ASSESSING EAST EUROPE'S UPSTREAM POTENTIAL

David Fontaine
Consulting Geologist
Houston

What a difference a year makes.

The Cold War is nearly over, though 700,000 Soviet troops are still in Eastern Europe. The postwar era is finished.

Political collapses in Eastern Europe have apparently liberated those countries from the pressures of the Brezhnev doctrine. The long-touted "domino effect" appears to finally be taking place-in reverse.

The roots of change in every major country east of the Iron Curtain are apparently anchored to political regimes brought to the point of economic collapse by corrupt and incompetent leaders who have lost all ideological credibility.

In this regard, today's developments mirror the events precipitating the French Revolution in the 18th century. Economic crisis led to popular discontent and collapse of the monarchy. A new order was born.

But is a similar fate before Eastern Europe? Are those countries destined to be a stable center of peace and prosperity? Will the shouts for free enterprise and democracy translate into lasting business opportunities for their denizens and Western companies, notably the oil industry?

The answers are uncertain. Premature celebrations must be avoided, and investment opportunity weighed against political risk.

EXPLORATION POTENTIAL

Much of the excitement about the exploration potential of Eastern Europe stems from opinions that significant reserves remain to be discovered, that modern technology will point the way.

These views are bolstered by the belief that we can "do it better" than those who have tried before us. We can weigh the merits of this line of thought by looking at the exploration history of these countries.

Official government reserves figures are difficult to obtain. Estimates from various sources are regularly stated in Western petroleum publications.

A compilation of estimates assigned to the various countries is shown (Fig. 1). Exploration in these countries is at a mature level, often dating back to the last century.

Existing reserves are very modest. The most favorable and obvious trends have been developed. The more subtle and difficult targets remain. The general exploration favorability of the region is subjectively rated as fair to good.

INVESTMENT PROSPECTS

Exploration potential must next be viewed within the context of the investment climate of these countries. Geological and investment favorability are compared (Fig. 2).

Some countries with favorable geology have terrible investment rankings. The cause of this lies in the national psyche and their historical views of individual liberty and its ancillary, economic freedom.

In general, the most restrictive countries will tend to remain restrictive in spite of the trend toward greater personal and economic liberty.

There is no assurance that current attitudes in Eastern Europe will either continue or survive the economic and political challenges these emerging democracies must face.

History offers some lessons. Here are four plausible possibilities for Eastern Europe that may affect Western investment.

The better world model.
This is an optimistic outlook that assumes that democracy takes hold under the following terms:
- Low internal conflicts.
- The new democracies do not fight each other.
The prime issue in each country will be economic growth, not military adventures. There will be cooperation on trade, economics, and the environment.
The chaos model.
Here we assume the new democracies cannot get properly organized and establish a market system. Their political environment will be one of ever-changing governments in an endless attempt to establish stability.
Here are their vulnerabilities:
- Ripe for outside intervention.
- Susceptible to internal military coups.
- May create an artificial external threat" on which to blame their problems.
The result is short-term unification. Nearby countries, however, may believe the threat to be real, and a true conflict may then become reality.
A benign example of a chaotic country is Italy, a country that changes governments frequently. Because of its current setting, it is basically harmless.
Return of the cold war.
Instability fosters the following:
- Coups by existing military.
- Popular uprisings against economic failure. Government sends in troops, and re-establishes dictatorship.
The U.S. and Western Europe will be blamed. High tension will result, and the Cold War will return.
One example from history is Russia until 1917. There the Czar was overthrown, democracy established, but the regime was unable to prevail economically. Communists came to power and became a world threat for 70 years,
Another example is post-World War I Germany. A democracy was established, and economic failure followed-enter Hitler.
Classical power politics.
This model assumes a pre-WWI realignment in Eastern Europe.
- Western Europe becomes more unified.
- Eastern Europe forms its own block.
- Russia goes it alone.
- U.S. stays about the same.
- Far East is a power block.

Competition will be keen in order to maintain or acquire superiority. Alliances will shift for short term gain. There are two possible outcomes:

Some friction, but things keep moving along.
Major breakdown and war.

History's example is Europe until 1918.

WHAT WILL HAPPEN

At this point, it is not possible to predict which model is likely to take hold.

Perhaps none will. Yet it is wise to remember that many of these countries have never known freedom anything like that of the West, and they have no recent experience with free markets, entrepreneurship, cyclical change, or the myriad of economic, business, and personal vagaries common to the West. The transition will not be easy.

Given the political realities and wide range of geological possibilities and constraints, Eastern Europe may become one more exploration front for Western companies, though not necessarily a major theater of operations.

Exploration in many of these countries will be an entre for more lucrative downstream ventures.