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Rolling the Dice on Marginal Fields

A Global View: 'No Perfect Laboratory'

How much is enough?

That's a question oil companies must ask themselves every time they make a discovery -- and there are no easy answers.

Many factors are considered when firms determine if a discovery is commercial, and often fields just don't make the cut -- leaving countless millions of barrels of oil untapped all over the world.

That's not a scenario governments around the globe relish, and increasingly marginal field legislation or incentives are cropping up to induce oil companies to give these international fields another look.

"Marginal fields have nothing to do with their size -- there are 100 million-barrel marginal fields," said Jeff Aldrich, chief geologist with Forest Oil International in Houston.

"It's all about economics."

Aldrich presented a paper, "Are Marginal Fields Worth the Effort?: An Examination of Past Efforts in Incentives and a Look Forward to Future Potential" at last month's AAPG international conference in Bali.

"Basically, companies examine if the cost of extraction is higher than the perceived returns under the current regime," he continued. "So if the economic burdens are lowered, some previously non-commercial fields are viable projects and additional production can be realized."

Marginal field legislation and incentives cover a wide spectrum of styles and methods, including tax holidays, reinvestment incentives and sliding scale royalties.

"There's no perfect laboratory out there," Aldrich said. "Every country has a different petroleum province and different needs, so no one solution works for every nation."

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How much is enough?

That's a question oil companies must ask themselves every time they make a discovery -- and there are no easy answers.

Many factors are considered when firms determine if a discovery is commercial, and often fields just don't make the cut -- leaving countless millions of barrels of oil untapped all over the world.

That's not a scenario governments around the globe relish, and increasingly marginal field legislation or incentives are cropping up to induce oil companies to give these international fields another look.

"Marginal fields have nothing to do with their size -- there are 100 million-barrel marginal fields," said Jeff Aldrich, chief geologist with Forest Oil International in Houston.

"It's all about economics."

Aldrich presented a paper, "Are Marginal Fields Worth the Effort?: An Examination of Past Efforts in Incentives and a Look Forward to Future Potential" at last month's AAPG international conference in Bali.

"Basically, companies examine if the cost of extraction is higher than the perceived returns under the current regime," he continued. "So if the economic burdens are lowered, some previously non-commercial fields are viable projects and additional production can be realized."

Marginal field legislation and incentives cover a wide spectrum of styles and methods, including tax holidays, reinvestment incentives and sliding scale royalties.

"There's no perfect laboratory out there," Aldrich said. "Every country has a different petroleum province and different needs, so no one solution works for every nation."

However, marginal fields have become important issues for producing countries. Plummeting oil prices and investment in 1998 coupled with the natural production decline of oil fields hammered national budgets all over the world, prompting government officials to find new ways to get production on line.

"Even today when oil prices have rebounded, there is still an exploration lag time before companies gear back up," he said, "so officials are examining if there are undeveloped fields that with higher prices and some incentives can be brought on-line to boost production quickly."

It Costs How Much?

There are only two things a country can do to increase production, he said:

  • Improve the fiscal structure.
  • Open previously unavailable acreage.

"Increasingly there is a move to do both in various countries around the world," he said. "Countries have to be more creative and flexible if they want to increase interest in their petroleum industry and boost production."

Too often, however, countries only see the lost revenue from potential incentives rather than focusing on the additional production that, without incentives, will never be realized.

"When an oil company finds a marginal 30 million-barrel oil field that might produce $50-$60 million dollars of revenue, too often governments are unwilling to allow the $20 million in incentives that would make the field commercial," he said. "All they can see is they are losing $20 million. But the reality is that without the incentives they are going to get zero revenue from that field.

"Countries have to broaden their perspective," he added. "Getting these fields on-line is the key, because it is normal for fields to actually grow as they are developed and ultimately realize more production than anybody initially thought possible."

To date the number of countries offering incentives for marginal fields has been spotty. More efforts are focused on exploration incentives, he said.

Unfortunately some incentive efforts for marginal fields fail as well.

"Often countries require a certain amount of investment to get certain credits -- they try to dictate the terms too strongly and narrowly right at the very beginning, and few fields fit the terms," Aldrich said.

"Also, some countries define marginal field legislation based not on economics but on some reservoir characteristic, such as deeper pool incentives. Again, not all marginal fields are going to qualify under these technical guidelines."

Efforts at marginal field legislation typically aren't that attractive to major international oil companies, because they don't see much upside to marginal accumulations. Legislation focused on production incentives are more successful -- if the goal is to boost low rates of return regardless of size with a better fiscal regime than other fields then oil companies are more receptive, Aldrich said.

Case Studies

One example from Indonesia shows how a creative approach has resulted in higher production for the country.

Maxus Energy formed a marginal fields team in conjunction with Pertamina, the state oil company, and, working through the existing production sharing contract, established a stepped program for marginal fields that has been extremely successful.

"The first level of the program allowed exploration investment tax credit on fields that would normally not qualify," Aldrich said.

Under this level, Maxus put five additional fields on-line, and in the first two years these fields produced 20 million barrels of oil.

Maxus brought on three more fields, and additional production is now up to over 50 million barrels, Aldrich said -- "all this from fields that were discovered five to 20 years ago, and some of them were quite large."

Among the best examples of successful marginal fields incentives is the Texas Railroad Commission's stripper well tax credits.

"Currently over 60 percent of Texas' revenue comes from stripper wells, which at 10 barrels of oil or less a day are definitely marginal producers. The state has given tax credits and lowered the tax regime as well as reduced the royalty on stripper wells -- and those efforts have really paid off."

Enter the Independents

An important change in the international petroleum business over the past two decades has been the massive expansion of smaller independent oil companies looking for opportunities around the globe.

This has particularly impacted the myriad of marginal fields all over the world.

"Independents have found they can work with many governments to affect changes that make smaller opportunities viable," Aldrich said. "As a small independent you don't have a lot of leverage to change the tax code in Grimes County, Texas, or in Alberta, Canada. But, in countries like Bulgaria, Syria or Vietnam, where not many companies are actively operating, you can get the ear of the government.

"Many governments aren't necessarily concerned with the size of the company, just their track record."

Aldrich said independents' influence could be particularly felt in eastern European countries, for example, the Former Soviet Union and other nations that have had a fairly strong nationalized oil company or been dominated by one or two major companies.

"Often when these countries initially open their doors to outside firms, they offer exploration opportunities as well as older fields and fields that have been marginal to the national company," Aldrich said. "The latter are real opportunities for independents to come in and bite off a field the size they can really chew on.

"You can go into Romania, Albania or Bulgaria, to name a few, and find oil and gas fields that the state companies now need help with," he added. "They may be in the 20 million barrels of oil equivalent range, which can be very significant for smaller companies.

"A good tax and fiscal regime make these opportunities profitable for independents."

In addition to the eastern European countries and the Former Soviet Union, Aldrich said some other areas that are ripe with marginal field potential include:

  • Latin American countries.
  • Large onshore concessions in West African countries that have been dominated by just a handful of majors.
  • Southeast Asia.
  • China -- if companies can work with the government, he said.

"You have to be careful when you examine these situations," he cautioned, "but if you do your homework there is a great deal of opportunities. Carefully crafted marginal field legislation can create a win-win situation where both the royalty or tax to the owner and the cash flow to the producer can both rise.

"When properly used, marginal field legislation provides increased revenue and opportunities to both the owner and producer.

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