TIPS SHARED FOR INDEPENDENTS LOOKING ABROAD

Jan. 9, 1995
Allen G. Hatley Consulting Ecologist Utopia, Tex. As smaller independent oil exploration companies and individual investors in North America and western Europe search for prospects with larger reserve targets, or when they desire to look at the reactivation of older oil and gas fields, they are increasingly drawn to examine the possibility of exploring overseas.

Allen G. Hatley
Consulting Ecologist
Utopia, Tex.

As smaller independent oil exploration companies and individual investors in North America and western Europe search for prospects with larger reserve targets, or when they desire to look at the reactivation of older oil and gas fields, they are increasingly drawn to examine the possibility of exploring overseas.

At the same time stories of $12 million wildcat wells and deals that require an operator to spend all the money, take all the risk, and get to keep only about 15% of the oil produced will keep many independents exploring only in the Denver basin, Oklahoma, or Alberta.

However, it is a fact that smaller oil companies successfully exploring in many remote regions of the world is nothing new or unusual.

For the last 40 years a number of small independent oil companies have either led the search for hydrocarbons or competed effectively with major oil companies for large and significant discoveries in numerous countries. For example:

  • It was a little known, North Hollywood, Calif., independent, Cabeen Exploration Corp., that took major company farmouts in two Latin American countries in the 1960s and discovered Union Oil Co. of California's first South American oil field in Argentina. In Peru, Cabeen on a farmout from another major oil company made several discoveries and then sold its offshore properties to Belco Petroleum Corp. at a significant profit.

  • It was Roy Huffington, Asamera, IIAPCO, and Petromer Trend, not major oil companies, who were the most aggressive and most successful explorers in much of Indonesia in the late 1960s and early 1970s.

  • It was Hunt Oil Co. which in almost its first venture outside North America opened a new oil province by discovering Yemen's first oil field in 1984 and brought in Exxon Corp. as a partner.

  • It was Triton that followed its success in the Paris basin years later and halfway around the world in Colombia with a good share of a billion barrel oil discovery in the early 1990s; and

  • It is small Alcorn International, which by understanding the reservoir, geology, and business climate continues to make money and produce more oil in the Philippines than anyone else.

While smaller independents and some individual investors have been very successful abroad, no one should be fooled: International exploration is different, and not for everyone.

It is not as simple overseas as drilling a wildcat well in most North American basins; it is not as easy as acquiring leases in South Texas; it is more expensive and more complicated than exploring in most basins at home, and an overseas posting for some geologists can result in a broken family life and divorce. However, careful selection of staff, exploration areas, and the timing of a program can appreciably reduce problems and costs even in places like Indonesia or Argentina.

Nevertheless, just as in the Permian Basin or Louisiana, many smaller oil companies exploring overseas have drilled mostly dry holes and lost their money. This article lists ideas on how smaller companies can explore internationally and yet avoid some traps.

Many of the procedures and methods used by larger companies operating overseas are applicable to any size company, but there are some very specific differences in large and smaller companies' approaches to international exploration.

The differences do not always relate only to the amount of money on size of a company's staff. In fact a smaller staff, particularly fewer layers of management, is often a blessing. Having more money to risk is not always the guiding light in the acquisition of leases, discovery of oil, or making an attractive return on investment.

How, then, does a smaller company participate knowingly in an international exploration or development venture in the late 1990s? Further, how might those working for or consulting for a smaller independent best approach that company's decision to work on an overseas exploration project.

Not unlike exploration in North America, there are two basic approaches to overseas projects-generating one's own play or taking a farmout.

The farmout may appear the only practical way for a smaller company to participate in most international ventures; what do you know, for example, about the Middle Magdalena basin in Columbia. But it's not that simple. There are times when the people bringing you a farmout don't know much more about it than you will after reviewing it. Worse, you may be the 95th company to see the deal after 94 others have turned it down for good reasons. That is not very comforting.

"UNDENIABLE TRUTHS"

Here are some guidelines the author has developed into a number of "undeniable truths" of international exploration. No rule made cannot be bent, but these undeniable truths will assist explorers in the very vital job of knowing what questions to ask and how to start coping with going international.

  1. Identify small company friendly nations.

    These are host countries that commonly have little or no signature bonus, data are free or low cost, small companies are already operating there, few financial guarantees required, contract not overly complicated, fiscal terms attractive, the government is accessible and will talk with small companies, and wells do not cost $10 million to drill.

  2. Do your homework.

    Study the host country's geology, exploration history, legal system, model contract and economics, infrastructure, oil and gas demand, and politics and culture. Ask whether there really is romance in today's exploration play.

  3. Spend time and money to gain more knowledge.

    Build a better database. Seek sound and practical advice. Talk with operators and service companies in the region, but remember that the established operators are your competition. Know the right questions to ask, and visit the area of interest, not just the data room.

  4. Select a target country and geologic play.

    Ask whether you understand the play and operating conditions. Do you need partners? Look for a niche. Will you operate onshore or offshore? If you go there and don't like it, keep quiet and find someplace better. It is unwise to burn bridges because you may want to return.

  5. You need to get started.

    Review and consider exploration costs, terrain, climate and weather windows, joint ventures and study groups, farmout opportunities, selecting partners, and going it alone.

  6. Take a closer look at going it alone.

    Decide how serious you are about going international. To commit for the long term are you prepared to operate or will you use contract operators. Can you assemble a competent staff using consultants.

  7. Top people with small companies operating overseas need to wear several hats.

    Independents require flexibility; there are very few specialists. It's wrong to depend only on past major company experience because yours is not a major company. Search for better ways to accomplish tasks. Remember that even old timers make mistakes.

  8. Understand the deal; understanding contracts and contract analysis.

    How do tenders compare with direct negotiations? What are the work commitments? What is the significance of the type contract you will sign? How sophisticated are the host country people you meet? How do you run the economics on production sharing? What is your ultimate share of the production?

  9. Negotiating the deal.

    Do you understand the deal better than other contenders? A fair deal for all is the best and only deal for all. Lawyers usually are not the best negotiators. Worry more about what you can afford and less about what the host country wants. Don't be in the room by yourself. Know how to deal with the other language, and know when to walk away.

  10. If you get the deal, then what?

    How do you get to Sulawesi, and what do you do then? Learn how to deal with the shock of the first overseas assignment. Undertake planning, planning, and more planning. What do you do when you suddenly find out there are 24 more dry holes on the block than you thought?

KILLER MISTAKES

These are presented as humorous statements but are based on the author's observations. Names and locations are changed to protect the experienced.

Killer mistakes I

  • "We don't need any consultants' advice. I just came back from Baghdad, and they really like me over there."

  • "We really took them. This is the best deal ever made in Afghanistan, and I just couldn't turn it down."

  • "They drilled a well in 1939 but didn't test it because of the war."

Killer mistakes II

  • "Who cares what the geology looks like, this contract is better than the one in Malaysia."

  • "I met this really great guy in Khartoum who is the brother of the president's driver, and he says he can help us get approval of the contract."

  • "Sell part of the Krakatoa prospect? No sir, I want 100% of this deal."

CONCLUSIONS

It is a fact that international projects offer many smaller oil exploration companies larger reserve targets and potentially more significant rewards than the prospects they are pursuing in North America.

Most international projects are not, however, without significant risk. The large majority of that risk is not in the technology to be used, political uncertainty, or lack of opportunity. It is rather a lack of knowing exactly what is and how to go about organizing and successfully participating in a viable international program.

This means that no matter how well you know the domestic oil business, the Denver basin, or the Gulf Coast, you need experienced, professional assistance at every stage in your project when you decide to explore overseas.

Hardly a basin, geologic play, or country is unknown or a complete mystery to the oil and gas industry.

To best avoid a potential money trap, find someone who has been successful in your overseas area of interest and seek that person's advise and expertise in pursuing your own projects. And, then look at the undeniable truths more than once.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.