Fiscal terms impede exploration

The oil and gas industry is a difficult one in which to make money. Daniel Johnston, a consultant to the international petroleum industry, told attendees at the Newfoundland Ocean Industries Association meeting in St. John's, Newfoundland, "It is really hard to make a living out there."

Jun 17th, 2003

The oil and gas industry is a difficult one in which to make money. Daniel Johnston, a consultant to the international petroleum industry, told attendees at the Newfoundland Ocean Industries Association meeting in St. John's, Newfoundland, "It is really hard to make a living out there."

Part of the reason for Johnston's view is that fiscal terms worldwide are too tough in his estimation.

Unrealistic expectations for prospect sizes, success ratios, and oil prices are resulting in prohibitive fiscal terms, Johnston said. "Generally speaking, we have lost a lot of money in exploration," he said.

One reason Johnston offered as an explanation is that the industry as a whole has been paying too much for lease blocks. "We have been over-bidding," he said. He pointed to the Gulf of Mexico as an example. "The Gulf of Mexico is a fabulous province in many respects," Johnston said. The problem is that investors have been over-bidding for years. The bonuses just don't make up for overpriced blocks, he said.

Part of the problem is that governments have allowed the market to determine what the market will bear, Johnston said. He suggested that governments would do themselves and the industry a favor by making bidding less painful. In his view, high costs dramatically reduce the amount of exploration that goes on once the block has been awarded. So although the blocks might generate a lot of revenue initially, the licensed areas will not get the level of exploration the government expects to see.

Johnston argued that selling leases at a high rate, then leaving the hydrocarbons in place because of the high cost of exploration, is an invalid position. "It is like money in the bank at 0% interest," he said. If exploration doesn't take place, the hydrocarbons have no value.

06/17/03

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