"When share market is falling, no buyers are available. But when the market is at peak, everyone rushes to market to buy. This is emotional behaviour of investors. Their decisions are not based on rational choices; they are influenced by their emotions. This is especially true when the market is volatile, or is under bull or bear phase. Studies in behavioural finance show Investment decisions are more dependent on investors' behaviours."
This is true also for investment in oil sector. Today when oil price is at low, people are withdrawing from oil industry and curtailing capital commitments. But if you want to be a successful entrepreneur, you should not be guided by impulse while making investing decisions. You should detach yourself from emotion. Low price provides an opportunity to enter and diversify into hydrocarbon sector.
Oil crises do come, but these are not permanent. The market crashes but ultimately recovers and continues to move on growth path. History shows that the market recovered after the oil price had crashed to $37 from $137 due to global economic crisis in 2008. The long term trend has remained upward. Oil price which was $1.70 a barrel in 1973 is now hovering around $50. The price remained high above $100 for a long period. Though it witnessed sharp decline in oil price to below $30 in January 2016, it started to recover and has reached near $50. This roller-coaster has left even market pundits confused with this wide fluctuations in short term. But outlooks remain positive in the long term.
The present bearish phase provides a hidden opportunity. You can buy E&P companies at almost one-third price. As the demand for oilfield service providers has gone down, the exploration, drilling and development costs have also declined. This gives an opportunity to investors to focus more on exploration at a low cost. You need to remember that any successful discovery translates into actual commercial production only after five to seven years; by which time the oil prices, with all probability, would be recovered. This will enable to sell oil at much higher price than the present prevailing price. This will maximize returns on capital invested now in exploration and development.
With the aforesaid background of oil economy, let us examine how the present auction of discovered small fields (DSFs) in India provides an opportunity to entrepreneurs and what precaution should be taken while selecting any field.
The Indian Government is offering 67 oil and gas fields for development of hydrocarbon discoveries made by National Oil Companies VIZ. Oil & Natural Gas Corporation Ltd (ONGC) and Oil India Ltd. 61 fields were discovered by ONGC and 6 by Oil India. These discoveries could not be monetized till now, due to multiple reasons including isolated locations, small size of reserves, high development costs, technological constraints, fiscal regime etc. This is spread over 7 Basins with 31 onshore fields and 36 offshore fields (Shallow water and Deepwater). Some of these discovered fields have been clustered to ensure viability of operations, resulting in 46 contract areas: 26 Onland, 18 Shallow Water and 2 Deepwater. These fields have been put on to competitive bidding under the new liberalized policy. The license granted to the successful bidder will cover all hydrocarbons in the field and exploration can be done during entire contract period. Another paradigm shift is from cost revenue model to revenue sharing. The contractors would have the right to sell oil and gas to customers of their choice.
These 67 small discovered fields are estimated to hold together over 650 Million Barrels of Oil and Oil Equivalent Gas in-place reserves. The estimated recoverable reserves are of the order of 220 Million Barrels, around one-third of in-place reserves. They possess trapped resources worth $11 billion at current prices. The value of SDFs is likely to appreciate with further exploration and development and commencement of production in next three years.
These discoveries were made after 2D / 3D seismic survey and drilling of exploratory and appraisal wells. Further development and appraisal wells would be required to drill. The field would need capital investment for drilling wells and field development to extract hydrocarbon. The successful bidder would have to complete these and start production within three years.
Oil industry is capital intensive with long gestation period. Success of small fields' exploitation depends on how you reduce capex and squeeze implementation time. This requires using other oil companies' facilities and infrastructure existing in proximity. In most of the cases, some kind of proximal facilities and infrastructures of ONGC and OIL exist. For example, today also, the Contractors in various small fields in Gujarat are already using the nearby existing pipeline, crude oil storage, handling and processing facilities of ONGC by paying service charges. Out of 5 DSFs in Cambay available under present bidding, two fields are just 10 -15 km away from existing GGS and EPS. The Appropriate Commercial Agreements on Tolling & Processing Arrangements (TPA) for transportation, storage, handling, processing and sales of oil/gas in onland and offshore areas may be entered between ONGC and the awardees of DSFs. The sharing of the facilities and infrastructures of ONGC by the awardees will bring reduction of capex and early monetization of the fields. The other area of economy is to use modular and reusable facilities on rent or lease. DOFs may minimise capex by spending more on opex. Use of new technologies such as horizontal drilling and multilateral drilling also reduces number of well required. Similarly application of coil tubing and ESP would increase productivity.
To sum up, history shows oil extraction is highly profitable venture. Oil companies continue to dominate the top tier of Fortune magazine's list of the world's 500 largest corporations. 4 out of Top 5 are oil companies. DOF provides an opportunity for new entrepreneurs to create wealth. Start-ups may also join hands with other companies to form Joint Venture to enter into oil sector. A small field is all about economics. Do homework and due-diligence while picking up a small field. Adopt a well-thought strategy to make the field profitable, even with low reserves.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.