Launching licensing rounds in tough times
IAN LEWIS, Contributing Editor
LONDON -- The low oil price and high project costs mean countries are under pressure to make oil and gas licensing rounds as attractive as possible for bidders if they are to be successful.
That means making sure the financial terms suit the difficult times, of course. But, reducing perceived risks for bidders by ensuring contracts are drawn up properly, regulation is transparent and ensuring potential explorers have access to as much geological and geophysical data as possible can also make the difference between success and failure in a round.
These were among the key messages put forward at the Oil & Gas International Licensing 2015 Summit hosted by IRN in London, which brought together representatives from all sides of the process, from energy ministries to potential bidders and geophysical data companies.
Despite the tough conditions affecting the global oil sector, several countries are pushing ahead with plans to offer blocks in coming months, in the hope that firms will still want to carry out relatively low-cost exploration now in preparation for more serious drilling as and when demand picks up. Mexico, Albania, the Canadian province of Labrador and Newfoundland, Lebanon, Uganda, Greece, Turkey, Bulgaria and Western Australia are some of those planning to offer acreage onshore or offshore, or both.
Mexico opens up
Mexico’s efforts to boost foreign investment in exploration and production, following reform of the energy sector, is attracting plenty of attention from oil firms well positioned to expand Gulf of Mexico operations south of the U.S. border.
Guillermo García Alcocer, head of hydrocarbons exploration and extraction policy at Mexico’s energy ministry, told delegates that his country had come “late to the party,” in terms of reform, but, as a result, had been able to learn from “all the good experiences and the mistakes that some countries made.” This has resulted in clearly delineated responsibilities for the different institutions involved in licensing. The new system also offers licensing structures tailored to both differing prospects—Mexico is offering mature fields, newly opened shallow water acreage and onshore blocks—and applicants, rather than adopting a one-size-fits-all approach. The ministry also insists that detailed preparation and binding contracts will reduce the risk of court challenges over environmental and social objections to projects down the line.
The negative impact on projects of high local-content requirements in some South American and African countries has also prompted Mexico to adopt what the energy ministry regards as a relatively relaxed, but achievable strategy. Projects will require 25% local content from this year, rising to 35% by 2025, allowing local firms to develop the necessary expertise to meet the needs of complex projects. Elsewhere, that lack of expertise has caused project delays and pushed up costs.
Learning from mistakes
Another country to learn lessons from the past is Iceland, though this time the blueprint for what not to do was to be found at home, according to Thorarinn Sveinn Arnarson, hydrocarbon exploration manager at Iceland’s National Energy Authority (NEA). Poor timing contributed to the failure of the country’s first attempt to license frontier offshore blocks, which took place at the height of the world financial crisis, closing in 2009.
The NEA consulted applicants and other interested companies to find out why the round ended without the award of licenses. Criticisms included a poor fiscal framework, the lack of a standard joint operating agreement (JOA), a timeframe for evaluation by companies that was too short for a frontier area and poor data provision. Following talks and collaboration with Norway, a revamped licensing framework improving on all these aspects was introduced for the next round, which has resulted in three licenses being awarded in 2013 and 2014 to groups led by Faroe Petroleum, Ithaca Petroleum and China’s CNOOC.
High quality marketing and improved data provision is becoming a must for countries seeking to attract explorers who are becoming increasingly risk-averse.
Speakers from Labrador and Newfoundland’s Nalcor Energy and Western Australia told the conference how they were employing comprehensive online data rooms to ensure the legwork done by geophysical companies was showcased to maximum effect.
Making the data available
The geophysical firms are, unsurprisingly, also keen to push the idea of using more detailed surveys and new data processing techniques as marketing tools, as well as offering to undertake seismic surveys at their own expense if they judge the acreage to be prospective. With a number of smaller countries with limited financial resources now ready to offer acreage, the opportunities to carry out such speculative activity are growing, though, by its nature, this is a somewhat unpredictable business.
When Norwegian-based Spectrum acquired new data for offshore Croatia, a potential oil play, at no cost to the state, the company reaped the rewards when the country’s first licensing round proved attractive to bidders.
Neil Hodgson, Spectrum‘s executive V.P. for the Mediterranean and Middle East region, said the company’s input started long before the round was launched, when it took legacy data from previous drilling and made it easily accessible and usable for oil companies. Spectrum then reprocessed old data using new techniques to improve geological detail. The firm also acquired new gravity and seep data sets.
Acquisition of a variety of different data sets was critical, according to Hodgson, as exploration now focuses on integrating data from many remote sensing tools to increase confidence in the results. “For an oil company, if your confidence in the interpretation of data is increased then you will bid for more wells and put more money on the table when you see a block,” he said.
The flip side of this success story in Croatia has been Spectrum’s experience thus far in Lebanon, where the company has provided seismic and data interpretation at no cost to the country, but where political and security issues have so far prevented a licensing round taking place, preventing Spectrum from gaining a return on its work.
Juniors fight for a toehold
The high cost of access to data sets—and bidding in general—for some licensing rounds was a bone of contention for executives at smaller companies. They told the conference they were often unable to compete with the majors for blocks where they may have been a better choice, because they would pursue a more active drilling program than their larger rivals, which may choose to acquire acreage now, but develop it much later.
Robert Lambert, chief executive of Petra Petroleum, a Mediterranean-focused explorer, said his firm had struggled to gain a foothold in several licensing rounds due to high entry costs and, in some cases, a preference by licensing authorities for majors over juniors. He also said the slow speed with which some western European countries evaluated bids was challenging to small companies, which depended on progressing to exploration activity rapidly if their operations were to be viable.
It is clearly not the easiest moment to launch a licensing round for all but the most prospective of acreage, but, as this gathering shows, there is no shortage of participants on both sides of the fence prepared to take the plunge, if the conditions are right.
