Building a complete understanding of economic potential is the first step in a series of critical decisions every nation should consider prior to offering oil and gas resources to foreign investment. From asset appraisals to development plans, the decisions and strategic choices made at the outset can impact the financial performance and creation of value for years to come.
“National oil companies (NOCs) and independent oil companies (IOCs) have access to unprecedented amounts of subsurface, production, and commercial data,” said Brian W. Horn, Senior Vice President of E&P Advisors at ION Geophysical (ION).
“These companies have the ability to make accurate and informed decisions about asset value. Energy ministries need access to similar information and expertise as they prepare for license rounds. This type of information parity ensures the terms of the offerings are both commercially viable for operators and financially beneficial to the national economy.”
- Ensure the round is globally competitive
- Optimise value for the State
- Attract maximum investor interest
- Negotiate from a position of knowledge
From pre-round feasibility studies through the licensing round execution stage, the right consulting partner can optimise sovereign value while maximising license round competitiveness and investment. Effective guidance and experienced-based advisory in the beginning stage can have a significant impact on the success of the license round and how quickly those assets are monetised.
The E&P Advisors group at ION has worked with more than 40 national governments and NOCs, serving as a technical, commercial and strategic partner for license round developments, reserve additions, production additions, and capital raises. Collectively, the E&P Advisors leadership team has more than 80 years of experience in finding, producing and monetising oil and gas opportunities worldwide.
Reducing information asymmetry
“Governments that are less experienced in resource development face unique challenges in attracting investment,” said James Deckelman, Vice President, Global New Ventures at E&P Advisors.
“Oil companies have access to extensive databases, technology and other resources that enable them to optimally employ capital. Many governments are not as well equipped. At ION, our job is to reduce oil company/government information asymmetry.
"We enable governments to understand the value of their acreage, to align contract terms with value and risk, and understand the competitive landscape. This allows governments to attract maximum investor interest while optimising value for the State.”
A variety of broader factors, from political stability and functional rule of law, to contact terms and monetisation risk, also play an important role in the decision making process for potential licensees.
Governments need to understand the complete risk profile that oil companies consider when evaluating license round opportunities and be willing to set their fiscal and contract terms accordingly.
“Selecting the right investment incentives and careful benchmarking of fiscal and contract terms has many long-term benefits. From tax and royalty revenue, to production and reserve additions, to employment creation, the effects are profound,” said Deckelman. “Choosing a competent and committed Operator is also of critical importance to governments.”
Accelerating revenue and royalty generation
Even the physical size of the license blocks can make a difference in how quickly oil and gas can be brought to market. Large block size can limit the number of investors. This can reduce the pace of investment and the rate of resource development. In areas such as the US, blocks are smaller, so there is competition between companies to access acreage for exploration and development opportunities. This activity helps build the knowledge base and facilitates shorter cycle time for revenues for operators and royalties for governments.
With the US Energy Information Administration projecting that US oil production will level out in 2023, and similar plateaus in other oil-producing countries, there will be opportunities for exploration to expand production in Africa, Asia Pacific and beyond.
Governments in emerging energy-producing regions can proactively develop license round structures that account for the added challenges and inherent risks for oil companies entering new basins or countries. This approach will help deliver first oil more quickly and make energy exploration economically advantageous for all parties.
“The oil and gas industry will be entering a new phase in the coming years, and those governments that are able to design appealing, mutually-beneficial opportunities will see stronger growth and greater investment,” Horn said.