Downstream Ties Can be Crucial

Needed: A New Set of Integrated Skills

Chuck Davidson, chairman, president and CEO of Houston-based Noble Energy, is breathing a little easier lately — the acquisition and exploitation of international long life or "legacy" assets has enabled him to jump off the E&P treadmill that previously saw his company reinvesting 90 percent of its cash flow just to keep its domestic production flat.

Davidson, who shared his experiences and advice during his luncheon address at last fall's AAPG Prospect & Property Expo in Houston, now has the luxury to plan strategic initiatives that will shape the company during the next five years.

Best yet, he has the cash on hand to implement these new initiatives — whether it's an acquisition opportunity or increasing the company's position in core areas.

Today, Noble Energy's international legacy assets — projects with constant production rates over a 20- to 30-year-long life cycle — represent 65 percent of the company's reserves. That's up from 28 percent in 1998. Production from international properties has soared from 8 percent of the company's daily output in 1998 to 38 percent at the end of the third quarter this year.

"We're about to celebrate the fourth quarter that international will be paying its way," Davidson told the APPEX crowd.

According to him, it's not a question of "if," but rather "when" domestic independents will seek out legacy assets in the developing world.

Citing a changing business environment in North America's E&P sector, Davidson laid out a compelling case for companies to expand their operations worldwide — and to be competitive internationally, he said E&P companies must:

  • Intimately understand the downstream side of the energy business, enabling them to take advantage of emerging regional markets for stranded gas reserves.
  • Leverage their core E&P business skills to find and exploit reserves overseas.
  • Create new and innovative business solutions to monetize stranded gas reserves around the world.

Davidson described the challenges that E&P companies face today in North America — limited access to prospective areas due to environmental issues, mature basins with smaller prospect sizes, higher decline rates and higher finding and producing costs.

"Here in the United States," he said, "we're challenged if we can even pull together a few thousand acres of land."

Image Caption

AMPCO, methanol plant in Equatorial Guinea.
Photo courtesy of Noble Energy

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Chuck Davidson, chairman, president and CEO of Houston-based Noble Energy, is breathing a little easier lately — the acquisition and exploitation of international long life or "legacy" assets has enabled him to jump off the E&P treadmill that previously saw his company reinvesting 90 percent of its cash flow just to keep its domestic production flat.

Davidson, who shared his experiences and advice during his luncheon address at last fall's AAPG Prospect & Property Expo in Houston, now has the luxury to plan strategic initiatives that will shape the company during the next five years.

Best yet, he has the cash on hand to implement these new initiatives — whether it's an acquisition opportunity or increasing the company's position in core areas.

Today, Noble Energy's international legacy assets — projects with constant production rates over a 20- to 30-year-long life cycle — represent 65 percent of the company's reserves. That's up from 28 percent in 1998. Production from international properties has soared from 8 percent of the company's daily output in 1998 to 38 percent at the end of the third quarter this year.

"We're about to celebrate the fourth quarter that international will be paying its way," Davidson told the APPEX crowd.

According to him, it's not a question of "if," but rather "when" domestic independents will seek out legacy assets in the developing world.

Citing a changing business environment in North America's E&P sector, Davidson laid out a compelling case for companies to expand their operations worldwide — and to be competitive internationally, he said E&P companies must:

  • Intimately understand the downstream side of the energy business, enabling them to take advantage of emerging regional markets for stranded gas reserves.
  • Leverage their core E&P business skills to find and exploit reserves overseas.
  • Create new and innovative business solutions to monetize stranded gas reserves around the world.

Davidson described the challenges that E&P companies face today in North America — limited access to prospective areas due to environmental issues, mature basins with smaller prospect sizes, higher decline rates and higher finding and producing costs.

"Here in the United States," he said, "we're challenged if we can even pull together a few thousand acres of land."

He characterized domestic independents as "typically active drillers and exploiters of hand-me-downs from the majors" — adding, however, that there are limited properties available today from the majors.

"The North American gas market is changing rapidly," he said. "The bad news is that we (as an industry) have not been able to build supplies as we had hoped."

Focusing on "the good news," Davidson listed the following reasons driving domestic independents to expand globally:

  • Significant acreage.
  • Less competition.
  • High growth/high return opportunities.
  • Political risks are manageable.
  • Regional gas markets are growing.
  • Opportunities can be "company makers."

New Skills Required

Making the transformation from a domestic independent to a competitive international energy company requires a whole new set of integrated skills, according to Davidson.

"Even if you choose not to participate in the downstream, it's critically important that you understand it," he said.

As a country develops or modernizes, its appetite for power grows in parallel; natural gas offers an environmentally friendly and generally cost-effective solution to an emerging nation's energy needs — especially if the gas already has been discovered.

"What may have been viewed as stranded gas a couple of years ago may be monetized today," Davidson said. "Timing is everything. The regional gas markets have developed."

In Ecuador, for example, Noble Energy created a downstream gas market to tie in a stranded gas field sitting offshore in the Bay of Guayaquil. The Amistad natural gas field represented an historical asset that no one wanted to tie in.

With a $250 million investment, Noble Energy constructed an electric power plant onshore, installed a drilling and production platform offshore and built a 40-mile-long pipeline to transport the gas. During the next 20 years, Noble Energy will transport approximately 13 Bcf of gas per year to the power plant onshore.

Ecuador's energy comes primarily from hydro-electricity. During the dry season, however, the country needs supplemental power — that's when Noble Energy's plant is base-loaded to operate at 100 percent capacity.

Wholly owned by Noble Energy, the 130 Megawatt, twin turbine plant provides 10 percent of Ecuador's current electricity needs. With additional capital expenditures, the plant can ramp up to a 220 Megawatt capacity.

Other examples of the company's monetizing stranded gas:

Offshore West Africa, in Equatorial Guinea's waters, where Noble Energy has monetized a stranded gas asset in the Alba natural gas and condensate field, containing one billion BOE of gross proven and probable reserves. Noble Energy has a 34 percent interest in the field, plus a 34 percent interest in another discovery, the Estrella #1, just north of the Alba field.

Adjacent and onshore, Noble Energy owns a 45 percent interest in the methanol plant that produces 20,000 barrels daily for export as a petrochemical feedstock. Noble Energy built the plant at a cost of $450 million — capital expenditures were shared with Marathon Oil, the company's 55 percent interest partner.

Daily production provides 3 percent of the world's methanol supplies. According to Davidson, the plant produces the second lowest-cost methanol in the world.

"We monetized and created value from our upstream resources," Davidson said. "We had to understand methanol markets — methanol is priced off of North American gas."

  • Three-and-one-half years ago, leveraging on its success and operating experience in the Gulf of Mexico, Noble Energy obtained 11 licenses offshore Israel. Noble Energy operates the blocks, with a 47 percent working interest.

    Davidson got animated when he described "wildcatting" in the Mediterranean Sea: Noble Energy has discovered two significant gas fields, with reserves totaling 1.1 Tcf of natural gas.

    Noble Energy and its partners have secured an 11-year contract to supply natural gas to the Israeli Electric Corp. Beginning in early 2004, the joint venture will supply 170 MMcf per day of gas for electrical power generation.

    Tie in of the second field will enable Noble Energy and its partners to produce 600 MMcf per day at peak rates.

    Noble Energy moved quickly to monetize its success — from wildcat exploration to shipping sales gas in under four years — in a country with no market, no gas resources and no infrastructure.

    "This is a real win-win for Noble Energy and Israel," Davidson said. Prior to the natural gas discovery, Israel imported bunker crude oil for electrical power generation.

Compromising Positions

Davidson described how Noble Energy has had to make some "compromises" in its domestic operations in order to pursue international opportunities.

Prior to going international, Noble Energy had been spending about $300 million annually in the Gulf of Mexico (GOM). The company subsequently slashed spending in the GOM — it also shifted the exploration focus from the mature, shallow continental shelf to the deep continental shelf and deepwater plays to take advantage of lower operating costs, larger prospect sizes and higher impact opportunities.

Noble Energy's capital expenditure (CAPEX) budget for 2003 is $510 million: international operations represent 55 percent of the total CAPEX, with 30 percent carved out for the GOM and the remaining 15 percent allocated to onshore United States. International operations — all offshore with the exception of Argentina — include China, Vietnam, the North Sea, Ecuador, Equatorial Guinea and Israel.

Noble Energy's reserves of 463 million BOE are comprised of 57 percent natural gas. The company's production of 100,000 BOE per day consists of 70 percent natural gas. With a market capitalization of $2.3 billion and an enterprise value of $3.2 billion, Noble Energy has deeper pockets than most independents, which positions the company to weather the long lead times required for investment in the developing world.

While Noble Energy continues to explore domestically for long-term production in the GOM, the Mid-Continent and the Rocky Mountains, its sights are set on new opportunities — and emerging markets — in the developing world.

"It's been an interesting ride with long lead times," said Davidson. "The benefits far outweigh the challenges."

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