High oil and gas prices induce change. National oil companies increase their activities. Governments increase their stake in production, and service and supply costs climb. The cycle stays true to tradition.This time around, that cycle combines a high level of demand with a low level of discoveries, said Pete Stark, vice president of industry relations with IHS Energy, as he introduced the 2006 North American Prospect Export International Forum in Houston.
At year-end 2005, discoveries sank to their lowest level since 2002. Over the past 5 years, the oil and gas industry has found the lowest level of resources since World War II at the same time as demand has soared in India and China and hurricanes Katrina and Rita have strangled supplies, said Sandra Rushworth, IHS Energy senior global exploration and production data advisor.

NOCs rise
The international oil companies (IOCs) no longer head the list of discoveries. Brazil's Petrobras and China National Petroleum Corp. (CNPC) took the top two spots between 2000 and 2005, she said, with ExxonMobil, Shell, Chevron, Total and Eni following. The top discoveries in 2005 came from CNPC, India's Oil & Natural Gas Corp. and Saudi Aramco. Korea's Daewoo took fourth spot with its Shwe gas discovery offshore Myanmar.
National oil companies (NOCs) now hold properties on every continent and in nearly every major gas-producing basin in the world. In the latest Nigerian bidding round, no IOCs showed up, but Korean, Chinese, Brazilian and Indian oil companies were there.
The presence of those NOCs squeezes IOCs in several ways. The top priority for NOCs is reserve volume over rate of return. They can outbid companies with internal rate of return (IRR) limitations. They also often have priority in country-to-country negotiations, and they usually have a priority advantage and often tax and royalty advantages in their own countries.

Trends
The rise of NOCs is just one of the trends affecting the industry, said Terry Hallmark, director of political risk and policy assessment with IHS Energy. Leftist leaders are emerging in Venezuela and Bolivia, and they want more oil and gas income. At the same time, non-governmental organizations are increasing pressure to limit access for exploration and production.
IOCs must play ball with NOCs, because the NOCs hold the resources.
He predicted the political situation in the Middle East will be more unsettled in the next 3 to 5 years with much of the focus on Iran. That political situation will be "neither benign nor cataclysmic," he said, but it will affect the industry. Other areas of the world also have political issues.
"If I were an explorer," he added, "I'd take a good look at India."

Globalization
Irena Agalliu, senior legal analyst with IHS Energy, took a closer look at the impact of NOCs. Among leaders, Petronas increased its out-country holdings from about 3,861 sq miles (10,000 sq km) in 1995 to some 169,884 sq miles (440,000 sq km) in 2005. CNPC had a similar gain. Among major NOCs, only the Korean National Oil Corp. showed a decline in foreign holdings.
In-country, Algeria, Colombia, Indonesia and South Africa have moved toward deregulation, while Brazil, India, Bolivia, Argentina and China have leaned toward privatization in the past decade. Argentina, Bolivia and Venezuela increased regulation.
Just as low oil prices encouraged countries to increase incentives to explore and produce in the late 1990s, she said, the high oil prices of the past 5 years are having the opposite effect.
For example, she added, the state take in the United Kingdom in 2000 was about 29%, giving operators an IRR close to 26% and a net present value at a 10% decline rate (NPV10) of more than 50% for 50 million bbl of oil at US $30/bbl. By 2005, state take had climbed to about 50%, IRR had dropped to about 20% and NPV10 fell to a little more than $100 million.
Similar trends dropped returns for operators and increased state takes in Trinidad and Tobago, Libya and Venezuela.
Some countries that needed oil revenues went the other way. India's state take dropped from around 78% for 600 Bcf of gas at $5/Mcf in 2000 to about 55% last year. At the same time, operator IRR rose 12 percentage points to about 30%, and NPV10 climbed from about $100 million to $350 million. Peru and Colombia followed the same pattern.
On a worldwide basis, however, state take has dropped nearly four percentage points to 63.32%, she said.

Cost pressure
Candida Scott, senior director, cost and economics for IHS, examined the impact of market conditions created as West Texas Intermediate oil prices rose from around $30/bbl in December 1999 to more than $60 in early February this year.
Between 2002 and 2006, raw steel costs doubled from $100 to $200 a ton as China took all the steel it could find. That caused increases from 65% to 80% in offshore structural steel, depending on location in the world, a 25% increase in equipment costs, a 35% rise in electrical conduit, a 25% gain in instrument costs and casing costs that more than doubled, she said.
At the same time, labor and construction costs rose 25%, and man-hour costs caused by a lack of experienced workers climbed 75% to 90%. Engineering, procurement, installation and construction costs increased 30% to 40%, and the day rate for installation vessels gained 25% to 35%.
Depending on the duty and capacity, offshore mobile rig day rates rose more than 200%, she said.
Overall, offshore project costs increased between 5% and 18% from June 2005 to January 2006.
That has a considerable impact on the bottom line, Scott said. Now, project evaluation costs of $30/bbl oil will not give an operator as great a return as $20/bbl oil in 2000. At $40/bbl oil, returns are better in most, but not all, parts of the world.
In all, it now takes $35/bbl oil to equal returns for $20/bbl oil in 2000. If prices rise just 10% this year, project evaluation prices would have to climb to $40/bbl to equal evaluations in 2000.
In spite of the new economics of the oilpatch, more projects are going through as operators follow high oil and gas prices. But, "Price alone isn't the driver," she said.
Project returns could be higher, but constraints loom in the form of fewer experienced people and delays due to manufacturing and construction capacity.
For the future, she said, a combination of factors will appear. Companies may be forced to take lower returns, demand will force prices still higher, operators will push harder for better fiscal terms, and operators and service companies will continue to look for ways to reduce costs through technology.

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