The Future Of International Oil And Gas Exploration
While conventional oil and gas exploration has declined precipitously in Canada, it’s still alive and well around the world. Isn’t it?
In the major producing basins of North America, decades of intensive exploration have identified most of the major hydrocarbon pools, spinning off huge datasets to guide exploitation of massive unconventional oil and gas resources. Other areas of the world are not as intensively explored, however, and there is great potential for significant discoveries in sedimentary basins on every continent.
Many countries in the developing world, including China, India, Pakistan, Argentina, Colombia, Brazil, Mexico and others are doing everything they can to expand oil and gas production. They understand that the road to prosperity is created by energy, and that only oil and gas can make that road a highway.
There are many issues influencing international exploration and reserves growth. Let’s look at a few of them.
- History – Major oil-producing areas of the world were defined decades ago by early exploration successes by major oil companies of the day – for example, in the Middle East, Russia, Nigeria, the North Sea and Venezuela. Infrastructure and markets were built early on, and investors flocked to areas with proven success. Other highly prospective basins, particularly in Africa and South America, saw some early exploration but quickly fell out of favour when oil strikes did not materialize quickly.
And today – investors are very averse to high-risk, high-reward “greenfield” exploration in basins without established production. Many perceive that their dollars are better spent in developing established unconventional plays or stepping out from established discoveries in well-known basins.
- Political risk used to refer only to the concern that the government overseeing a prospective basin was unstable or unreliable, and that business or economic parameters could change very quickly, rendering an investment uneconomic. Or worse yet, that the government of the day could get overthrown and be replaced by one that would expel the oil and gas industry, or at least nationalize it.
Now “political risk” can also mean that the host country has or will bring in onerous regulations hindering oil and gas development, often with environmental concerns in mind. While we are still correct in thinking of places like Sudan, Nigeria and Kazakhstan having classical political risk, we now have to consider countries like Canada, France, New Zealand and the U.K. to have considerable political risk arising from environmental regulations.
And even when we think we have the risk situation figured out, things can change quickly – as we’ve seen happen lately in Mexico and Argentina with profound changes in government and attitudes, or in Saudi Arabia with renewed military activity.
- Regulatory regime is also critical in establishing business confidence and therefore exploration investment. Countries with little regulatory experience, or with onerous regulatory requirements, make it difficult to develop confidence that an exploration investment can progress to economic returns.
For example, it’s almost impossible to upgrade a field development plan once submitted to the regulator in Kazakhstan, which hinders disposition of an asset that a buyer might want to develop more efficiently. In India, the regulator decides whether wells are exploratory or development, which has a huge impact on costs that can be deducted under terms of production sharing agreements. In the United Kingdom and France (not to mention Nova Scotia, New Brunswick and some American states), regulations and/or moratoria make hydraulic fracturing virtually impossible, thus sterilizing exploration for unconventionals.
Land tenure is part of this topic – while Canada and the United States have different systems, both favour highly competitive acquisition of land positions. Elsewhere, infrequent auctions of large acreage blocks acquired using production sharing agreements instead of up-front bonus bids can essentially sterilize exploration prospects for years at a time.
Database access is also critically important – Canadian oil and gas have grown on open public access to critical datasets like well logs, cores, well tests, lab analyses, and production statistics. New Zealand goes one better, making some seismic data available after a land tenure has expired. In contrast, many countries keep datasets confidential, and release them only to support auction bids, or even share them only with the winning bidders. The fewer people that see the data, the fewer good exploration ideas get generated.
In fact, a compelling part of the story that Calgary-based Central European Petroleum tells about exploration in Germany is the detective work required to access legacy data in that country. They have been active in Germany for 12 years only because they persisted in hunting down the data.
- Business culture and attitudes are critical to development of a successful oil and gas industry. A rich diversity of international, major independent, intermediate and junior companies, supported by an equally diverse service and consulting sector, has generated the immense range of projects and opportunities we see in North America – from offshore through huge unconventional plays to the oilsands. In countries where industry is dominated by a few major players with government connections, there is little competition, new ideas are rarely tested, and it’s difficult to attract the capital outlays needed for big developments.
India provided an interesting example of this recently. A large number of marginal appraisal / development blocks were made available, designed to attract new small players to the industry. Without a small oil company culture in the country, however, many blocks were awarded to inexperienced entrepreneurs who were unable to follow through on evaluating their blocks, and did not generate new activity.
Big exploration actually is taking place in some parts of the world right now. Guyana looks to become an important oil producer in coming years as huge offshore discoveries by ExxonMobil, Tullow and others are developed. Pakistan is inviting renewed activity in the lightly-explored Indus Basin. India awarded numerous big exploration blocks last year in seven basins around the country and huge seismic and drilling commitments have been made to explore them — although mostly by the few established large Indian oil companies. There is renewed interest in the North Sea and parts of Australia. Most targets are conventional, as unconventional potential is not well delineated — so lots of potential remains.
A final note — Canadian oilfield expertise is still highly regarded in many parts of the world, so we’re seeing talent and equipment moving overseas to follow the potential. Perhaps, if we’re lucky, some will be left to come back once Canadians across the country understand the importance of domestic oil and gas.