Last year international exploration couldn't afford a new pair of shoes. This year it went to Rio, toured Australia and splashed around in the waters of West Africa.
What happened?
For one thing, major players didn't lose their shirts after all. Take a tuck in production, loosen a stitch in demand, and product prices found a more comfortable fit. The result left the industry much better-suited for global travel.
Robertson Research International of Wales recently completed its 13th annual International New Ventures Survey. The survey report is based on responses from 94 companies that account for about 70 percent of worldwide upstream spending, the firm said.
In announcing the survey results, Robertson Research identified the following Top Ten areas of international exploration interest in 1999:
- Brazil
- Australia
- Iran, United Kingdom (tie)
- Indonesia
- Libya
- Algeria, Iraq (tie)
- Angola
- Argentina
- Egypt, Gabon (tie)
- Venezuela
Brazil rose from 43rd place in worldwide interest in 1994 to number one this year. The country's first auction of exploration rights, held in June, drew wide industry attention -- but limited participation.
"My reaction is that it's a satisfactory cash value for the bonuses received by the ANP, the national petroleum agency," said Michael G. Snape, Robertson Research marketing manager-North America. "But I think the number of companies participating was a disappointment."
Snape added that a "range of opportunities outside the bid round" may have deflected some interest from the auction. Possibilities include partnerships with Brazil's Petrobras, which captured an interest in five exploration blocks at the sale.
Majors and other large international players dominated in the bidding, with names like Exxon, Texaco and ENI (through an Agip subsidiary) among the winners of exploration rights.
Other companies, he continued, were constrained by limited financial resources.
"Smaller companies are sitting and waiting somewhat for the ANP to show its full hand," he observed.
Statistically Speaking
In addition to Brazil, several Middle East countries jumped higher in the survey rankings. Saudi Arabia moved up 25 places in the list of 147 countries, Kuwait rose 13 places and Iran climbed 12, to third place overall.
Snape attributed that interest to low finding and lifting costs in the region, combined with emerging potential for outside investment. Libya also showed up as a favorite, rising 15 places to the number five spot.
Economics clearly dominated politics in the survey. Not surprisingly, reaction to 1998's industry downturn strongly affected the exploration outlook.
Some selected highlights:
- Last year, 74 percent of the survey companies cut exploration programs and staff -- and 46 percent expected additional reductions in 1999.
- Opportunity may be knocking, since 58 percent of the companies cited an improvement in the quality of international exploration choices during the past five years. Among large independents, 80 percent see more opportunity now than five years ago.
- However, only 30 percent of the companies were actively seeking new ventures in 1999, compared to 52 percent last year.
- And fully 40 percent of large independents expected to reduce their geographic exposure.
- Interest in natural gas production continued to increase, as 45 percent of the respondents said gas will figure more prominently in their 1999 plans.
- Heavy oil took a heavy beating, with 41 percent of the survey companies reporting reduced interest.
Despite high upfront costs, majors retained their thirst for deep-water plays -- for them, it remains a favorite.
Exxon, for example, says it targets deep-water prospects in West Africa, the south Caspian Sea and Brazil, ranking them among the areas "most likely to contain the best resources the world has to offer." It recently signed a production sharing contract for deep-water acreage off Guyana.
Robertson Research provides a copy of the survey results to every company that responds to its questionnaire. It offers the 100-page report for sale only to national oil companies, which are not eligible to take part in the survey.
The 1999 version produced no big surprises, Snape noted.
"It was as predicted, really," he said, "but it's nice to have some statistics to back up what we expected."
One predictable finding: In addition to development opportunities, companies have a preference for low-risk exploration in established basins and medium-risk exploration in underexplored basins with known potential.
Today's economic reality rules out high-cost exploration areas, according to Graham Kellas, manager-economics services for IHS Energy Group in the United Kingdom. The company's new Review of Petroleum Fiscal Regimes analyzes more than 120 global E&P fiscal structures.
With an unfavorable cost picture, even sizable discoveries may be labeled non-economic.
"Focus naturally turns to the lowest-cost regions, primarily the Middle East, West Africa and some parts of Latin America," he said. "Governments in these countries are aware of the high profit levels associated with low-cost production, however, and demand a very high proportion of the proceeds."
With resource-rich countries reaching into industry pockets and recently depressed prices still constrained by market forces, Kellas drew this conclusion: "Exploration for oil and gas has become very unattractive in most parts of the world.
"Of course, companies will continue to invest heavily in any opportunity that provides access to large fields -- hence the continued interest in the CIS, despite that region's many political and transportation problems, and more recently Iran, Iraq and Kuwait."
Terms of Agreement
Major companies welcome access to prolific areas but still grumble about terms in production sharing agreements. Kellas sees countries entering "novel contract arrangements" that guarantee participating companies a return without providing upside benefits or even operating rights.
Some governments have revised their restrictive financial terms, he noted, and others are reviewing their fiscal regimes.
Royalty rates based on gross revenues are a primary focus for review. By comparison, taxes based on profits have a more neutral impact as oil prices change, Kellas said.
But he warned that rising oil prices might cause countries to shift attitudes about international investment.
And while companies are "excited at the prospect of getting access to the huge reserves of the Middle East and other OPEC countries, it is worth noting the economic terms they agree (to) there will set benchmarks that others will hope to emulate elsewhere."
Large players almost exclusively favor areas of known high production. Countries without that history often have trouble attracting attention and may end up as international bargains.
In June, for example, Greenland announced plans for an oil exploration licensing round in 2001. Rights will be offered in a 140,000-square-kilometer area off west Greenland, with licenses granted in early 2002.
News of the Greenland offering hit the industry with the force of a tiny sponge. "They're going to struggle," Snape acknowledged, noting the industry's preference for areas of established production.
Vietnam said it will open tenders on five exploration blocks, despite light interest and a lack of sizable nearby reserves. Companies also have criticized the likely deal structure.
The country's national oil and gas company, Petrovietnam, introduced Joint Operating Company agreements last year to replace production-sharing contracts. Industry reaction ranged from cool to icy.
In addition, a Petrovietnam official said industry has complained about tax requirements, citing Vietnam's recently passed value added tax. Companies tend to criticize any tax burden in effect during the exploration phase, when they generate no production revenues.
Brazil's tax environment also came under sharp criticism before and during its acreage auction -- but the concerns did not stop bidders from paying $180 million for exploration rights.
If the industry shows "willingness and ability to pay top dollar for quality acreage, it significantly weakens its own arguments for reduced fiscal burdens," Kellas noted. In fact, some may have bid in Brazil just to get a toe in the water.
And if big bets on exploration keep coming, so might the opportunities.