Competitive Legislation - The Key To Asia Pacific Petroleum Prospects
Authors: Gaffney Peter D. 
Published: December 2007

Gaffney, Peter D., and Moyes, C.P., Gaffney, Cline and Associates

The prospects in the Asia Pacific region remain excellent, as they have done before, during and since the boom which culminated in 1974. Political factors have changed the scene in the region as a whole, Political factors have changed the scene in the region as a whole, and have resulted in the two to three year reduction in major exploration efforts in Indonesia and Malaysia, in particular. Whatever effort has remained has swung toward the Indian subcontinent, Thailand, the Philippines, and now Australia. As in other parts of the world, the Philippines, and now Australia. As in other parts of the world, the industry remains one of the focal points for government attention. The ease with which public support can be gained by tightening taxation and other type screws on the oil industry in Southeast Asia is no different (in fact, the effect is perhaps less so) than the ease with which it can and is done in North America and Western Europe.

The question, therefore, hinges nowadays not entirely on how good the prospects are, but rather on the relative terms that may be available prospects are, but rather on the relative terms that may be available in one locality compared with another. How does the potential return look in the context of technical and legislative risk, and how does it compare with situations which may be obtainable elsewhere, in particular, back in the domestic U.S.? It is still true that technically the size of potential reserves are large relative to the front end exploration costs, but this is offset by the terms offered and the degree of legislative uncertainty.

An analysis of comparative legislative and net returns suggests that the region still contains excellent opportunities, and that given certain incentives, a degree of legislative stability, and some innovative approaches, we can expect a further period of growth and development of the regional resources.

Introduction

In previous discussion on the Asia/Pacific region, we have established that the exploration opportunities for the discovery of small, medium and even large-sized fields are extensive (Ref. 1–3). The continued success ratios in the major basins in the region and new discoveries in new basins continue to bear this out. The nub of the problem, then, is the economic circumstances in which these problem, then, is the economic circumstances in which these geological opportunities exist, not only the circumstances within the region, but also the extra-regional influences which have a bearing on the available risk capital. This discussion is an attempt to quantify some of those economic factors and to look at the relative changes in government legislation and their effect upon investment in the key prospective countries of the region.

Activity Review.

First, let us briefly examine some of the offshore trends over the last seven years. Fig. 1 shows the number of offshore wells drilled over the last seven year in the region. The classification of exploration wells has been liberal, in that some stepout and some wells which might otherwise have been classified as development have been included. It can be seen that following the steady buildup 1970 to the top of the boom in 1974, there was a catastrophic drop, resulting not only from the drop in Indonesian activity, but also by similar reductions in Australia and Malaysia. In all cases, this appeared to result from governments adjusting in their favor the split on income from successful ventures. Forecast returns from production then appeared insufficient to justify the commitment of further significant exploration funds, with a consequent decline in activity.

In each case in this region, as in for instance the U.S.A. and the U.K., the changes were in keeping with the intentions and policies of the governments in office. These changes were taken, we must accept, in good faith, as being in the best interest of each nation at that time. We must, as an industry, accept that for the economy and well being of Country X, it may be necessary to adjust upwards the nation's return from current production, even if the net effect is to curtail exploration temporarily. The importance of immediately increased cash flow can frequently, even in the private sector, far outweigh long term gains.

One of the difficulties for government is the advice that it receives on how to encourage exploration. This advice is rarely based on a risk assessed discounted cash flow basis, the effective method used by the industry to decide on the relative merits of exploration investment. There is also a problem in that apparently certain international advisors compare the cost of existing operations in the Middle East with the cost of finding, developing and producing new reserves in much smaller fields in this region.

What is regrettable is that there are means available which are rarely used initially by which government can substantially increase their take from current production and yet not severely effect exploration in the long term. In the U.K. and Far East countries, governments have recognized the need to achieve this balanced objective in different ways, but unfortunately, only after a serious hiatus in exploration efforts caused by previous legislation. The regional upturn in 1977 reflects the decision by a number of these governments to increase the return to the industry to encourage exploration.