NEWS U.S. independent operators seek international opportunities, Part 2

International operations of Phoenix Resources Cos. Inc., Oklahoma City, center on Egypt's Western Desert. Here, construction of storage tanks is under way to transfer production into the Sumed crude oil pipeline. Photo by Josef Polleross, courtesy of Phoenix.

• Where U.S. Independents Hold Oil and Gas Reserves [29604 bytes]

Many U.S. independents are taking advantage of opportunities abroad to expand their operations.

Most are building oil and gas production and reserves outside the U.S. by blending steady development in relatively safe areas with exploration plays in frontier regions (OGJ, Mar. 4, p. 31).

For example, Energy Development Corp. (EDC), Houston, pursues a two pronged international exploration and development (E&D) program.

In areas where it feels geologic and political risks warrant, EDC starts small and slowly builds production and reserves by extending operations or taking additional interests. At the same time, the company shoots for big discoveries in places with high potential.

In either case, EDC relies on its international expertise and experience to keep overhead low.

As part of its strategy for keeping international costs in check, EDC since beginning international activity in 1991 has been willing to operate acreage during exploration phases. Except for the U.K., however, the company as yet doesn't operate acreage on which production has begun.

"Part of the reason for that is we don't want to go through the process of setting up a large office somewhere and building overhead unless we absolutely have to," said EDC Pres. and Chief Executive Officer Malcolm Butler.

As the worldwide financial community has become more aware of factors affecting the international oil and gas scene, Butler said, financing has become more certain in well known oil and gas regions. However, it still is difficult to finance E&D opportunities where there isn't an established industry. That poses a set of unique risks for U.S. independents working abroad.

For example, Butler said, drilling an oil or gas discovery in a frontier area outside the U.S. is risky for an independent because of the long times often needed to place the find on stream.

"A company has to have things fairly well defined before anybody's going to give it money to finance development," Butler said. "An independent company might make a discovery and find it has to offload most of it to a major company because it can't afford to appraise the prospect and wait the 5 years needed to get it on stream."

Butler said it is important for independents working internationally to be opportunistic because most lack the financial staying power or large staffs needed to compete head to head with major companies.

"Majors can take a statistical view of worldwide exploration, get into a certain number of basins, bid in all the licensing rounds, and put in some hefty programs," Butler said. "Independents have to be much more selective and have some kind of edge to go into an area.

"If you have the knowledge and can be opportunistic, there still will be a lot of interesting opportunities out there."

Toe holds and elephants

EDC on one hand has built its international portfolio with a strong production acquisition program focused on properties and companies that can provide immediate cash flow and firm toe holds in low risk areas.

On the other hand, EDC is pursuing exploration opportunities in frontier areas outside the U.S.

EDC moved into the international arena by taking a minor nonoperating interest in Argentina's El Tordillo field, a 28,000 acre tract operated by Tecpetrol in the San Jorge basin. Butler said the acquisition was strictly a production purchase and has been a success for the company. EDC in August 1995 owned interests in 347 oil wells in the field.

El Tordillo partners in 1995 collected 3D seismic data over about one third of the field and plan to cover the rest of the unit this year.

EDC, meantime, has built a strong base in the U.K. for international activity. The company in May 1993 acquired Brabent Petroleum Resources plc and in June 1994 bought International Scotland Energy Ltd. (ISE).

Acquiring Brabent gave EDC a low cost office in the U.K., a team with expertise and an oil and gas data base in Northwest Europe, and acreage where production at yearend 1995 amounted to about 3,000 b/d of oil and 15-16 MMcfd of gas net to EDC.

EDC's U.K. production likely will increase significantly in second or third quarter 1997 when Windermere field goes on line in the North Sea.

EDC is hunting elephants in China, where EDC (China) Inc. is operator with 100% interest in a production sharing contract (PSC) covering a 3.6 million acre tract in the Boyang basin.

Partners on the huge tract at the end of February expected to finish drilling a 3,000 m wildcat. EDC knew before spudding the well it was a high risk prospect.

Part of the decision to drill stemmed from EDC's efforts to develop good relations with its Chinese hosts.

Independents in most cases can't compete with major companies when it comes to relationship building. But Butler said EDC's good relations with its Chinese hosts were key in obtaining interests in two Kerr-McGee operated tracts in the Bohai Bay area.

EDC also is trying to establish a presence in gas prone areas of the East China Sea.

Despite the strategic and logistical limitations facing U.S. independents operating overseas, EDC's presence abroad shows success is possible. The company's international production has increased in each of the past 4 years, mostly because of acquisitions.

EDC in 1992 curtailed exploration spending in the U.S. because of low gas prices.

Butler said, "In the past couple of years, increases in our international production have replaced declining domestic production."

Although it varies year to year, EDC spends 20-25% of its capital budget internationally. After only 5 years of international operations, about 19% of the company's reserves are abroad.

Production off India

Similarly, Enron Oil & Gas Co. (EOG), Houston, in the past 2-3 years has spent about 25% of its capital budget on international E&D.

The company likely will maintain that share of international spending this year. But Forrest Hoglund, EOG chairman, president, and CEO, said international investment long term could account for 30-35% of EOG's capital outlays.

EOG is involved in operations in several countries, including some big integrated programs with other Enron units. Its core areas of operation internationally are Trinidad & Tobago, where it operates the Southeast Coast Consortium (SECC) tract, and India, where it is developing oil and gas reserves in three offshore fields.

In Trinidad & Tobago, EOG's most established international location, the company's net sales average about 125 MMcfd of gas and 7,700 b/d of crude oil and condensate. Total crude production on the SECC tract is 21,000-22,000 b/d. Production comes from Kiskadee and Ibis fields in 180-200 ft of water.

Trinidad & Tobago awarded the tract to EOG because the country wanted the reserves brought to production quickly.

"We told them we could get it on line within 1 year, and we were successful doing that," Hoglund said.

EOG is leading another fast track project in the Arabian Sea off Bombay, India, aiming to boost oil production in Panna and Mukta fields and start gas production at Tapti field. About 20 Panna and Mukta wells are producing 12,500-13,000 b/d of oil. Apache stores production in a moored tanker, then transfers the oil into ocean going vessels for transport to shore.

EOG has ordered five platforms for the development, one for gas processing, one for oil processing, and the others for drilling and production. The group also must lay pipelines.

EOG early in February disclosed it had let 18 month drilling contracts, each with an additional 18 month option, to Reading & Bates Corp. for two 300 ft independent leg cantilever jack up rigs. EOG expects the units to be ready to begin drilling about Apr. 1.

EOG plans to put one unit to work drilling wells in about 80 ft of water at Tapti and the other in 180-200 ft of water at Panna. All told, partners expect to drill about 100 wells in the three fields.

The EOG group expects big increases of oil and gas production about mid-1997. In addition, 3D seismic data collected over part of the area indicate more potential than partners first thought.

Santa Fe's success

Santa Fe Energy Resources Inc., Houston, has built a substantial international portfolio since acquiring its first acreage and production outside the U.S. in 1991 with an 18% interest in Argentina's El Tordillo field.

As of early 1996, the company was netting 6,000-7,000 b/d of production from international sources. Production could rise substantially next year.

Santa Fe significantly boosted its international position in its May 1992 acquisition of Adobe Resources Corp. But Santa Fe has achieved notable exploratory success in other countries, especially with core operations in Indonesia and South America. In addition, Santa Fe owns a 25% interest with operator Marathon Petroleum Gabon Ltd. in the Tchatamba oil discovery on Kowe permit area off Gabon.

Santa Fe focuses its Indonesian exploration on two tracts:

• Jabung block, a 2 million acre tract in Central Sumatra, where it operates through a unit with a 33.33% interest.

• Tuban block on Java, where another unit with a 12.5% interest operates jointly with state company Pertamina.

At Jabung, Santa Fe and partners in early February said the 3 North Geragai delineation well flowed a combined 2,800 b/d of oil and 2.4 MMcfd of gas from two zones that earlier had proved productive in the field discovery well.

The group at last report was drilling 4 North Geragai, the field's third delineation well, 1/2 mile northeast of 1 North Geragai wildcat.

The group plans to file a development plan in second quarter 1996 and expects production to begin in early 1997.

Also on Jabung, the Santa Fe group last August said 1 Northeast Betara wildcat flowed 22 MMcfd of gas and 420 b/d of condensate from 84 ft of net pay in three intervals at 4,908-5,164 ft. Carbon dioxide accounted for about 55% of the gas flow.

The Northeast Betara prospect is 24 miles northwest of the Geragai discovery.

Santa Fe and partners at yearend 1995 were completing a development plan for their Tuban block in Java. Commercial sales from Tuban's Mudi field could begin as early as mid-1997.

The group's 5 Mudi delineation well in mid-December 1995 flowed 10,500 b/d of oil from Tuban limestone at 8,365-900 ft. It marked the best of five successful tests of the Mudi prospect.

In Argentina, a unit of Santa Fe and partners last May began producing gas for commercial sales from Sierra Chata field in the Neuquen basin, about 600 miles southwest of Buenos Aires. The field is on the 1.1 million acre Chihuidos tract, where Santa Fe is operator with a 19.9% interest.

A wholly owned Santa Fe unit, Petrolera Santa Fe, is selling about 105 MMcfd of Sierra Chata gas to Argentine gas distribution company Metrogas SA. The Santa Fe group found Sierra Chata field in April 1993.

Also in South America, a group led by another Santa Fe operating unit, Petrolera Santa Fe (Ecuador), in January 1996 signed a pact covering E&D on Block 11 in the North Central Oriente basin. Partners planned to collect and process more seismic data on the acreage in 1995, with exploratory drilling to commence this year.

Santa Fe through its Ecuadorian unit holds a 35% interest in Block 11.

Focus on economics

Apache Corp., Houston, like many other U.S. independents, was lured to international activity by the call of larger targets.

But instead of searching exclusively for big fields, said Floyd Price, vice-president of international exploration and production, Apache concentrates on finding economical projects in core areas and tries to tie development to as many existing facilities as possible.

The company's international strategy is an extension of its U.S. strategy. Rather than trying to "be all things to all plays," Price said, Apache tries to build a critical mass in selected plays so it becomes one of the dominant players in each region.

In its two main international core areas-Australia and Egypt-Apache has interests in production, can conduct a development program on the acreage in hand, and has opportunities to expand acreage and production significantly.

Apache recently began stepping up activity in the Carnavon basin on the Northwest Shelf off Australia. It expects a big increase of production and cash flow from Australia in 1997-98 as a result of production to begin this year.

Apache obtained a stake in Australia by acquiring a U.S. company with an Australian unit, gaining strategic critical mass with the transaction.

Because the company it acquired operated the Varanus Island gas hub, Apache immediately became a player in gas marketing in western Australia.

In addition, Apache obtained interests in about 3 million net acres in the Carnavon basin. With discoveries on the acreage in the past couple of years, Apache this year expects to book Australian reserves that could quadruple the reserve base it originally acquired in the country.

Apache plans to move gas produced from recent discoveries Wonnich and East Spar to Varanus Island for processing.

Apache operates the Varanus Island gas processing plant with a 22.5% interest. Facilities are designed to process about 100 MMcfd. Work is in progress to boost plant capacity to 120 MMcfd.

In addition, Apache is operator with a 20% interest in the East Spar gas processing plant, a 200 MMcfd facility scheduled to begin operating next October.

Apache this year expects to drill 11 wildcats in Australia, including four near the Stag discovery, three in the Wonnich-Varanus area, and one near East Spar. The latter eight wildcats will be in areas with gas pipeline systems.

"If we make another discovery, the benefit to Apache will be incremental because we won't have to install a whole new system of facilities," Price said.

Preliminary development drilling plans at Stag this year include five horizontal wells. The most recent Stag appraisal was a horizontal well that flowed more than 6,000 b/d. Apache also plans appraisal drilling this year in Wonnich.

Apache Corp., Houston, operates the Varanus Island gas processing plant in Australia's Carnavon basin. With design capacity of 100 MMcfd, the plant is handling 60-80 MMcfd of gas and yielding about 1,500 b/d of liquids.

In Egypt, Apache and Global Natural Resources Inc., also of Houston, last January won preliminary approval of state owned Egyptian General Petroleum Corp. (EGPC) for a PSC on the Darag block, a 460,000 acre tract in the Gulf of Suez. If concluded, partners would commit to a 3 year, $13 million exploration program to include three wells and collection of seismic data.

Apache in mid-February acquired a 50% interest in the East Beni Suef concession, a 6.8 million acre tract in Egypt's Western Desert. Apache has the option of becoming operator of the tract if a discovery is made.

Apache also holds interests in XCL's Zhao Dong project off China and is operator of the Bentu block in Central Sumatra and Block CI-27 off Cote d'Ivoire.

Apache earlier acquired a 25% interest in Egypt's 2 million acre Qarun concession, where exploration operator Phoenix Resource Cos. Inc., Oklahoma City, drilled a sizable oil discovery in 1995.

Success in Egypt

Phoenix is one of the rare U.S. independents focusing its international activity entirely in one country. Few U.S. independents with such a narrow international focus have performed as well.

The company has operated exclusively in Egypt since selling all other holdings after a reorganization starting in the late 1980s. Phoenix presently holds interests in 4.4 million acres in Egypt's Western Desert, including a 40% interest in the PSC covering the 320,000 acre Khalda concession and a 50% interest in the PSA on the Qarun concession.

Phoenix CEO George D. Lawrence Jr. said the company has a competitive edge in Egypt because of its familiarity with the country's legal framework and operating parameters.

Khalda has been the company's main Egyptian asset since a predecessor company found the tract's lower Cretaceous reservoirs in 1985.

EGPC operating unit Khalda Petroleum Co. started production at Khalda in 1986 and has maintained a steady drilling program on the tract. Gross production, meantime, has increased to about 32,000 b/d of oil from about 70 wells compared with 21,000-22,000 b/d in 1990. Production costs within the past 6 years have declined to about $1.50/bbl.

Lawrence said partners have drilled 10-15 Khalda development wells in each of the past 5 years. Exploration drilling in 1995 included eight or nine wildcats. Partners plan to drill six more in 1996.

Phoenix's 1996 capital spending in Egypt will amount to about $60 million, up from $22 million in 1995 and $4 million in 1994. Partners expect the large spending increase, coupled with plans to lay the Friendship pipeline to transport Egyptian gas to markets in Israel, to cause a big jump in Khalda production within the next couple of years.

Production is set to increase by yearend 1996 on the Qarun concession, operated by EGPC's Qarun Petroleum Co. Most of the increase will coincide with completion of a 50 km pipeline spur from Qarun to the Dashour pump station on the Sumed crude oil pipeline from the Red Sea to the Mediterranean region. Transportation components include two 350,000 bbl storage tanks at Dashour.

Qarun partners since last year have been trucking 5,000-7,000 b/d of oil to the Sumed line. With the new pipeline in place, production could increase to as much as 40,000 b/d.

Early discovery and production are key aspects of expansion plans at Khalda and Qarun. With production from both fields, partners can pay for the expansions as well as exploration with money from PSC cost recovery provisions.

Lawrence said, "The combination of well control, increased visibility of the subsurface through reprocessed 2D seismic data, and availability of a cost recovery tool have led us to explore more and more. When we decide to drill a wildcat, one of the worst things that can happen is we'll get our money back."

Other programs

Other U.S. independents are achieving promising results with international activity focused in one country.

For example, Pogo Producing Co., Houston, and partners have tested a string of successful offshore wildcats on Block B8/32 in the Gulf of Thailand. The group about mid-1995 began development drilling in Tantawan field after penetrating nine fault blocks on the structure. Plans include accelerated development drilling through late 1996. Production is to begin by fourth quarter 1996 from the first of two 12 well platforms.

Most recently, Pogo late last month said its 1 Pakakrong wildcat flowed a combined 25.5 MMcfd of gas and 738 b/d of oil and condensate on two drillstem tests at 4,428-4,910 ft. Site is on the seismically defined Pakakrong structure in the Tantawan area.

A unit of Pogo operates the 70,000 acre Tantawan area with a 46.3% interest. Partners in November 1995 signed a 30 year agreement with Petroleum Authority of Thailand to supply gas to Thailand from the field.

Pogo estimates its share of Tantawan reserves at 11 million bbl of liquids and 85 bcf of gas.

Pogo's Thai operating unit owns a 31.67% interest in the balance of the 2.6 million acre Block B8/32 operated by a unit of Maersk Olie og Gas AS.

The group on Maersk operated acreage in the past year has drilled four successful exploratory wells into the Benchamas structure. The most recent Benchamas well flowed a combined 25 MMcfd of gas and 5,012 b/d of oil and condensate on three drillstem tests at 8,563-9,087 ft.

Meantime, Nuevo Energy Co., Houston, and partners are reversing the performance of Yombo field, operated by CMS Nomeco off Congo, West Africa, in the Atlantic Ocean.

Since acquiring its only international interest in December 1993, Nuevo and other members of the group have slowed the rate of production decline to 8%/year from about 15%. In that time, Nuevo estimates, its Yombo net oil reserves have increased by 6.7 million bbl, or 40%. The field is producing about 15,000 b/d, and production is expected to reach 18,500 b/d by April.

In the most recent action, Nuevo said in early February the first two wells in a 12 well program were producing a combined 1,893 b/d of oil from Sendji pay.

In addition to encountering 114 ft of net Sendji pay, the B-13 well cut 154 ft of Tchala strata. The B-3 well penetrated 101 ft of Sendji pay and 165 ft of Tchala.

Partners expect to drill a deep test in the field in second quarter 1996 to begin testing seismic structures below producing horizons.

Copyright 1996 Oil & Gas Journal. All Rights Reserved.