INTERNATIONAL OVERCOMMITMENT DRAWS WARNING

After rushing to take advantage of new opportunities offered by governments around the world, the international petroleum industry may be overcommitted.

Cooperation among countries and companies in the next 2 years will be required if "a lot of grief" is to be avoided, says an international petroleum financing consultant.

Christopher P. Noyes, a partner in Edge Technologies Inc., Dallas, to the fall conference of the Association of International Petroleum Negotiators (AIPN) in Dallas early this month that currently "everyone is counting on farming out to everyone else."

To respond adequately to the cash crisis, Noyes said, industry must:

Reduce internal costs.
Reduce project costs.
Lay off project obligations.
Sell noncore assets.
Renegotiate license obligations.
Slow down, scale down projects.
Finance projects.

In the 1990s, management will be a key asset-cash management, asset management, and risk management, Noyes said.

Producing governments are hit by reduced revenue, limiting their ability to develop infrastructure and fund new projects. There also is increased competition among countries for scarce exploration and development dollars, Noyes said.

Countries are changing-or will change-the structure of their petroleum contracts to encourage continuing and new investment.

"Governments are open to renegotiating or extending contract terms to maintain or increase current levels of investment."

Noyes compared the "risked" and "unrisked" rates of return for a number of countries in which exploration and development activity is high.

The unrisked rate of return used in the comparison does not take into account funds exposed up through the drilling of the first well. The funds include bonuses, seismic survey expenses, and initial license expenses. The risked rate of return includes those funds.

CAPITAL LIMITS

In the years ahead, international petroleum companies will face tough choices when allocating capital among opportunities.

Stagnant prices and low margins on refined products have reduced cash flow for U.S. companies, for example.

"So despite the sale of capital assets and sharp reductions in personnel and overhead we have less capital to invest," said T.L. Sandridge, vice-president of international exploration and production, Phillips Petroleum Co.

Sandridge told the AIPN conference, "It takes a lot more than just the promise of sizable oil discoveries to attract scarce capital." By offering a more favorable legal and tax regime, a host country can induce a company to shoulder more geologic risk, he said.

Many companies will focus their exploration and development work on fewer countries, E.R. McHaffie, manager of planning and administration, Amoco Production Co., Houston.

McHaffie told AIPN delegates Amoco is active in 40 countries, but "the number of countries in which we operate will reduce substantially over the next 5 years."

As companies look for projects that have good hydrocarbon potential, along with flexible, negotiable, stable fiscal and contractural terms, there will be "...substantial capital resource flows into some countries and out of others," McHaffie said. Countries with disincentives to investment will suffer.

At higher levels of government take, only large projects with robust cash flows will be pursued, McHaffie said. This is not in the interest of either the contractor or the host government, "and as a primary goal, we seek a fiscal regime that allows projects of varying degrees of profitability and size to earn competitive returns."

He said, "In particular, terms should be structured so that small or marginal field projects are economic."

Common use of the term "contractor" is recognition, McHaffie said, that the days of the concession contract are gone. This does not mean the fiscal elements of tax and royalty usually associated with concessions are redundant. But industry now generally accepts that the host government owns and has the right to control its mineral resources.