In the United States, the scenario is familiar.
Small independent companies over the past 15 years have followed the majors into mature areas and then, relying on various technology and stringent management, coaxed more oil and gas out of the ground than most people thought possible.
That scenario is about to go global.
At least, that's the view of Naresh Kumar, former worldwide development geology manager for Arco and now owner of Growth Oil and Gas in Richardson, Texas.
Kumar might be Texas based, but he hopes to be Brazilian bound -- he is currently negotiating a project for his small company in Brazil.
As such, he's experienced both the domestic and international aspects of exploration.
"With more than 23,000 entities operating oil and gas wells in the United States, the domestic basins are the most densely drilled in the world," Kumar said. "Independents drill a majority of those domestic wells and control more than one-half of the proved domestic reserves.
"Until recently, because of the capital, technology and resources required, international exploration was a domain only for the majors and very large independents," he continued.
"However, when an average oil well produces 12 barrels a day in the United States, compared to a worldwide average, excluding the U.S., of 170 barrels a day, it is critical that companies of any size select opportunities on a global scale."
Kumar talked about this during a paper he presented at the AAPG annual meeting last April in San Antonio titled "Exploration of Mature Basins Outside the U.S.: A Niche for the Small Independent."
Kumar pointed out that significant amounts of new oil have been found around existing fields in basins people view as mature -- and that most reserve additions in the United States in the last 15 years have been through field growth.
"I started looking at those same kinds of opportunities outside the United States," Kumar said, "in a country like Brazil, for instance, where the overall drilling density is orders of magnitude less than what has been done in this country.
There, he said, independents can achieve growth:"
- Through acquisition of producing properties from larger companies.
- By drilling development wells.
- By introducing secondary and tertiary recovery projects at older fields.
- Through selective exploration projects.
Kumar's message? All those same opportunities are becoming available to small companies in countries all over the world.
"Large oil companies are getting larger through mergers and acquisitions, and because of their size and cost structure they generally have a threshold of about 50 million barrels of oil or more in recoverable reserves for international projects," he said. "At the same time, the median international discovery is only approximately 10 million barrels.
"Large international companies and large national oil companies are not going to be interested in these smaller fields, but small independents with their low-cost structure and use of technology comparable to that of large companies can profitably target small discoveries all over the world," he continued. "I believe the U.S.-type technological and management approach of smaller independents has a significant future looking for these opportunities globally.
"The experience gleaned in the United States will give these independents an edge in the international arena."
Brazil's Potential
Kumar, centering on the many opportunities in countries like Brazil, said the basin areas in the lower 48 United States and Brazil are similar -- but there are 50 times fewer wells in Brazil and 85 times fewer producing oil wells.
Brazil has eight times less oil production with only 4.5 times less reserves and 85 times less gas production with only 30 times less reserves than the United States, he said.
"According to the U.S. Geological Survey, estimates for undiscovered oil in Brazil at a 95 percent confidence level is 6.3 billion barrels of oil, and at a 50 percent confidence level 12.7 billion barrels -- 1.3 to 2.6 times the existing reserves," he said. "Estimates of undiscovered gas in Brazil is 16.5 trillion cubic feet at a 95 percent confidence level and 46.7 trillion cubic feet at a 50 percent confidence level, which is three to eight times the existing reserves.
"It's easy to see there are tremendous opportunities in a country like Brazil," he added, "and much of the remaining reserves will be from smaller fields that will not attract major international companies or Petrobras, Brazil's large state oil company.
"That leaves a great deal of potential for small independents that can profitably develop these smaller fields."
Let's Make a Deal
The biggest learning curve for small independents venturing into the international arena is negotiating with the host country -- something they have no experience with in the United States.
"Large oil companies have whole expert staffs devoted to negotiating international deals," Kumar said. "Obviously small companies don't have that kind of resource, so it is important for them to have a local connection or partner in a country that they can rely upon and trust."
That "local presence is crucial in the negotiating process,"he said, because they know the business culture and the political system.
"Frankly, without a local contact it would be very difficult for a small independent to successfully conclude a deal," Kumar said.
Even with a local participant, the most difficult part is the time it takes to close an international deal.
"In the United States it takes a relatively short period of time -- a year or less -- to negotiate a property acquisition deal," he said. "nternationally, countries have historically focused on large-scale projects with large companies. These countries are often just learning how to structure these smaller projects and it takes quite a bit of time to finalize a deal.
"It requires patience because there is a learning curve for the host country."
Kumar also said, however, don't make the mistake of thinking countries are not interested in attracting smaller investors.
"Many countries are now beginning to promote opportunities in smaller fields that have been bypassed," he said. "For example, Brazil is making a concerted effort to do just that. Petrobras is a very large company, and just like the majors in the United States 15 years ago the firm has gone through its portfolio and realized that the big opportunities are in the higher risk, higher potential frontier areas.
"The company is willing to negotiate deals for properties in more mature producing regions where there is potential -- just not enough considering Petrobras' size and cost structure."
Worth the Effort
The keys to international success for small companies, Kumar believes, is a focused approach based on exploration and development potential in a target country, the political and economic climate, local contacts, project economics, capital availability and patience.
Changes in the petroleum business are aiding small companies in their bid to go international. In the 1980s majors were the primary users of technology and capital was not easily available to small companies. That's all changed.
"The business environment in the next century will be very different," Kumar said. "The industry will be smaller but will be stabilized, and worldwide efforts will concentrate more heavily on natural gas production -- something small U.S. independents have a great deal of experience with.
"Also, primary technology development is no longer closeted in major oil companies," he said. "New technology is accessible to very small companies -- an important factor, since the focus on applying cutting edge technology will only become more important."
Technology is an important part of the changing landscape of the industry.
"Big companies have traditionally brought a lot of financial resources, people and, most important, technology to an international project. Today, however, countries are recognizing that the technological edge is not just with the majors any longer. Independents can now provide about the same technology, which is available from service contractors today."
That's true in all areas of technology, he added -- drilling, seismic services, downhole techniques and production systems. Indeed, a recent survey by the Independent Petroleum Association of America indicated that very small companies are using state-of-the-art technology like 3-D seismic on their projects.
"Along with the best technology available, small independents can impose operational efficiencies on small international projects of 15 to 20 million barrels of oil or less and make them economic," he said. "In the United States we have witnessed again and again small companies taking over and running the same fields with less people and more technology and finding opportunities in those fields to make money."
Financing was an enormous obstacle for smaller independents in the past, but even that hurdle is lower today. There is a host of financing sources, including bank debt, venture capital, public offerings and corporate debt that has become readily available domestically.
"While it's still a relatively new concept for financing organizations to back a small company for an international project, they are certainly willing to listen and learn about the opportunities," Kumar said.
Additionally, in some cases there are financing options from the host country and there are government organizations like the Organization to Promote International Commerce that can help smaller companies go overseas.
"To succeed globally, today's independents must have a worldwide outlook, an ability to make decisions rapidly and use technology efficiently," Kumar said. "They also need to have a low-cost organization and should be able to raise adequate capital.
"When you consider that about 60 percent of the fields worldwide are smaller than 15 million barrels of oil, the potential opportunities are worth the effort."