In much of the United States, the choice to explore for oil or gas is governed by the expected finding and development cost for equivalent volumes.
And ... it's hard to find large volumes of oil or gas in the USA.
Internationally, gas is easily and cheaply found -- but it is often very difficult to make money from new international gas fields. In international gas development, what is important is the availability of gas markets, not low finding costs.
As my Texas friends might say, "If you can't sell it, it ain't worth nuthin."
Being Near Markets
Proximity to markets is exceptionally important in assessing worth of discovered gas.
Oil found remote from market can often be moved inexpensively long distances to market -- but gas is very expensive to move long distances to market. Successful international gas exploration and production requires that companies listen as closely to their gas marketers as to their geologists.
Your explorers will want to go to the international areas where large gas fields can be easily found. Your gas marketers will want you to explore near markets. Listen to your marketers.
Many companies exploring for gas internationally are seduced by the size of the gas prospects; it isn't the size of the field, it's the sales value of the gas that is important.
Remember, discovered gas may have no value. It won't make any difference if it is a large gas field or a small gas field, if you can't sell the gas.
Don't be surprised by the fact that international exploration contracts often have incomplete clauses relative to gas development, and need to depend on post-discovery negotiations to complete the contract. That is because international gas contracts need to be closely matched to field characteristics and local market conditions.
In some international situations it is more profitable to find gas than oil; such cases, however, are rare.
The LNG Option For International Gas Producers
Many international operators have made discoveries of gas that are unable to be economically connected to markets by pipelines. In such cases, consideration may be given to investing in LNG projects to monetize the gas.
First you need to prove there is at least enough gas to supply a 20-year market from a single liquefaction train -- say, about three tcfg.
Your next consideration would be whether field reserves would eventually justify a multi-train plant. Additional trains lower unit costs, and low unit costs are vitally important.
At the present time, there are probably a score of LNG projects "under consideration" -- and most of these are economic nonsense. There is a very limited market for expensive methane in the world, and everywhere (always!) only the low cost producer will be able to sell product from a new LNG plant.
The lowest cost LNG producers will be:
- Those who are adding to existing capacity.
- Those who are closest to market.
- Those who have high flow rates and low development costs.
- Those with rich recoveries of co-produced condensate.
Some existing LNG projects are formidable economic barriers to newer entries in the LNG business; additional capacity expansion at plants in Algeria, Qatar and Malaysia can set market prices.
Few "greenfield" projects can compete with such add-to-capacity projects. An exception from Indonesia might be the Wiriagar Field with its advantages of size, proximity to market and moderate development costs.
Creating an LNG contract that is acceptable to producer and purchaser is a Herculean labor; one that will likely take three or four (or 10!) years of negotiations. These lengthy negotiations are less legal discussions than they are arrangements for exchange of economic hostages.
Good News, Bad News
Once international gas projects are up and running, they can throw off huge sums of cash for many years. That's the good news.
The bad news?
As rule of thumb, you may be waiting 10 years for payout of your international investment.
The relative ease of finding gas fields internationally can lead to its own set of problems.
In the late 1970s and early 1980s, Pecten International was heavily involved in drilling "bright spot" prospects in offshore Cameroon.
Our staff had a remarkable string of discoveries, and were quite successful in predicting oil versus gas outcomes. We were drilling about 20 wildcats a year; explorationists were absolutely delighted at finding new oil fields with nearly every new wildcat.
After a year or two, we found we had predicted and drilled several large dry gas discoveries, and had laid out a program of drilling a half dozen similar prospects.
Any new oil field discovered allowed past exploration costs to be recovered, and new oil fields were rapidly put on production. In contrast, gas discoveries could not be put on production (lacking a market), and all the costs of gas exploration were stranded.
I visited with my exploration team and reviewed the peculiarities of the Cameroon contract. I pointed out that we could recover dry hole costs, but we could not recover costs of undevelopable gas discoveries; gas discoveries, although lots of fun for explorationists, were a complete loss to Pecten.
I told them I would not approve any wildcat recommendations that indicated that gas would be the expected product.
My exploration team had been so pleased at the ease and perfection of the mapping of these gas prospects that they were visibly reluctant to stop drilling gas discoveries.
Finally, one of the senior hands said:
"Marlan, we really think we should drill these next six prospects, even though we told you we expect to find gas. Marlan, we're often wrong!"