Adventures, Examples and Lessons in Exploration Deal-making

Most contributions to the exploration community that get attention in articles and conventions concern the essential technical issues: petroleum geology, prospect/play risk analysis and volume expectation, economics, etc. However, once the prospect has been evaluated and the project is validated for implementation, there remains a sometimes difficult phase of negotiation that is an essential part of the “Art of Exploration,” to use a formulation made famous by our late colleague, John Masters.

The following three real life cases give a frontal view of the action of this particular stage of the exploration process. Although the events took place years ago, the experiences offer useful lessons that remain applicable.

Case 1: Venezuela

This case illustrates the need to calibrate a level of contractual commitment significantly higher than warranted by a strictly technically-driven strategy, in order to get a stake in a high-risk and costly project.

The case involved the participation of Total in a round of so-called marginal fields initiated during the mid 1990s by Venezuela’s state oil company PDVSA. The block in question was within the depleted Jusepin shallow field in eastern Venezuela, but the main interest was focused on a pretty risky, untested prospect on trend with several giant fields of the multibillion-barrel El Furrial area. This prospect was extremely deep, between the El Furrial and Orocual fields.

The available 2-D seismic, interpreted by Lucio Margherita and Serge Matesco in liaison with Total’s regional geologist Jean Ferrat in 1987, showed, with a high degree of certainty, the existence of a structural high. There was, however, some doubt about a fully mappable geometry due to the difficult seismic imaging plus insufficient coverage; the latter called into question the size of potential reserves. However, knowing the general structural grain of the province, we felt confident that any significant high recognized along the trend would correspond to some kind of four-way closure, to be defined better in the future with additional seismic. More work was done by Jean-Paul Barbot, who recommended the prospect to Total’s management. We had to make a critical decision about the level of commitment to be offered in order to win access to the proposed service contract, taking into account an expected aggressive competitive environment.

The conclusion was that one deep well would be technically sufficient to make a valid test of the prospect, whereas we had to present an acceptable program of tertiary recovery work on the shallow field in order to satisfy the primary purpose of the bidding round. However, there was a feeling that one single deep well commitment was not sufficient to win the bid. In spite of the high risk, the exploration team liked the prospect and badly wanted the block. Therefore, after some internal discussion, it was decided to make a two-well submission for the deep prospect, together with the mentioned rejuvenation program. In the end, the bid – prepared at the time by Total’s negotiator Georges Buresi – was won by a narrow margin.

This daring undertaking, helped by a close real-time collaboration between explorers and negotiators in partnership with Amoco, led to several discoveries with a cumulative production level of some 35,000 barrels per day – a very profitable venture. After several years of operation, a partial nationalization (with financial compensation) was considered by the state until PDVSA finally took the field back.

Image Caption

Jusepin project location, discoveries and proven reserves, in eastern Venezuela

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Most contributions to the exploration community that get attention in articles and conventions concern the essential technical issues: petroleum geology, prospect/play risk analysis and volume expectation, economics, etc. However, once the prospect has been evaluated and the project is validated for implementation, there remains a sometimes difficult phase of negotiation that is an essential part of the “Art of Exploration,” to use a formulation made famous by our late colleague, John Masters.

The following three real life cases give a frontal view of the action of this particular stage of the exploration process. Although the events took place years ago, the experiences offer useful lessons that remain applicable.

Case 1: Venezuela

This case illustrates the need to calibrate a level of contractual commitment significantly higher than warranted by a strictly technically-driven strategy, in order to get a stake in a high-risk and costly project.

The case involved the participation of Total in a round of so-called marginal fields initiated during the mid 1990s by Venezuela’s state oil company PDVSA. The block in question was within the depleted Jusepin shallow field in eastern Venezuela, but the main interest was focused on a pretty risky, untested prospect on trend with several giant fields of the multibillion-barrel El Furrial area. This prospect was extremely deep, between the El Furrial and Orocual fields.

The available 2-D seismic, interpreted by Lucio Margherita and Serge Matesco in liaison with Total’s regional geologist Jean Ferrat in 1987, showed, with a high degree of certainty, the existence of a structural high. There was, however, some doubt about a fully mappable geometry due to the difficult seismic imaging plus insufficient coverage; the latter called into question the size of potential reserves. However, knowing the general structural grain of the province, we felt confident that any significant high recognized along the trend would correspond to some kind of four-way closure, to be defined better in the future with additional seismic. More work was done by Jean-Paul Barbot, who recommended the prospect to Total’s management. We had to make a critical decision about the level of commitment to be offered in order to win access to the proposed service contract, taking into account an expected aggressive competitive environment.

The conclusion was that one deep well would be technically sufficient to make a valid test of the prospect, whereas we had to present an acceptable program of tertiary recovery work on the shallow field in order to satisfy the primary purpose of the bidding round. However, there was a feeling that one single deep well commitment was not sufficient to win the bid. In spite of the high risk, the exploration team liked the prospect and badly wanted the block. Therefore, after some internal discussion, it was decided to make a two-well submission for the deep prospect, together with the mentioned rejuvenation program. In the end, the bid – prepared at the time by Total’s negotiator Georges Buresi – was won by a narrow margin.

This daring undertaking, helped by a close real-time collaboration between explorers and negotiators in partnership with Amoco, led to several discoveries with a cumulative production level of some 35,000 barrels per day – a very profitable venture. After several years of operation, a partial nationalization (with financial compensation) was considered by the state until PDVSA finally took the field back.

Case 2: Yemen

Yemen is a country that, in the 1980s, was in fact two countries: the People’s Democratic Republic of Yemen in the south, under a communist rule that was strongly supported by the Soviets, and the Arab Republic of Yemen, which was more politically oriented toward their northern neighbor, Saudi Arabia.

The two states were not very friendly, to say the least, but after a war in the region, they wisely decided to do something together in the hope of softening their relationship and materializing an improvement. They jointly proposed that the industry bid for a narrow, elongated block straddling the common border of the two countries – a very singular geometry. However, it was deemed extremely attractive, since it was located on-trend with large discoveries made by Hunt and Exxon to the north, in Marib, and rumored discoveries by the Soviet operator in the south. It was named “Neutral Zone” before being renamed “Jannah Block.” The accompanying illustration shows the position of the blocks at the time (due to numerous relinquishments and new assignments, it appeared much more fragmented afterwards).

The area was relatively easy to operate: flat and desertic, in contrast to the more difficult steep canyonland of the east where Total was operator on another block. Also, Total had made several oil discoveries there and, in addition, had developed significant production from fractured basement.

A highly competitive situation was expected and, indeed, extremely high bids were rumored to be considered by several companies, expressed in what we thought were totally unrealistic numbers of committed wells, given the modest acreage concerned.

We decided to do something to avoid an industry crowd race (the “bandwagon syndrome”) and the ensuing escalation of bid levels on a much coveted “golden block.” Already being active in the two countries, Total took the initiative. The strategy was to bring in some main regional actors, namely Exxon and Hunt from the north, with whom we made contact, and the Soviet party. For that purpose, we travelled to Moscow to convince the Soviet operator from the south to join us, and we finally completed the roundtable with Kufpec, a Kuwaiti partner from the Gulf with whom Total had established a good working relationship on several occasions.

We were able to convince the Joint Authority in charge of the business that such a group of experienced operators, with operational and cultural proximity to the area, would guarantee efficiency and optimize added value. With Philippe Picard negotiating on Total’s side, all partners and the Authority reached an agreement involving a realistic number of committed wells, which set the stage for a dynamic exploration program. It was also agreed that Total would be the operator during the exploration phase while Exxon would follow in the development phase. This arrangement made sense due to the production infrastructure already established on nearby fields to the north.

Surprisingly, several discoveries were made on this small acreage position. And, by the way, many more wells were drilled than the contractually committed number! We found oil and gas, including the significant gas reserves of the Jannah field in the easternmost part of the block; these straddled the Neutral Zone and the Marib block.

Although this venture brought modest reserves to Total’s portfolio relative to those of other discoveries made in the province, it served as a stepping-stone for further action by the company, ending as the leader of a huge liquefied natural gas operation. The project was launched in 2005; exports started in 2009, with a 6.7 million tons per year (or 1.2 billion cubic feet per day) capacity, but had to be stopped and put in preservation mode for security reasons in 2015.

In summary, this was a good case of small streams making a big river. A very special partnership suited to a specific geopolitical situation resulted in accessing the prize with a reasonable committed working program, ending up with a major regional project.

Case 3: Thailand

In the early 1980s, Total started a new strategy and decided to acquire production rights in established reserves as a complement to additions from exploration (in Total, we used to call them “third type deals”).

Bongkot, the Thai gas field in question, had been discovered in 1973 but not developed due to lack of a gas market and also a complex reservoir architecture. Also, 3-D seismic was available in one of the earliest applications of the technology. It was indeed difficult to produce and required innovative drilling methodology and numerous wells to reach the many small and thin sand reservoirs with gas structurally trapped against a dense family of faults, and also stratigraphically controlled.

One of the motivations was a likely significant upside in the contract block. With the use of 3-D and well-identified direct hydrocarbon indicators, we could monitor and optimize the profiles of deviated wells well beyond the field’s boundaries, on still undrilled targets. Drilling was relatively easy, and it would take two to three weeks to complete a well. The number of rigs operating at the same time led the exploration teams, headed first by Jacques Gouadain and later by Jean-François Mugniot, to establish a rigorous data management organization to integrate abundant incoming data from geoscience in real time and impact the ongoing drilling program.

As for the deal-making part, such opportunity was of course a tempting target for a nascent, promising and growing regional market for gas. It was soon realized that acceptable profit-sharing conditions and the related pricing formula were not sufficient to satisfy the national operator and rights owner.

A critical factor in the negotiation was to propose a possible transfer of technology leading to full control of the operations after a given number of years, if requested by the national company PTTEP. This primary focus on human resources could be accomplished through a strong, well-planned training program to be applied to all levels of the organization. A special project, with its own dedicated staff, management and budget, was created to take care of that focus and monitor the program. This part of the deal, combined with a complex operation, was to become a real challenge for the affiliate and its management.

Features of the project (named OTP for “Operatorship Transfer Project”) and the related participation and operating agreement included: a common project organization managed by a steering committee, setting up working groups to propose action plans, a transfer project manager nominated by Total with a deputy transfer project manager appointed by PTTEP, and a master plan drafted to set up the details and propose common OTP objectives.

As a result, the proposal was accepted by PTTEP and was carried out in full by the parties. This led to a build-up of confidence through a long transition period. The challenge was successfully faced by the affiliate, led first by Jean-Claude Soligny and later by Jean-Paul Azalbert, and Total and partners produced up to 550 million cubic feet per day in July 1998 when the transfer ceremony took place after three successive phases of accelerated development.

Lessons

• From case 1 in Venezuela, the lesson is that just going “by the book” is not necessarily the best strategy. The business negotiators should be given enough flexibility to be able to arrive at terms that reflect (reasonably!) the project generators’ conviction.

• The lesson from case 2 in Yemen is that building a strong partnership can be a winning factor, rather than trusting pure numbers, such as high working obligations (and/or cash consideration), when warranted by the specific business and political environment.

• The lesson from case 3 in Thailand is that the social content is becoming an increasingly important factor in deal-making, with an insistent focus on a commitment to transfer technology and management skills to the host country.

A general conclusion would be that the human factor undoubtedly adds value to a winning strategy when it comes to the delicate steps following the more “quantitative” technical preparation of a prospective deal. Success was not a given outcome in any of the three case histories. Perseverance, optimism, a daring attitude and being able to “get off the beaten track” were the common drivers in highly competitive settings around the world.

Many thanks to Serge Matesco, Philippe Picard and Jean- Paul Azalbert, who kindly helped refresh and complete my memory. I am also immensely grateful to Chris Moore and to Hans and Judi Krause, and Matthew Silverman, who reviewed this article.

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