Innovative Commercial Relationships To Revitalize Our Mature Basins

By Bill Edman, President
Chevron Latin American Operations

Third Joint International Conference

Veracruz, Mexico

I am especially proud to be here, not only because Mexico is one of the world's great oil-and-gas nations with a proud past and an even brighter future, but also because I think we have entered one of the most exciting chapters in the oil and gas industry. A time in our history when our economies need energy to grow, our businesses need energy to thrive, our fellow citizens need energy to enjoy a good quality of life; and our children will need it for their futures.

Virtually everything we value depends on a steady supply of affordable energy. And that means all of us here today have a critically important job to do and a great deal of work ahead. But there is more to our challenge than just what we do. Equally important is how well and how wisely we do it.

As most of the earth scientists here know, exploration remains at the heart of our business. However, managing mature fields that often contain very old reservoirs is now perhaps an even higher priority.

I am not talking about new applications of technology to manage these mature areas, but about the commercial and strategic framework to allow us to work smarter.

And this brings me to my primary message today, "Innovative Commercial Relationships to Revitalize Our Mature Basins."

New commercial approaches to our business are already paying off in various mature basins in North and South America. Examples include the Burgos Basin and the turnaround in production and reserves in the Neuquen Basin in Argentina. These basins provide prime examples of dramatic change brought about by quite different commercial situations. Other examples include the Permian Basin in Texas, the San Joaquin Basin in California, Venezuela and the North Sea.

These are all basins once thought about as approaching maturity or the end of their life, but revitalization including application of new technologies and new investments added new reserves, higher levels of production and exciting new exploration opportunities.

One example that comes to mind is the Burgos Basin in Mexico, where gas production is up four-fold in the last five-years. That's over 400 percent in a very short timeframe. This is due in part by the Mexican government's direction to the industry that gas is vital for the industrialization in northern Mexico.

This revitalization has been driven in part by changes in commercial relationships between the resource operator, Pemex, and various service providers. This is a great success story for our industry.

As for Mexican gas, it appears that the huge new demand for electricity needed for national economic growth has put an enormous challenge in front of Pemex. This challenge is to continue to strengthen its oil production while at the same time dramatically increase gas development to supply energy for electricity generation.

Let's turn now to Argentina.

Our friends in Argentina, over the last decade have revitalized not only the Neuquen Basin, but also the entire industry in Argentina resulting in reserves and production growth by approximately 75 percent. Their approach was very radical. The government changed the commercial, fiscal and regulatory framework, which allowed growth in capital investments in their mature basins. It created new private Argentine companies and competition amongst them, thus resulting in greater efficiencies in production, oil and gas recovery and an aggressive outlook for new exploration plays.

Their new approach to commercial relationships has made it possible for the twin revitalizing forces of investment and technology to work their magic.

There are numerous other cases of success in our hemisphere.

Commercial and strategic changes in major basins like the Oriente in Ecuador and Lake Maracaibo in Venezuela have breathed new life into oil and gas areas that everyone thought were approaching maturity.

Consider the Boscan field in Lake Maracaibo -- a good example of an innovative commercial relationship between a resource owner and a petroleum service provider in a very mature basin.

This 46 year-old field will be described in detail on Tuesday, but I would like to talk about the innovative commercial arrangement that allowed us to achieve our success. This is called an Operating Service Agreement (OSA). An Operating Service Agreement is an agreement between a resource owner and a service provider.

The key feature of this commercial relationship is that the resource owner, PdVSA, retains ownership of the field and the marketing rights to the oil and gas production; and transfers the operation of the facilities and subsurface reservoirs to the service provider, such as Chevron. The service provider operates the field under contract, which typically includes providing all investments and operating expenses; and receives an internationally competitive fee with agreed incentives for production increases and cost reduction.

In the case of the OSA in Boscan, the field has increased production by nearly 50 percent. Presently we have the capability to further increase production from a field considered mature and declining for many years.

But of course, revitalization is not confined to our hemisphere alone.

Look at the Joint Venture Operatorship we have in the Britannia gas field in the North Sea. This is where two operators -- in this case, Conoco and Chevron -- jointly operate the field on behalf of a large joint venture with each operating partner doing what they do best. In this case, Chevron manages the subsurface reservoir performance, and Conoco operates the production facilities where they have noted expertise in the North Sea.

There are signs that other innovative deals like this are being evaluated in our hemisphere. For example, in Brazil, where international partners will contribute various types of skills and capital, and Petrobras will contribute its world-class expertise in subsea completions and deepwater developments.

But there is much more to gain from innovative commercial relationships. Let's have a closer look at some of these advantages.

OSA and Joint Venture Operator relationships create new jobs. Employment occurs both in the new organization and in the local industry.

And of course, this is not limited to direct jobs in the oil and gas industry. Wherever our industry operates, we create indirect jobs in the support industries and secondary services, as well as positive changes to the infrastructure, education and health services.

Another advantage is technology transfer. I am not only referring to new technologies, but also new applications of existing technologies, which is transferable to the resource owner, either directly or indirectly.

This also means providing access to a larger technology portfolio, including proprietary technologies of the service providers. Some examples include:

  1. New processing techniques for 3-D seismic,
  2. Application of 4-D seismic,
  3. Integrated reservoir modeling and simulation,
  4. Horizontal completion techniques to maximize flow efficiencies, and
  5. Some of the latest approaches to environmental practices and cost reductions.

Another key feature of innovative commercial relationships is the improved efficiency in capital investment. This occurs when the funds from an outside service provider are devoted to a mature field, allowing the capital investments of the resource owner to be invested in national infrastructure development, such as education, health services and transportation systems.

Innovative commercial relationships are -- in one sense -- just a continuation of a long tradition in the earth science community. I'm talking about our tradition of taking a fresh look at a known field or a mature basin. Taking a fresh look is one of the things geologists do best. We are not afraid of continuous change, of new ways of thinking, of doing our work differently. It is one of our most important job duties, combining our scientific training with our experience, creativity and instinct.

I believe we have only begun to find ways to innovate and revitalize. There is no right or wrong way to proceed. Each policy maker and resource operator must decide how to choose the proper commercial framework that will allow revitalization of their mature fields and basins.

However, as they say in Argentina, it takes two to tango.

Our industry has made great progress over the last decade here in our hemisphere from Argentina in the south, to Venezuela, to Mexico and to the mature areas in the U.S. and Canada. We have knowledge of the basins. We have known reserves. We have technical expertise, we have markets and we have the leadership and management talent.

However, our industry's responsibility is no longer merely earth science; it is to be good stewards of the geologic assets. It is asset management and strategy creating maximum value.

This is a time of evolution, not revolution, in our industry. We must take advantage of opportunities created by rapid change -- and ride the wave of change, rather than let it pass.

I believe I can speak for everyone at Chevron when I say that we look forward to working with many of you to keep the revitalization trend alive.

Oil and gas supplies may be finite, but possibilities of partnerships are infinite.

Spanish translation of speech (En Español)

Updated: October 1999