Desire Petroleum: Why an oil play is not over until the last well is drilled...

(First published on 31 March 2010)

So, Desire Petroleum's first well in the Falklands has failed to find anything more than a smear of oil. This is a disappointment. But it is not the end of the game - by a long shot.

What Desire has said is that the first well, Liz 14/19-1 has "shown that oil may be present in thin intervals but that reservoir quality is poor".

Judging by the tenor of the announcement I would be surprised if Desire does not take the decision sooner or later to abandon the well.

This is a blow, but don't forget that this is only the first effort in programme that will see five wells drilled.

It would be wrong to conclude that just because the first well has failed, so will the others...

There have been numerous examples in the history of this great industry that prove just how random is the discovery process. Take Alaska for example.

The 'wildcat' well that rescued the US economy

For centuries the Eskimos had used the oil that seeps out along the Arctic Coast of Alaska for fuel. But very little exploration occurred on the North Slope of Alaska because the Arctic Ocean is frozen for most of the year, and tankers cannot get into the area.

So even if oil were discovered, the only way to get it to market would be to lay a hugely expensive 800-mile pipeline across the state to the southern port of Valdez.

Only the discovery of a 'super giant' oil field could justify such an investment.

But in the early 1960s, exploration of the North Slope got underway. Seismic surveys were conducted, pinpointing the geological features that could host oil reservoirs. Six exploration wells were drilled into these anticlines. All came up with nothing.

Then, in one final fling, Atlantic Richfield drilled a wildcat well during the winter of 1967-8, when the ground was frozen and could support a drilling rig.

It was a faint hope. Atlantic Richfield put the chances of success at one in twenty. Down went the drill bit, cutting through the frozen ground and the rocks below.

There was no great sense of expectation. In all probability this well would simply add a few more millions to the vast sum written off in failed oil exploration.

Then, against all odds, at a depth of 8,200 feet, the drill struck oil! This turned out to be the massive Prudhoe Bay reservoir, a vital lifeline for the American economy and the making of Atlantic Richfield.

A billion-dollar gamble that didn't pay off

The epilogue to this story reveals just how fortunate they were. Fifteen years later, 11 oil companies clubbed together to repeat the trick. They identified a geological trap in Alaska very similar to Prudhoe Bay.

The reservoir rock was the same Sadlerochit sandstone, and the cap rock was shale. The exploration leases sold for a massive $1.5bn. A gravel island had to be constructed in the Beaufort Sea to support the well. A well, called Mukluk, was drilled at a cost of $120m. It was dry.

Why Prudhoe Bay contained 13 billion barrels of oil and Mukluk nothing may never be understood. But the fact is that luck still plays a huge part in the oil industry.

It would be nice to think that oil resides in nice large, easily identified underground pools and that it can be simply sucked out like coca-cola through a straw.

But gas and oil is derived from organic matter buried and preserved in ancient sedimentary rocks.

First a possible source of this organic matter must be found. But that is not enough, because once transformed into gas and oil by the heat of the earth's core, it starts to move around.

It seeps upwards and sideways through cracks and channels before coming up against a wall of an impenetrable rock.

By mapping underground rock strata seismic surveys have improved the chances of identifying oil reservoirs, but 80 years on from the first use of seismic techniques these are still far from perfect.

Oil exploration is a complex and fascinating subject. It certainly adds to the excitement of your investment when you know just what lengths explorers have to go to in their mission to strike black gold...

And in April's edition of Red Hot Penny Shares, you can find out all you need to know about it. In my regular Masterclass feature, I describe the process of exploring for and producing oil and gas, and I explain some of the terminology commonly used.

But back to the Falklands, and it looks like a case of 'one down, four to go'.

Bear in mind that the geology of the North Falklands basin, where Desire has its acreage, is quite different from that of the South Basin, which is where Falkland Oil & Gas is hunting. That only goes to emphasise the truth that this big gamble is far from over.

For the full details on the Falklands Oil story please click here.