Domestic oil and gas finders are attracted
to international turf for any number of reasons -- the lure of the
big find, the challenges inherent in uncharted territory. Indeed,
it can be a heady experience.
Occasionally, however, a trek overseas might be a
matter of fate stepping in. Look at Benton Oil and Gas Company (BOGC),
for instance.
For them, a meeting in Houston and a telephone call
from contacts in London triggered an odyssey that would result in
BOGC striking agreements in such far-flung locales as Siberia, Venezuela,
the Middle East, Africa and the People's Republic of China.
Alex Benton, the company's founder, offers a comprehensive
account of many of the highs and lows of such a journey in a paper
he authored titled "The Accidental International." The article is
one of many case studies detailed in AAPG's newly-published
[PFItemLinkShortcode|id:20603|type:standard|anchorText:International Oil and Gas Ventures -- A Business Perspective |cssClass:asshref|title:must have reference book|PFItemLinkShortcode]
,
slated to become a must-have reference for anyone contemplating
an overseas E&P venture.
Benton's goal: Get a license or agreement for a small field so his company could demonstrate its value and then capture more business.
A Toehold in Venezuela
With its technical team trained at the majors, BOGC
debuted as a niche player, drilling on California gas leases prior
to moving into the Gulf Coast to capitalize on opportunities to
apply its 3-D seismic expertise more effectively.
In 1990, the company's industry contacts in Houston
introduced Benton to an engineer from Corpoven, a Petroleos de Venezuela,
SA (PDVSA) affiliate.
At the time, BOGC was busy establishing a track record
for applying new exploration and development technologies to old
oil and gas fields in Louisiana. Knowing that Venezuela had many
such old fields and wanted to open its oil and gas industry to outsiders,
Benton flew to Caracas to meet with Corpoven.
His goal: Get a license or agreement for a small
field so the company could demonstrate its value and then capture
more business.
The ensuing meetings went well, according to Benton.
Then, to his dismay, Venezuela in 1991 announced a global tender
offer for a Marginal Field Reactivation program, calling for the
kind of work that Benton had proposed -- but on far more than a
single field.
Refusing to be intimidated by the prospect of worldwide
competition, BOGC decided to go after fields that best suited its
technical expertise. Its bid strategy for this international tender
was a continuation of its domestic strategy, according to Benton:
- Avoid or minimize up-front cash payments.
- Stage capital commitments over time.
- Prepare a development plan to result in early cash flows.
- Provide checkpoints for investment revisions and potential
exits.
But Benton incorporated a non-industry-related element
in his Venezuelan strategy that would hold almost any international
player in good stead.
BOGC struck a 50:50 partnership with Vinccler, C.A,
a local engineering and construction company with a long history
of successful public works and private sector projects in Venezuela.
The partner could provide advice and assistance on dealing with
governments, regulatory bodies, customs and importing procedures,
local banking relationships and, perhaps most important of all,
labor unions.
Another non-industry-related operative would come
later in the form of medical, dental, optical and surgical assistance
to the needy who resided in the areas of eastern Venezuela next
to BOGC's operations.
Purchasing Power
More than 200 companies indicated interest in the
field reactivation program, and PDVSA then pared the list to 83.
Ultimately, three foreign companies were awarded contracts, and
in 1992 BOGC signed an agreement to reactivate three fields in the
South Monagas Unit in eastern Venezuela. One of these had been produced
heavily and the other two barely touched.
Within nine months, Benton Vinccler had established
commercial operations essentially by recognizing opportunities to
improve on how things historically had been done in this area by
means of the effective use of off-the-shelf technologies, according
to Benton.
But already, turmoil was brewing on the foreign turf.
Two coup attempts were mounted by the military even
before the contracts were finalized. The following year, the president
was impeached for financial misdealings, and in 1994 the banking
system collapsed, sending the country into an economic nosedive
-- but indirectly triggering one of the best investments ever made
by BOGC, according to Benton.
Vinccler's banking institution was shut down by regulators,
causing the company to become illiquid and to need capital to continue
its own operations. Benton came to the rescue, negotiating to purchase
more than half of Vinccler's shares in their jointly-owned company
via a combination of cash, notes and warrants.
Benton Vinccler, however, had only 12 months of commercial
production on its books, so valuations were based essentially on
undeveloped, probable and possible reserves.
Deciding to take the reserves and valuation risk,
BOGC purchased 30 percent of what Benton said may turn out to be
as much as 250 million barrels for less than $15 million -- or less
than $0.10 per barrel.
By the end of 1995, estimated cumulative recoveries
were already double the risked reserves of 70 million barrels estimated
during the tender process, and Benton Vinccler had become the heavyweight
in BOGC's asset portfolio.
To compete with the majors as the Venezuelan oil
and gas climate became increasingly attractive to foreigners, BOGC
formed a consortium with The Louisiana Land & Exploration Co,
(now a part of Burlington) and Norcen Energy (now a part of Anadarko
via the UPR acquisition). In 1996, the group successfully bid on
the Delta Cantro Unit 10 miles north of the South Monagas Unit,
with the idea that certain economies of scale might be achieved.
Benton noted that many of the competitors were weary
of being shut out by big bids, and bonus fatigue had set in by late
on the last day of bid week when the Delta Cantro Unit bid was scheduled.
Little did anyone suspect that any bid at all would have beaten
the no-bonus bid submitted by the consortium at the last minute.
After the bidding, however, the project became bogged
down in paperwork, moving at the proverbial snail's pace compared
to South Monagas.
Hello, Mother Russia
Meanwhile, BOGC had plenty of activity elsewhere
on the international scene.
In 1990, the same year he was introduced to the Venezuelans
in Houston, the Russian-born Benton steered his company into Russia
quite by accident, he said.
A London-based seismic house got word there might
be large-scale opportunities opening up behind the Iron Curtain
to investment by Western companies willing to take a risk in an
unproven area. The oil and gas ministry in Moscow thought a smaller
company might move more quickly than the majors, so Benton's seismic
house contacts suggested he pursue this potential opportunity.
Introductions were made, and the only advice given
by the oil and gas ministry was a caution that BOGC could rely on
the political and economic stability of the Russian Republic more
than anywhere else in the USSR. This would prove to be fortuitous,
given the instability that wracked some other regions in later years.
The ministry arranged for Benton to see three fields
in various locales, and his first stop was to visit Purneftegasgeologia
(PNGG), a geological company in western Siberia whose mission was
to find and study fields via seismic operations, test wells and
volumes of written reports.
Once an assessment was completed, a geological company
would turn the field over to various scientific and industrial research
bodies and to a nearby production association, which was called
Purneftegas (PNG) in the PNGG case.
However, PNGG had been able to keep a license for
itself that included the North Gubkinskoye field, and it needed
a partner willing to risk E&P capital. Oil reserves there were
estimated by both PNGG and the Tyumen Institute at over 300 million
barrels, with another 50 million barrels of condensate and 4 Tcf
of free and associated gas.
The opportunity to produce a brand new field had
an added attraction: Unlike most of the deals being cut by foreign
investors, BOGC would not have to expend effort and capital to rework
and modernize an old field -- a somewhat daunting task in many Russian
fields with poorly managed reservoirs that had been badly drilled.
Benton called off the tour of other sites and began
contract negotiations on the spot, ruling out any interference by
rivals.
Uphill Challenges
Recognizing that PNG had the production experience
in the area, the two companies invited it to join the venture. Benton
pointed out that PNG enjoyed total control over the region in production
affairs, including access to pipelines and service companies.
The charter documents designated the two Russian
companies each to own 33 percent of the new limited liability company,
Geoilbent Ltd., with BOGC owning the remaining 34 percent.
The Russians would make non-cash contributions, and
the only source of cash would come from BOGC, which paid for Western
equipment and outside contractors. Its exposure was limited to about
$7 million -- a lot for the company's size, but a paltry sum to
control a third of the vast reserves estimated to await the drillbit.
But the going was definitely uphill.
First, finding good managers and technicians who
could work in a capitalist mode was a problem. Apathy that stems
from working for a huge government ministry in a remote location
presented its own kind of problems, as did disagreements on drilling
methods and skills.
Even so, the wells were drilled adequately, and Geoilbent
was exporting oil in just over a year.
In the midst of the sometime chaotic activity, the
Soviet Union dissolved, replaced by the Russian and other republics.
Still, business kept grinding away, slowly but surely.
To contain its own capital exposure in the Geoilbent
project, BOGC went on a quest for external financing -- a nightmare,
in Benton's words.
None of the potential lenders he approached had ever
done a reserve-based loan on a new field in Russia. Besides, BOGC
was small, and its only assets at the time were its small gas production
in the Gulf of Mexico and its oil production in Venezuela, which
didn't lend themselves as security for guarantees.
The company persevered, and six years after the initial
meetings the first funding occurred.
Seeking to leverage its Geoilbent experience, BOGC
evaluated other Russian deals, and in 1996 snared a stake in Severneftegaz,
or Senega, which had a license for a block containing as much as
17 Tcf of natural gas. Fallout from the tumbling oil prices of 1998,
however, put a damper on rapid exploitation of these significant
reserves.
Benton attributes his small company's international
good fortune to a number of strategies, including a willingness
to trade political risks for low geological and development risk
opportunities that have company-making reserves.
The Benton Vinccler and Geoilbent ventures both are
testimony to the importance of striking a positive relationship
with host countries and seeking out local business partners.
BOGC's monetary strategy includes placing a premium
on receiving revenues in U.S. dollars or other freely convertible
currencies, with costs being a blend of local currencies and dollars.