlight when it was revealed that the global oil and gas industry faces a 15 percent shortage of qualified engineers by 2010 – a shortfall of between 5,500 and 6,000. According to Pritesh Patel, of consultants Cambridge Energy Research Associates (CERA), the industry faces the prospect of leaving up to 15 percent of posts vacant over the next two years.

There are already too few engineers to meet exploration and production project demand and this is perhaps reflected in the way that last year (2007) BP postponed several deepwater developments in the Gulf of Mexico, including Tubular Bells, Dorado and Puma. The company partly blamed “resource constraints” for this delay.

Expert forecasts predict that global output from deepwater projects is due to rise from four million to 11 million barrels of oil per day by 2017. But Pritesh Patel warns that these figures as based on the industry avoiding major delays – and points out that the shortage of engineers has been building up over the past few decades.

The Middle East and Libya accounts for 20 percent of global projects adding productive capacity up to 2011, according to CERA. It is also the region requiring the most manpower during this period, with 35 percent of global projected total. Experts point to a critical bottleneck being the shortage of skilled staff, with an industry workforce dominated by people nearing retirement and inexperienced graduates. Libya, in particular, could suffer more than most through an expected shortage of engineers and other oil personnel, according to CERA.

Conventional and nuclear
The sector’s problems are compounded by the fact that competition for the oil and gas industry’s talent is expected to rise in the next few years as both conventional and nuclear power plants are built. Some companies have responded by opening new training centres in south-east Asia, but their trainees will not gain the skills to manage, much less design, major projects for several years.

Large oil and gas producers have the advantage over smaller rivals through their ability to offer longer contracts and better rates of pay. They are also increasingly aware of the need to add a raft of incentives, so staff stay in their employ and qualified newcomers are drawn in.

At Devon, the largest independent oil and gas producer in America, company president John Richels personally sends birthday cards to each and every one of his 3,478 US-based workers. Devon also hold regular office social gatherings, such as picnics, and host a lavish Christmas party for workers and their partners. Part of the company’s enlightened campaign has involved the appointment of a senior level executive, senior vice-president of human resources Frank Rudolph, to tackle the retirement crunch head-on.

“A lot of little things make the difference,” says Mr Rudolph. These include includes an ongoing kid glove treatment of prospective new recruits. Senior executives escort them on a field trip to a gas field in Texas, and when the students return to university they are kept in touch with the company thanks to emails and phone calls from Devon workers and even care packages of food and drink during final examinations.

The need for this constant PR campaign is apparent when it is considered that about half of Devon’s 5,000 employees will reach retirement age in the next decade. Elsewhere, the picture is equally challenging. CERA predicts that more than a half of today’s engineers, whose average age is 51, will retire by 2015, an erosion rate of six percent per annum.

An influx of new entrants will offset this by five percent by 2010 – but there will be a knowledge gap, says Pritesh Patel. A survey of the industry’s human resource leaders revealed the personnel crisis was a “top five business challenge” for financial growth, according to Dina Pyron, an Ernst & Young partner and HR specialist.

Lost benefits
In the face of this problem, Chevron, the second largest oil company in America, is attempting to retain staff by calculating their retirement benefits every year, so they are constantly aware of the benefits they stand to lose if they switch to another company.

Chevron are also very conscious of the needs of high-performing workers and those nearing retirement age. “We try to scratch the itch,” Jim Schultz, the company’s human resources manager, recently told the Financial Times. “It really is about knowledge retention.” This means offering key employees flexible hours, more pay, phased retirement and the opportunity to work from home.

A typical example is 66-year-old geologist Susan Longacre, who retired from Chevron six years ago but still works up to eight weeks a year for her old bosses. The reason is that the company has only about 15 other geologists with Susan’s experience of reading samples drawn from deep underground to predict potential volumes of hydrocarbon resources. “It’s a process that takes time,” says Ms Longacre. “You learn it, elbow to elbow, over the core sample.”

Royal Dutch Shell is one oil company that has been aware of recruiting issues for some time. For the last decade, bosses have operated a business challenge reminiscent of Sir Alan’s Sugar’s TV show, The Apprentice, allowing 50 go-getting university students to spend a week working for Shell on a fictitious desert island. They are judged on everything from refining and exploration to finance and marketing, as company chiefs pose business challenges that could crop up during a five-year business strategy.

This year, Shell have doubled their recruiting efforts by holding two of these business challenges – and hiring up to half of all the contestants. Despite efforts such as these, Dina Pyron says there may still be a recruiting void in the near future. “This is going to become a critical issue,” she adds. “Companies are going to have to come out with something more creative. This is not an industry that moves at a rapid, innovative pace. It’s an open door for the company that says, ‘We need to do something more innovative to distinguish ourselves.’”

Some companies have already taken the hint. In Venezuela, the national oil company Citgo offers staff a range of unusual perks and incentives. They include an inter-office baseball tournament which involves jetting employees in style from Houston to Caracas to play.

At Texas-based Stress Engineering, the president, Joe Fowler, has made the company employee-owned – and held staff turnover down to two percent.

At Arthur D. Little, the world’s first management consultancy (founded in 1886), bosses are not resting on their laurels. Company director Priscilla McLeroy says the global consultancy is filling jobs once reserved for professionals trained in oil and gas by signing up PhDs from other sectors.

Attracting talent
They recently recruited a postgraduate in microbiology to help on an enhanced oil recovery programme that would normally be undertaken by a reservoir engineer. Ms McLeroy believes that one way to attract talent could lie in characterising projects as “energy”, which conjures up sexy images of sustainable business, instead of ‘oil and gas,’ which is usually associated with visions of undesirable hydrocarbons.

“Demand for all sorts of energy continues to rise,” says Bruce Williamson, chief executive of Dynegy, a leading Texas-based power company once known as “The Natural Gas Clearinghouse” which has two new plants under construction. A boom in power plants is expected in the wake of new laws governing carbon output and will almost certainly run parallel to the building of new nuclear plants.

Last September (2007), American power generator NRG Energy applied for official permission to build a new nuclear plant in the United States – the first in almost 30 years. The Bush administration now expects this move to spark up to 30 similar applications from other power corporations that are encouraged by the gradual acceptance of nuclear energy as the popular choice through its low carbon footprint and less detrimental effect on global warming.

And it seems almost inevitable that the demands of these expanding companies will only add further to the staff recruiting and retention problems of the oil and gas industry.

Since it first opened its doors in 2004 Baar, Switzerland based Manas Petroleum has assembled a well-diversified portfolio of high impact exploration plays spanning two continents and five countries. It includes agreements on and varying interests in over five million acres in Central Asia and Eastern Europe. Only a week ago Manas added to its stable of high impact projects when it was awarded an exploration license in the Magellan basin in Southern Chile – an area that is rapidly becoming one of South America’s oil and gas exploration hot-spots. The company has recruited Mr. Ricardo Ponce for that project. Mr. Ponce used to be the General Manager of world wide exploration for Chilean state owned Sipetrol. That was when Sipetrol wisely farmed into Apache’s now spectacularly successful El Diyur, Egypt gas play. This time Apache is not a partner but a neighbor in the Magellan, a region the company says reminds them (in their Q1 confernece call) of Egypt’s early days.

While Chile is Manas Petroleum’s latest project, the company’s first project was its Kyrgyz Republic Fergana basin oil exploration play. It was a natural beginning for the company as Manas CEO Dr. Alexander Becker received his PhD in structural geology at Kyrgyz Republic’s Frunze Academy of Science (Bishkek) after which he quickly set about discovering two oil fields and was subsequently named by the Soviets, the area’s top mapping geologist. After a stint as an award winning researcher at Israel’s Ben Gurion University he got back to the business of finding oil. Manas Petroleum is the result. It is clear that Dr. Becker’s knowledge of the region’s bureaucracy, politics and geology has been more than a little help in assembling the now world-class Kyrgyz project. In 2006 UK based engineers Scott Pickford estimated that part of Manas Petroleum’s Kyrgyz Fergana holdings had a P50 an in place resource of 1.2 billion barrels of light oil – an estimate the company is confident will be significantly upgraded.

Overall strategy
Those licenses have since been farmed out to Australian major Santos leaving Manas with a 25 percent interest, 20 percent of which is carried until production. “Kyrgyz is a good example of our overall strategy” says Manas Director of Business Development Neil Maedel as he points out that the company is working to close a similar deal for the company’s neighboring Tajik license and that other large projects with accompanying farm-outs “are certainly part of the strategy”. That the company’s Central Asian portfolio looks exceptional is clear. But what is generating the most excitement, as Dr. Becker pointed out in a recent interview, is Manas Petroleum’s oil and gas Production Sharing Contracts which cover over 3,000 square kilometers in Albania.

Albania has been known for its oil for a very long time. Almost 2000 years ago the Romans mined bitumen, an oil product, in Southwestern Albania. Albania’s first oil well was drilled in 1918. But it was not until the late 1920s when intensive drilling by companies including Standard Oil and the Anglo Persian Oil Company (now British Petroleum) led to the discovery and development of shallow fields near known tar sands and bitumen occurrences. Albania’s Patos Marinza is among them. It was discovered in 1932 and still has approximately 2 billion barrels of oil in place, making it Europe’s largest onshore oil field.

In the 1960s the use of seismic with the help of Chinese partners led to the discovery of deeper fields that instead of heavy oxidized high sulfur crude contained light crude oil. But the ultra-Stalinist regime of Enver Hohxa was anything but good for the country’s development – the oil and gas sector included. And as even the Soviets grew somewhat moderate, an increasingly paranoid Hohxa government spent most of its energy preparing for an invasion that never came. By the 1980s the regime had built more than 700,000 concrete bunkers for its 3.5 million people.

Hohxa died in 1985 and as the Soviet Union was collapsing in the late 1980s so did the dysfunctional Hohxa government. In 1990 after more than a half century of isolation, the first Albanian offshore licensing round was opened. It was followed in 1992 by the country’s first onshore round which was won by a French company called Coparex, a Croatian company called INA Naftaplin (reputed to have supplied half of Croatia’s oil over the past 50 years) and Shell.

Analyse this
Shell and Coparex subsequently spent a combined $25 million to acquire, analyze and reprocess approximately 4,000 km of seismic. In doing so they discovered a deep under-thrust structure which by their calculations had the potential to hold a combined 820 million barrels of recoverable light oil.

Shell and Coparex’s combined calculations showed a potential for 820 million barrels of recoverable light oil. The two companies’ seismic imaging revealed that the same thrust sheet which holds all of Albania’s oil reserves plunged to a depth of around 4 kilometers to form a giant sub-thrusted anticline under their licenses. Gustavson Associates, a global mining and petroleum engineering firm summarized what subsequently happened by saying:

“Shell and Coparex suspended all exploration activity and abandoned the blocks in reaction to extreme unrest in Albania and conflict in neighboring Kosovo, allowing Manas to later acquire these superbly defined, giant, virtually drill ready prospects.”

Since then much has changed for the better. Albanian diaspora, which work mostly in the EU and the US, remit over a billion dollars annually back to the country’s economy, while the EU also works to rebuild Albania, all with a profoundly positive effect on its small population. The Southeast European Times recently said “Albania has become a construction site” while last year the Economist magazine published an article entitled “Good Times at last” which praised the country’s performance. The IMF said in its latest quarterly review that Albania had met all targets set by the institution, while ratings agency Moody’s gave the country a B1 grade – its first ever – putting it at the same level as Jamaica and the Ukraine. Albania is expected to join NATO next year, although EU membership still looks a ways off.

Negotiations
In 2005, Occidental Petroleum made a light oil discovery in Albania, approximately 50 kilometers south of the Manas blocks. This occurred just as Manas was initiating its efforts to negotiate Production Sharing Contracts with the Albanian government.

The discovery dramatically reduced the exploration risks associated with the Tirana sub thrust anticline that was discovered by Shell and Coparex because it further confirmed that it was the oil-saturated Ionian thrust sheet. Gustavson describes the discovery as having “substantially reduced exploration risks” as it “greatly increases the probability that the giant anticline outlined by Shell and Coparex seismic is in fact the oil saturated Ionian formation”. In its conclusion in a subsequent discussion on the risks and probability of success for all of the Manas Albanian prospects Gustavson says: “The probability of success for a wildcat well in a structurally complex area such as this is relatively high due to the fact that it is in a structurally favorable area, there exists a proven hydrocarbon source and analogous production exists only 20 to 30 kilometers away”.

The Albanian project is the brainchild of Manas Chairman Heinz Juergen Scholz. Mr Scholz is a Physicist, Engineer and automation expert who built hi-tech factories and telecommunication networks in the Former Soviet Union. He advised Soviet Ministries regarding the sale of Russia’s East German telecommunication network following the Soviet Union’s collapse and has collaborated his research with scientific institutes in the Russian Federation. Mr Scholz knows his way around the Former Soviet Union and its satellite countries and it is Mr Scholz that played a major role in negotiating the company’s Albanian PSC’s. And notably, as success appeared increasingly certain, he also began recruiting the region’s top geological talent.

They include Dr. Agim Mesonjesi who is a PhD petroleum geologist and was part of Occidental’s original Albanian exploration team. Dr. Vilson Bare has also joined Manas – he is an expert geophysicist who received his Doctorate from the Tirana University (for his thesis on the “Study of diffraction in seismic section and its uses in geological interpretation). Professor Selam Meço (paleontology, University of Tirana) is also assisting in the project. Another exceptional player to be involved is UK based reservoir engineer Chris Pitman. Mr Pitman is also the Managing Director of Energy Advisors Limited and a former advisor to BNP Paribas (Paris) and the Abu Dhabi Investment Company.

Expert in the field
The Albanian team played a vital role together with Ukrainian geologist Yaroslav Bandurak (Manas Petroleum’s head geologist) to merge and refine the Shell, Coparex and state oil company Albpetrol previous work. Their data sets were combined for the first time and together with the formidable geological talents brought to bear by the group, resulted in a huge improvement on what Gustavson has already referred to as (Shell & Coparex’s) “superbly defined virtually drill ready exploration targets”.

The Manas team results defined and discovered a total of eight giant prospects which according to Gustavson calculations have the (P10) capacity to hold up to 5 billion barrels of light oil and 5 trillion cubic feet of natural gas if the prospects are oil filled.

If they contain oil with a gas cap the amount of recoverable oil drops to a still breath-taking 2.4 billion barrels of oil with 26 trillion cubic feet (Tcf) of gas. If mainly gas, the P10 amount recoverable is 46 Tcf an amount that would make it Europe’s largest field outside of Russia. These amounts are the headline best case volumes. Gustavson puts the most likely volume (P50) if principally oil at 2.98 billion barrels with 3 Tcf of gas.

Estimations
If oil with a gas cap the amounts are 1.4 billion Bbls of oil and 15 Tcf of gas and if just gas the P50 is 28 Tcf. The lowest case estimate for the prospects if oil filled, oil and gas or just gas is a respective 1.636 billion barrels, 738 million barrels with 8Tcf of gas and 16 Tcf of gas. Critically any of the above would make Manas a major oil and gas company.

No matter how good the Albanian project might be, however, Dr. Becker is quick to emphasize, that there are unknowns and with exploration there is always potential for disappointment. We know the prospects’ reservoir capacity is very large and that there is oil in the system. “But we will never really know for sure if some unexpected geological event has intervened”. This we will not know until the prospects are drilled”.

We can reduce the impact of these risks. The only way around this is to diversify our geological (and political risks). “We already have very high quality high impact plays in five countries”, Dr. Becker reminds us. “And in the next six months our goal is to add several more to what think is already an all-star list.”

Staggering figures
Currently, independent engineering reports give the company a P50 oil resources of just over 4 billion barrels. “That does not include Tajikistan or any other new ventures which have yet to be independently assessed – giving substantial room for growth.” says Manas Director Neil Maedel. “To see the direction we hope our strategy will take us” he advises, “divide the number of shares Manas has outstanding into the independently engineered resources (which to be conservative we will use 3 billion barrels) which we already have. The number is around 26 barrels per share. Divide it into our share price and you will get around $0.16 per barrel. In comparison North Sea proven reserves sell for about $20 per barrel. Somewhere in between is the exploration and development potential. Best yet is that we are getting other companies to take on most of the risks and pay the bills. We may end up with less of a project but we also get to play safe and smart by spreading our risks among many great high potential projects. And that is how we plan to build a large oil exploration company”.

Rocksource, a Norway-based oil exploration and production company, has developed analytical tools for analyses of electromagnetic (EM) data that have been proved to triple or even quadruple the likelihood of identifying hydrocarbon deposits.

The EM technology can dramatically reduce the cost of exploration by revealing the presence of oil-bearing structures in even deep and difficult waters where exploration companies are increasingly forced to search for the next high-producing well.

“Rocksource’s tools can increase the chance of success in establishing oil-bearing from 20 percent to 60 percent or more,” explains chief executive Trygve Pedersen. “Hydrocarbons are becoming harder to find and the costs are rising significantly. Our technology means you can improve exploration results and, over time, the efficiency of capital. Basically, it means you can drill wells in a smarter way.”

When correctly interpreted, the firm’s EM technology dramatically reduces the number of dry wells, as a result optimising rig capacity and slashing finding cost per barrel.

“It’s knowledge that oil companies can use,” adds Pedersen, a veteran of the industry who worked for Statoil, BP and Petoro before joining Rocksource. In just four years since the company was established, it has achieved impressive performance on the basis of its technology  based approach.

Comparative advantage
Analysts give Rocksource the thumbs-up for its performance so far as well as for its potential. “The EM technology is proven with fast-growing acceptance as a new important exploration tool,” noted DnBNOR markets last year, rating the company as a buy. “The EM competence provides Rocksource with a comparative advantage.”

Glitnir also rates the company as a buy. “Current valuation does not incorporate the potentially huge upside potential in the company’s technology and future exploration success,” it pointed out late last year.

Glitnir also singled out Rocksource for adding “green” value to pre-existing EM technologies. “The company differentiates itself from other E&P players by utilising its own EM interpretation technology to decrease geological risk,” it noted.

Based in Bergen with offices in Oslo, Stavanger and Houston, Rocksource’s management is composed of veterans of the exploration industry. As well as Pedersen, it includes Jonny Hesthammer, vice president technology and professor of seismic interpretation, who has a PhD in structural geology and 11 years experience from Statoil. Similarly, John Howell, vice president of production and a professor in analogue reservoir modelling, has collaborated with most of the major oil companies. Gregor Maxwell, vice president exploration, holds a PhD in reservoir geology and worked for nine years with Texaco and Chevron.

“We have been able to attract the best people in the industry,” says Mr. Pedersen. Of the 40-plus employees drawn from all over the world, no less than 26 are geologists and geophysicists.

Rocksource’s technology has already attracted some blue-chip shareholders in the form of Morgan Stanley (7.75 percent), DNO Invest AS (9.09 percent), Dexia Banque Internationale (5.28 percent) and JP Morgan Chase (1.82 percent). The University of Bergen, where the EM technology originated, holds a 2.5 percent interest.

CSEM a valuable extra tool
The company was established in 2004 to develop the raw, analytical technology it acquired from the university to a point where it has become a tool on which major commercial decisions can be based. According to sources, Rocksource’s advantage is not in gathering EM data, which is now widely used in the exploration industry and is assembled under contract by a number of outside parties such as emgs, Ohm and AGO.

Instead the company’s rapid growth is based on its ability to provide much more precise analysis of EM-gathered data than was possible before, thus potentially saving considerable amounts of drilling capital, and improving success rates.

The company’s core technology is related to controlled source electromagnetic sounding (CSEM), a highly specific methodology that makes possible the identification of resistivity contrasts –crucial in hunting for hydrocarbons – in the subsurface. In simple terms hydrocarbons are resistive, meaning they will bounce back electromagnetic energy to EM sensors placed on the seabed. But if the subsurface rocks are filled only with water, the energy will pass straight through.

Rocksource’s proprietary technology also addresses a problem that has long dogged the exploration industry – the frequency of misleading conclusions from apparently correct interpretations of the raw data. For instance, “false-positive” findings result from data that identifies resistivity as indicating the presence of hydrocarbons when it is something else. And “false-negative” findings may indicate the absence of hydrocarbons in a reservoir where they are in fact present.

Used properly, CSEM data is complementary to seismic data. It integrates it and other information into the entire analytical process. For example, under normal conditions seismic energy, which reacts to variations in rock density and velocity, may suggest the presence of hydrocarbons. But the evidence is not sufficiently concrete to justify expensive decisions. In contrast EM energy provides data that points much more firmly to hydrocarbon content.

Rocksource’s proprietary technology has proved especially valuable in complex, noise-filled settings that require advanced interpretive skills. This has been particularly apparent where other resistive bodies occur near the hydrocarbon reservoir, playing havoc standard interpretative techniques.

“This is why CSEM is another very useful tool in the tool box”, explains Pedersen.

Technology proves its effectiveness
The breakthrough for Rocksource’s tool came in its analysis of the legendary Luva gas discovery on Norway’s continental shelf where BP drilled a well in 1997. Existing EM technology was unable to confirm the presence of gas, although it was known to be there. That led to a collapse in credibility for the electromagnetic detection techniques available at the time. However Rocksource was able to identify the reserves by applying its proprietary analytical tools. “The Luva case was very significant for us,” says Pedersen.

Last year, the first when it explored on its own account, Rocksource tested 39 prospects on the Norwegian continental shelf. It now believes it has identified several prospects that contain promising levels of hydrocarbons. “We know which prospects are highly likely to contain hydrocarbons and which are not,” says Pedersen.

On the basis of its analysis, Rocksource has nominated blocks for the 20th round. The company is further expecting to put down its first EM-based well next year.

The firm’s confidence in its geotechnical skills has been encouraged by the performance of its on-shore fields in Texas — Drews Landing Field and New Ace Field. It drilled seven wells in 2007 on the basis of its proprietary reservoir management technology. All were put into production and are producing well ahead of target. An eighth well was drilled in December and should enter production in January.

“We turned an unprofitable business into a highly profitable one,” says Mr. Pedersen. “It comes down to the ability to use the right tools at the right time.”

Conservative financing
Although Rocksource continues to invest heavily in exploration and development, analysts give it good marks for a healthy financial position. In the final quarter of 2007, for example, revenues increased to 15.4m Norwegian krone [US$2.9m], nearly five times up on the comparable period in 2006. The company retains working capital of around 228m krone [chk], of which 148m krone is in cash. It also has access to extensive credit lines.

Looking ahead, the management team is excited by the farm-ins – the parlaying of its CSEM toolkit into a strategic move into partnerships with bigger operators. “We plan to use our technical edge to develop relations with large companies with much more extensive portfolios,” explains Mr. Pedersen. “Over 2007 we analysed the most suitable areas around the world for our technology and talked with the significant players operating there. So far we have had considerable success in negotiations. For us, this is a very exciting part of the Rocksource story.”

It was anyone’s guess. Tensions in Nigeria, Benazir Bhutto’s assassination or a report that claimed the Organization of the Petroleum Exporting Countries (OPEC) might fail to meet its share of global oil demand by 2024. Just three of the many explanations offered up when oil peaked at $100 per barrel in January. In truth, no one knew for sure.

OPEC, the group of nations responsible for about 40 per cent of world oil supply, chose to rebuff claims of an imminent crisis, even though January 2, 2008, represented a low point. Oil costs had tripled since 2004. At the 146th (Extraordinary) Meeting of the OPEC Conference on December 5, 2007, in Abu Dhabi, United Arab Emirates, members did note ‘with concern’ that prices were volatile. The Conference acknowledged geopolitical developments were contributing factors.

But it insisted market tightness was, in major part, the responsibility of market players, ‘exacerbated by non-fundamental factors, including the heavy influx of financial funds into commodities and speculative activity in the markets’.

Having evaluated the market, including the overall demand and supply projections for the year 2008, in particular the first and second quarters, the Conference insisted that market fundamentals had effectively remained unchanged. The market was continuing to be well supplied, the members agreed, and with commercial crude stocks described as at ‘comfortable levels’, the Conference convened. Production has remained constant, yet unchanged, post January 2; as has the OPEC position.

Supply and demand
Heavy price falls followed in January, but traders warn of further runs at $100 in 2008. Some are predicting $200 by 2010. Despite OPEC’s optimism, the long term concern remains the same – the real issue is supply and demand.

Although shorter term fears in the market during the first part of 2008 mostly related to instability in Iran and Nigeria, by the end of January traders were looking to Europe, rather than the Middle East and Africa, where their real focus was on Vienna.

The OPEC Conference had agreed to convene an Extraordinary Meeting in the Austrian capital, on Friday, February 1, 2008, in case ‘necessary measures’ were required to maintain production in balance. Consumer nations called on OPEC for an increase in supply, and The International Energy Agency issued a statement on January 3, 2008, claiming that more oil production was necessary. But it was not a lone solution.

“$100/bbl may be just a symbolic figure but it is a strong reminder that consumers and governments have to implement measures that improve energy efficiency,” warned the agency. Reiterating the need for investment in efficiencies, IEA Oil Analyst David Martin added: “Governments have talked about energy efficiency a lot but not much has happened. “$100 oil is a clear signal that the market is tight. Either we have to get more production or consumers will have to use less.”

Recession and depression?
The IEA’s stark message came just three weeks after energy experts met in London to warn a Parliamentary group that the UK government was failing to recognize how oil and gas depletion could undermine efforts to mitigate climate change. Fears abounded that cheap coal would be used to fuel the country’s furnaces.

Speaking at the All Party Parliamentary Group on Peak Oil, Jeremy Leggett, Executive Chairman of Solar Century, Britain’s largest solar energy company and a government energy adviser, called on the government to enact an urgent contingency study into the prospect of declining world oil reserves. Leggett warned that failure to address oil depletion would lead to ‘a shock to the global economic system that is capable of taking us not just into the next recession, but into a depression in the way that the events of 1929 did’.
Chris Vernon, an oil analyst and commentator for The Oil Drum website, echoed the warning.

Several speakers at the meeting on December 5, 2007, claimed world oil production had reached a plateau, and that terminal decline was likely to set in before 2015. John Hemming MP, Chair of APPGOPO said: “If the government fails to act, the economic, social and environmental consequences are likely to be dire.”

New discoveries
While debates over demand, fuel alternatives/efficiencies and production costs continue, upstream developments within the oil industry have not been insignificant. The world’s second largest discovery in the past 20 years occurred at Brazil’s Tupi field, in November, 2007. Estimated recoverable reserves could reach eight billion barrels.

Galp Energia – owner of a 10 percent stake in Tupi – climbed to a record in Lisbon trading amid reports production may deliver one million barrels of crude a day. Galp’s shares more than doubled to a market value of €15.8bn.

Oslo-based Rocksource announced on January 8, 2008, that production targets for the year had been met from its US subsidiaries, exceeding 2,000 barrels of oil equivalent per day. Two days later, Swiss-based Manas Petroleum stated that a resource evaluation in north-western Albania had assigned 2.987 billion barrels of oil with 3.014 trillion cubic feet of associated gas.

Upstream investment
Despite the successes, oil suppliers in general are struggling to increase production. Investment is increasingly being seen as the panacea for the supply/demand conundrum. While some experts (Ernst & Young 2008 Global Oil & Gas Industry Forecast) predict an even more cautious approach to upstream spending in 2008, others suggest more substantial, untapped oil and gas reserves could be realised.

India – with its unprecedented growth (alongside China’s) fuelling the global oil and gas demand – is among those nations pushing to develop new energy resources. Mr M.S. Srinivasan, India’s Union Secretary for Petroleum and Natural Gas, issued a stark warning while addressing delegates at New Exploration Licensing Policy-VII road show, in Mumbai, India, on January 8.
Crude oil prices could reach $150 a barrel within two or three years, he said, and therefore the Government intended to put more efforts into oil exploration and production.

As Asia’s third largest oil consumer, the country remains fearful that soaring crude prices will curb its record economic growth. Attempts are ongoing to attract major companies such as Exxon Mobil and Chevron to invest their specialist knowledge and expertise to explore the remotest regions.
But the government is not alone in seeking to develop resources. India is competing with countries such as Nigeria to attract global explorers to search in deep waters and formerly inaccessible districts.

Several hundred experts and delegates attended the 7th International Conference & Exposition on Petroleum Geophysics, in Hyderabad, over three days from January 14-16 to discuss new upstream strategies. Supported by Society of Exploration Geophysicists USA and European Association of Geoscientists and Engineers Netherlands, the theme was: Energy Security: Exploration, Exploitation & Economics.

“This was a unique opportunity to present and share the benefits from technical experiences, achievements and advances made by fellow professionals,” said Apurba Saha, President of the Society of Petroleum Geophysicists, India. The Union Secretary for Petroleum and Natural Gas, Mr M.S. Srinivasan, stated at the conference that the Government would decide within a fortnight on a moratorium for oil exploration.

Poor infrastucture
The statement followed a request made by major oil companies to extend deadlines regarding delays in exploration. The problem was a shortage of rigs for exploration. The IEA believes poor infrastructure is an issue affecting energy resources worldwide. The agency is confident large amounts of untapped oil and gas remain available, but it fears access is limited when utilising aging infrastructure in areas of high demand.

Chronic new project delays and cost inflation mean significant delays in consumer delivery. Others are in agreement with the IEA assessment that more investment is required. Latest analysis by the IMF suggests that supply is lagging demand growth because of the increasing technological and economic challenges for oil production.

The IMF predicts a prolonged price surge will have an effect of curtailing demand—especially in the United States, by inducing greater substitution into other energy sources and by increasing incentives to conserve energy.

But tight market conditions are expected to persist and possibly intensify, assuming strong GDP growth continues in the emerging markets of India, China and others.

China’s growing economy is believed to be the most important factor in the oil price rise over the past four years, with India not far behind. Although global figures have been revised for 2008, GDP remains strong, and is likely to intensify pressure on demand whatever happens in America.

Gas to liquids in 2008
The demand issues will increase focus on synthetic fuels this year. Research and Markets, the world’s largest market research resource, has announced the addition of a report: Analyzing Gas to Liquids Market – 2008 1st Edition, to its portfolio. Major international oil companies (IOCs) such as BP, ExxonMobil, Royal Dutch Shell continue to investigate options in the gas to liquid market. South African national oil companies PetroSA remains among the most active in its production. Global LNG demand is now expected to reach more than 500 bcm/year by 2015 and 635 bcm/year in 2020.

The International Energy Agency estimates that European imports of gas from Africa and the Middle East (mainly in the form of LNG) will at least quadruple by 2030. As for long term predictions regarding crude oil? A finite source that will one day run out. Beyond that we are all guessing, even the Middle East.