Problems & Opportunities Making Money – Part 2

In part 1 of our series, we look at the problems and the opportunities in making money 1) as a land company, 2) by purchasing other companies, 3) by purchasing assets.  Now let’s look at re-development work for groups lacking financial muscle or technical expertise.

Making Money by Re-Developing Other Peoples’ Oil & Gas Fields

In recent years, a lot of attention has been given to the opportunities of re-developing international oil fields.  International oil fields have average recovery efficiencies less than half that of American oil fields.  Most of these international oil fields are the responsibility of national oil companies, and the possibility of being invited to participate in the enhanced recovery from these fields is very attractive to private oil companies.

There is no doubt about the size of the opportunity target, but what are the special problems with this option for investment?

Generally, national oil companies are interested in enlisting the participation of private companies because the national oil company has little or no re-investment capital available for enhanced recovery.  Why is this?  In most countries, the revenue from the national oil fields has been split into two streams; a modest fraction for the national oil company’s operating costs, with the lion’s share going directly into the central government.  The government fraction is often completely committed to administrative functions, and can rarely be weaned back towards oil field capital improvements.

Wealthy (of fiscally prudent countries) are quite able to provide their re-development capital for their oil fields.  This mean that private company investments are most welcome in those countries that have been most profligate.  The national oil companies generally have able staff and can acquire adequate technology; they lack capital.

What is it that a private oil company is able to bring to the re-development project? Money, technology, and project efficiency skills.  Money; remember that the money you bring is unsecured risk money; that you are the “banker of last resort.”  Technology; you must be given to the national oil company as a condition of the investment.  That technology transfer requires training of national staff.  Project efficiency skills; you have traditionally used your skills to improve production rates and lower production costs.  Better be able to marvelously increase the production rate, because you should not expect to be permitted to lower production costs!  Remember, what a private company calls “operating costs” are what a national oil company calls “field operating revenues.”  Those oil field cities, those bureaucracies, that have grown up around oil fields will not let themselves be annihilated to satisfy your search for field operating efficiencies.

[callout1]Remember your national oil company ‘partner’ referees all arguments.[/callout1]

Be sure to think about the mutual difficulties of determining exactly how future production volumes will be credited to the capital, the technology, the management skills that you bring to the project.