NEWS U.S. independent operators step up exploration, development abroad

A.D. Koen
Senior Editor-News

Flares signal the discovery of Zafiro field on Block B off Equatorial Guinea by units of Mobil Corp. and United Meridian Corp., Houston. The strike flowed more than 10,500 b/d of oil. Production start-up is due in second half 1996. Photo courtesy of United Meridian.

More U.S. independent producers are using upstream capabilities developed at home to search for bigger prizes in countries around the world.

With chances steadily dwindling of discovering large reserves in the U.S., some independent operators for decades have been willing to take small interests in non-U.S. exploration and development (E&D) projects. Most independents, however, continued working in familiar producing areas in the U.S., leaving foreign risks to big companies with more fiscal strength.

Yet as upstream competition has grown keener in the U.S., many independents have been forced to master new skills to effectively search for oil and gas in new domestic areas. As a result, many independents today are using new technologies to carve out niches among the lowest cost, most effective finders and producers of oil and gas in the world.

At the same time, many countries have begun allowing private companies-foreign and domestic-to acquire equity in energy projects of all types, especially upstream oil and gas E&D. Access to more acreage has been abetted by strong investment programs sponsored by multilateral financing agencies.

With so many countries becoming dependent on a good standing in the world financial community, risks of a host country nationalizing oil and gas assets have declined significantly.

Host countries like the speed with which independents can make decisions and advance projects. Independents in general are faster because they are not burdened with a huge corporate structure required for decisions and need to establish cash flow as soon as possible to help fund operations.

Also, most independents have fewer international prospects in their portfolios, allowing more time to focus on each project, although that characteristic might be changing.

Armed with new tools and skills-and with access to more E&D opportunities and more sources of funds-more independents in the past few years have begun finding international upstream projects attractive. They're also becoming more willing to shoulder greater risks that come with taking larger interests. The most ambitious companies are agreeing to operate selected projects, including some so large and complex they would challenge most major integrated companies.

Independents as a group are proving equal to the tasks, by some indicators matching achievements in the U.S. with work in projects overseas.

Some U.S. independent companies have refocused oil and gas E&D exclusively overseas. Most, however, are trying to balance U.S. and non-U.S. activity.

International efforts

Data compiled by Arthur Andersen & Co. (AAC) show U.S. independents in the past decade have placed increasing emphasis on activity outside North America.

While U.S. independents in the past couple of years have begun reemphasizing domestic activity, they still have maintained strong activity levels in other countries. And results of independents' international operations are improving steadily.

AAC's most recent study of annual reports filed by U.S. public oil and gas companies shows independents-except for 1992-consistently have spent more each year to find and develop oil and gas in the U.S. than outside it.

Since dipping to $4.7 billion in 1992, domestic spending by U.S. independents for oil and gas E&D reached $7.5 billion in 1994, group spending levels not seen in a decade. By comparison, foreign E&D spending by U.S. independents has held steady since 1991 at $4.7-4.9 billion/year.

AAC's independent producer group in 1994 boosted combined domestic production revenue about 12.5%, compared with 1992. Independents in that time increased domestic oil production 10% and domestic gas production 17.6%.

Meantime, despite flat non-U.S. spending during 1992-94, independents reported 4% more production revenue in 1994 from foreign operations, ramping up oil output overseas by 27.9% and foreign gas production 13.7%.

U.S. independents in the past decade have added more foreign than domestic oil reserves and more domestic than foreign gas. In the 1990s, independents' domestic oil and gas reserve increases have outpaced foreign additions.

AAC calculates that during 1990-94 independents added non-U.S. reserves from all sources at an average cost of $5.87/bbl of oil equivalent (BOE). Independents' domestic reserve additions from all sources during the same time averaged $5.32/BOE. Industry-wide, U.S. producers in 1990-94 replaced non-U.S. reserves at an average cost of $4.97/BOE.

AAC prefers to express oil and gas replacement costs as 5 year averages. Yearly averages can vary widely because spending and resulting reserve additions often are not reported in the same year.

What historic numbers cannot reveal are future effects of current E&D programs. On that score, many U.S. independents expect their non-U.S. operations to add significant production and reserves through the end of the century.

Non-U.S. production

Part of the expected production increase stems from the fact that many U.S. independents are just beginning to see results of their non-U.S. E&D programs.

For example, Anadarko Petroleum Corp., Houston, and partners could start production in 1997 from the first of three oil, gas, and condensate fields in the Illizi-Ghadames basin of eastern Algeria.

The Anadarko group has been exploring and delineating those discoveries and two others under a 1989 production sharing agreement (PSA) with state owned Sonatrach.

Operator Anadarko holds a 50% interest in the PSA and Lasmo Oil (Algeria) Ltd. and Maersk Olie Algeriet AS 25% each. Sonatrach may take a 51% interest in developments upon a declaration of commerciality, an event that could occur soon.

After 6 years of work, partners have asked the Algerian energy ministry for provisional exploitation authorization (PEA) for first phase development of Hassi Berkine and South Hassi Berkine fields. Under PEA terms, Anadarko estimates gross production could climb to as much as 40,000 b/d with a total cost of about $210 million.

Initial production is to move to Sonatrach's Haoud El Hamra oil terminal through an existing pipeline.

Partners this year plan to request exploitation licenses (ELs) for Hassi Berkine and South Hassi Berkine fields, pending results of delineation drilling. Full development for both fields is expected to cost about $1.2 billion.

Anadarko expects to have a multirig drilling program in progress in the two fields in second half 1996.

Next year, a 30 in. oil pipeline is to be complete with design capacity of 400,000 b/d. That line also is to handle oil produced on other acreage.

The Anadarko group this year could apply for an EL for East Berkine field. Hassi Berkine, South Hassi Berkine, and East Berkine are on Block 404.

Anadarko this year expects to spend about $176 million on non-U.S. projects, including about $150 million in Algeria.

Host countries

International E&D by U.S. independents can provide significant, sometimes unexpected benefits to host countries. That's what United Meridian Corp. (UMC), Houston, discovered from its work since 1992 off Cote d'Ivoire in West Africa.

UMC Chairman and CEO John B. Brock said the slim chance of finding significant oil reserves in the U.S. was one of the main factors in 1991 that prompted UMC to start an international effort.

The company signed a June 1992 production sharing contract (PSC) with Cote d'Ivoire for offshore Block CI-11 with the idea of developing major company oil discoveries on the acreage. But plans changed as UMC began working the acreage through its UMIC Cote d'Ivoire Corp. (UMIC) unit.

"We saw that several wells had tested gas," Brock said. "But it was only after we had acquired 3D seismic and were able to map the acreage that we developed the opinion that three previous major company wells all had found gas in the same reservoir-even though they were several miles apart."

UMIC drilled its 1 Panthere wildcat amid older wells on Block CI-11 to show it was a common reservoir and held substantial reserves. Once it had demonstrated existence of the gas reserves, UMIC began competing for a contract to supply gas to fuel two power plants onshore. UMIC signed that contract in September 1994.

UMIC and partners began producing oil from Block CI-11 in April 1995. The group began producing gas from the tract last November, about 13 months after signing the gas supply contract.

With production averaging about 20,000 b/d of oil and 45 MMcfd of gas, the project has backed out fuel oil imports used to generate electricity and helped Cote d'Ivoire achieve energy self-sufficiency.

Brock said UMIC's development off Cote d'Ivoire is typical of many international projects undertaken by U.S. independents because it has been developed from a former major oil company prospect.

In addition, it is another sign that many independent companies are the technological equals of major integrated companies, "and maybe even a little more innovative in using some technologies that can make a project economical," he said.

Among the ways UMIC held down costs off Cote d'Ivoire was the use of guyed production towers in applications where most major companies probably would have installed conventional piled platforms. The company also cut costs by buying a jack up drilling rig in the Gulf of Mexico and converting it to a production platform at Pascagoula, Miss., then moving it to Cote d'Ivoire.

Falcon drilling rig tests 1 Suriya, one of two gas discoveries and a confirmation well drilled by Carigali-Triton Operating Co. off Thailand in 1995. Carigali-Triton is owned by a unit of Triton Energy Corp., Dallas, in partnership with Malaysia's Petronas Carigali (JDA) Sdn. Bhd. Photo courtesy of Triton Energy.

Drilling continues on Block CI-11, where partners have completed eight successful wells in a row. UMIC recently completed a 3D seismic survey on Block CI-11 and adjoining Block CI-12 based on leads generated by a 2D survey completed 1 year ago. The group could drill as many as four more wildcats this year off Cote d'Ivoire.

In addition, officials are developing plans for a third power generating plant that could boost the UMIC group's marketed gas by early 1997 to as much as 100-125 MMcfd of gas.

UMIC also is acquiring 2D and 3D seismic data on Blocks CI-01 and CI-02, also off Cote d'Ivoire. Pending agreements with partners, UMIC could drill wildcats on those tracts in 1996.

Worldwide, UMC owns interests in nine international tracts covering about 6 million acres, of which it operates eight. It also has applications pending for acreage in Bangladesh and another tract off Cote d'Ivoire.

Brock said UMC in 1996 will spend $50-60 million on international projects out of a total budget of $125-150 million.

Golden age of exploration

Triton Energy Corp., Dallas, for nearly three decades has been involved in international E&D. The company within that time has participated with small interests in more than a half dozen major oil and/or gas discoveries in Europe and Australia.

Combined reserves discovered by the international E&D efforts amounted to more than 3.5 billion bbl of oil and more than 12 tcf of gas reserves. Triton's most recent international discovery is Colombia's Cusiana-Cupiagua megacomplex, where reserves are estimated at 2-3 billion bbl of oil and more than 4 tcf of gas.

Already heavily exposed internationally and convinced by its success in Colombia that many foreign countries could harbor undiscovered giant oil and gas fields, Triton about 4 years ago concluded a number of factors were converging that likely would lead to a golden age of international exploration.

Among the main factors supporting that conclusion:

World oil prices had been reasonably steady, so capital was readily available for good international E&D prospects.
The opening of the Soviet Union, as well as countries in South America, Asia, and Africa, indicated that international companies would have access to more prospective acreage than ever before, and it was likely that more countries would follow suit.
World oil demand was rising and appeared likely to continue increasing beyond 2000.

Tom Finck, Triton chairman, president, and chief executive officer, believed U.S. independents especially were well positioned to take advantage of emerging international opportunities.

First, U.S. independents were driv- ing down costs in the U.S. simply to survive. Management had become more efficient, and the group's cost structure was low.

What's more, Finck said, U.S. independents were better able to apply new technology quickly and effectively. Because of that, they could create significant economic value in foreign projects or other situations in which engineering or technical requirements were high.

Together, the low cost structures and improving technical competence meant independents more and more were able to extend the productive lives of non-U.S. properties acquired from major companies.

"We felt Triton with its background, expertise, and worldwide reputation could benefit more and faster than most independent companies," Finck said.

Today, all of Triton's capital spending is on projects overseas, and the company recently has been retaining larger interests in its international deals. In the U.S., Triton owns only royalty interests in oil and gas.

International focus

Although rare, other U.S. independents are maintaining purely international E&D activity.

Garnet Resources Corp., Houston, was formed in the late 1980s as an international exploration company. By the early 1990s, the company held oil and gas interests in seven countries and was able to farm out interests in all but one.

Garnet Pres. Doug Fry said his company's strategy involved taking acreage in non-U.S. countries, spending a small amount of money to organize the prospect, then farming out interests if it believed the project merited further work. Many of the prospects Garnet farmed out were small by international standards but appeared huge from the perspective of U.S. companies that worked 100% in the U.S.

However, during the 1990s, more countries began opening their doors to foreign operators and more companies became involved in international operations, generating more international prospects.

"In a short time, it became harder for an independent to farm out," Fry said.

When Garnet began production in Colombia, directors were anxious for the company to begin making a return on its discoveries there and wanted Garnet to limit exploration spending to its cash flow. Operating from an exploration base in several countries is difficult, especially on a limited budget.

So about mid-1995, Garnet decided to refocus on core areas of international operations.

One core country chosen was Colombia because Garnet through its Argosy Energy International unit has been successful in Colombia and had committed a lot of resources there. Garnet also retained acreage in Papua-New Guinea, where it owns a small interest in Petroleum Prospecting License 181 operated by a unit of Occidental.

In addition, Garnet changed from a pure exploration company to an E&D company and decreased costs to align its budget with its income.

"The bottom line is, we decided to change our focus from everywhere-the world-to Colombia and Papua-New Guinea, where we had data, expertise, and operations," Fry said.

Focus on China

XCL Ltd., Lafayette, La., is another company halting U.S. E&D in favor of international work. XCL is selling its U.S. properties and by mid-1996 expects to focus fully on oil and gas E&D in China.

The company in February 1993 signed a PSC with China National Oil & Gas Exploration & Development Co. (Cnodc) covering the 197 sq km Zhao Dong tract in shallow water of Bohai Bay, abutting China's onshore Dagang field (OGJ, Mar. 1, 1993, p. 28).

Operator XCL and the Apache China Corp. unit of Apache Corp., Houston, each own a 50% interest in the Zhao Dong PSC. Cnodc can take as much as a 51% interest in the project, once commerciality is declared.

Since starting Zhao Dong activity in April 1994 with spudding of the C-1 wildcat, XCL has drilled four successful wells in five attempts. XCL and Apache have notified Cnodc they plan to extend the PSC exploration phase until Apr. 30, 1998.

In addition, the combine expects by the end of this month to file a development plan with China National Petroleum Corp. for Zhao Dong C field that would enable production to begin in early 1997. Zhao Dong partners plan to drill two wildcats on the acreage this summer and could attempt a third.

The 1996 budget includes another confirmation well in either Zhao Dong D or F fields.

XCL is so enthusiastic about progress on Zhao Dong, Chairman and CEO Marsden W. Miller said it is talking about other exploration opportunities with Chinese officials.

SOCO's experience

However, not all U.S. independents attracted to international operations have been willing to pin all their hopes on opportunities abroad.

Snyder Oil Corp. (SOCO), Fort Worth, about 3 years ago decided to begin building a small international portfolio with the idea of increasing non-U.S. activity over time.

SOCO officials believed the timing was right because-as part of the global evolution toward free market economics-host countries around the world were becoming more competitive with one another and, therefore, offering better E&D terms. The cost cutting trend in the U.S. had been slow to go international.

By tailoring low cost operating methods developed in the U.S. to fit foreign opportunities, SOCO officials "felt we could operate at a much lower cost than companies operating internationally had been operating, and this would be a big help on foreign exploration, development, or exploitation projects," SOCO Chairman John Snyder said.

Essentially, the company believed it could provide seed money for an independent consultant to organize projects in the Eastern Hemisphere until they were positioned for larger capital infusions. At that point, the consultant would be responsible for finding financing to carry the projects forward.

The arrangement aimed to combine the consultant's regional expertise with SOCO's fiscal strength and credibility as a public company with significant U.S. operations.

Snyder said the decision to begin moving internationally at first was little more than an effort to get one more ball in the air.

"In the oil business, it's good to have several balls in the air because often a prospect doesn't work out and a producer has to turn someplace else," he said.

SOCO moved quickly in 1993 through Soco International Inc. into international operations:

Acquiring Australian exploration and production (E&P) company Command Petroleum Ltd., which held interests in E&P permits and licenses in several countries.
Forming the Permtex joint venture with Russian production association Permneft to develop fields on a 300,000 acre tract in the Volga-Urals basin.
Signing a PSC with Mongolia's state oil company, Mongol Petroleum Co., covering 2.8 million acres in the Tamtsag basin in the northeast part of the country.

SOCO's international strategy includes three main elements: Take local companies as equity partners, use as much indigenous material and as many native employees as possible to build good relations and hold down costs, and use foreign equity markets to raise money as project advancements call for more funding.

All three strategies are reflected in SOCO's international core areas.

It acquired a 40% interest in Command at a cost that was well covered by Command's cash accounts and proved reserves, in the bargain gaining entry to Australian equity markets. In addition, Command has taken interests in SOCO's Russian and Mongolian projects, bought SOCO's Tunisian project and combined it with its own to trim administrative spending, and achieved an exploratory success in Yemen, where production is to begin this year.

Japanese trading company Itochu, Soco International's biggest partner in the Permtex Russian JV, has helped arrange to export its share of oil.

Soco International and partners in the Tamtsag basin, using Chinese rigs and crews, drilled two wells in 1995 at a cost of $5 million that likely would have cost a major company as much as $10 million apiece.

Also in Mongolia, partners have collected seismic data using a Mongolian crew at a cost of about $500/ line km in a survey for which a major company might have spent $10,000/km.

Considering prices new partners have been willing to pay for shares in Soco International's various projects, Snyder said the combined value of the company's international reserves appears to be approaching $100 million. That would make it the third most valuable part of SOCO, behind two U.S. operations.

Despite the value SOCO apparently has built in its international operations, Snyder estimates the company's international spending accounts for less than 5% of its capital budget.

"We're very gratified that over the past 3 years international activity has come from nowhere to become a pretty significant part of the company," Snyder said.