The following is taken from the Q3 2011 issue of SCA's GeoLOGIC newsletter. For access to downloadable back issues of GeoLOGIC, click here. Subscribe to the Upstream Petroleum Blog to receive links to future editions and other unique industry news and perspectives.
Oil and Gas Opportunities (Deals)
by Jeff Lund and Daniel Tearpock
Oil and gas “opportunities" or "deals” are the heartbeat of the upstream industry. Almost every well that is drilled, almost every acreage block that is leased, almost every oil or gas field that produces, has or has had a history of ownership change and often phases of technology application. It's common to hear the terms “brown field” projects and “green field” projects referring to old projects being renovated or receiving a new round of activity (“brown”) and new or start up ( “green”) projects.
Deals involve individuals, small companies, huge companies, independent and so-called major companies, national companies, foreign governments, naive investors and thieves. They can range from exploratory prospects looking for undiscovered resources, development of discovered but incompletely exploited fields, application of new technologies (water flooding for example) to force out additional oil and simply reselling of producing properties as companies rebalance investment portfolios or have differing opinions of the future of commodity prices.
There are many opportunities that are done, not through large“brand name” investment houses, but through individuals and small consulting companies having sound personal contacts from decades of working in the industry. They can identify and evaluate some of the best opportunities. The key ingredients are: 1) personal contacts; 2) extensive industry experience; 3) the technical ability to separate the wheat from the chaff (to be able to define what is of good quality over what is of poor or lower quality) and 4) to find these opportunities often without the potential buyers having to go through competitive bidding processes.
Small entrepreneurial consulting companies often have the edge over the larger investment houses due to their ability to personally identify and evaluate opportunities including the financial, economic and perhaps the most important part of the equation, the technical merits of the opportunity (the geology, geophysics, petroleum engineering, and other technical areas behind the discounted cash flow numbers). Opportunities span a huge range of values. We at SCA have seen investments ranging from a few ten's of thousands to several billion dollars.
There is also a large range of risk and reward available in the oil and gas deal market place. The graph below shows a relationship of increasing risk of economic failure (such as drilling dry holes) to potential reward. The general rule is that increasing reward almost always involves being exposed to greater risk. The various types of oil and gas deals ranging from buying proven producing properties up to frontier or high risk exploration, systematically expose the investor to greater potential reward but also greater chance of failure. One issue on which many companies and individuals need advice is quantifying this trade off.
Sometimes an enthusiastic seller has become so excited about the deal he is proposing he forgets to explain the risk element to buyers. That's one good example where expert technical advice is critical.
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Interested in reading some examples of real-life prospect evaluations? See SCA's collection of case studies. In addition, if you're looking to develop your knowledge in this area, SCA offers training courses specific to economic evaluation of petroleum opportunities. Click here to find out more.
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