International: What Attracts Independents?

I'm very pleased to be with you. It is a special honor to be asked to discuss such an important and timely a subject as new opportunities in the hemisphere's dynamic and rapidly evolving petroleum sector. And to do so with so many distinguished conference participants.

In a moment I'll discuss resource-, economics- and "above-ground-risk"-related elements that make worldwide opportunities more-, or less-, attractive to the "independent " U.S. oil and gas exploration and production companies. I hope that by the end of our discussion you will share the excitement and enthusiasm that I have for the potential hemispheric role these independents in the future.

To begin, let me explain what we mean by the term "independent".

Independents as we think of them are those who only explore for, develop and produce crude oil and natural gas resources. In the United States we have thousands of independents, ranging from very small, perhaps family, businesses to large, multi-billion dollar corporate independents that I represent.

While "independents" are often active marketers of their oil and gas from the wellhead, they are not thought of as having refineries or gasoline service stations. While they may-and often do-process natural gas, they themselves are not gas distributors. By the exploration and production niche they have chosen, they are highly focused.

Of special importance to this conference and the future of the hemisphere's petroleum sector, independents are also highly entrepreneurial. They have the heritage of the famous "wildcatters" of the early exploration days in the United States-men willing to take more than the average risk in the search for oil, and then, increasingly, natural gas.

But they are definitely already moving into the Twenty-First Century in exciting ways.

According to an analysis done recently by Deutsche Banc Alex. Brown, our 17 Domestic Petroleum Council member companies drill over 40% of all wells in the United States-and over 70% of all wells drilled by independents. They produce significant quantities of oil, and nearly 16% of U.S natural gas. The DPC companies have interests in thousands of offshore leases in the Gulf of Mexico, including approximately one thousand in deep water.

These companies are the high-tech leaders in the independent sector. They have been leaders in geoscience innovation and application. In horizontal and multilateral drilling. In reservoir stimulation. One of our members is using the world's first production spar in the deep Gulf of Mexico. And they are environmentally responsible.

They have names that often cause a curious look by those outside our industry. Apache, Anadarko, Burlington Resources, BHP America and Cabot, for example. Without service stations and related signs and advertising, it is not surprising that names such as CNG Producing, Devon Energy, EOG Resources and Kerr-McGee may not be as readily known, at least by gas consumers.

These companies, however, are increasingly well known in the oil and gas industry worldwide. Companies like Ocean Energy, Pioneer Natural Resources and Pogo Producing do have a unique perspective because of their size, their expertise in using of all the modern tools of our industry, and their financial strength. DPC members like Santa Fe Snyder Corporation, Sonat Exploration, Spirit Energy 76, Union Pacific Resources and Vastar are the kind of companies that are in the business for the long haul. They are well-equipped to meet the challenges of price changes and tough operating environments. They are companies that demonstrate the ability to move quickly and aggressively - just like the wildcatters of the past-- when necessary to drill a prospect or make a connection to move gas and oil to market.

The DPC companies and other independents are viewed as solid partners worldwide. In fact, they are increasingly being sought to bring their unique attributes to new ventures. Most DPC members have international operations and are looking for more international opportunities. A quick check before this Conference showed DPC member companies alone with exploration and production interests in more than two dozen countries, including a number in this hemisphere.

A special note for our friends and colleagues from Mexico: Members of the DPC have bought and sold gas across the Mexican/US border. And our members tell us that they look forward to mutually beneficial expansion of that trade.

Against this background, independents will be increasingly active participants in the petroleum sector throughout the hemisphere.

Let me turn now to some brief thoughts on factors that may provide incentives for our independents to seriously consider partnering with, and investing in, nations of the hemisphere. And again, these factors stem from the independents' entrepreneurial heritage, their business focus and bottom line orientation sharpened in large measure by their work in the higher-cost U.S. basins, the financial strength and international expertise especially of the larger independents--and their active involvement in public policy arenas in the United States with a goal of removing impediments to market integration, market-based demand and competitive investment.

They have watched with interest and have applauded the progress being made in many countries of the hemisphere toward these goals.

First, with respect to the resources upon which they may be asked to focus, independents need to know with certainty and timeliness what areas and formations are to be included for potential investment, bid rounds or concessions. And they need to know about the availability of data on them. Drawn-out processes and delays at early stages disadvantage independents compared with their larger, integrated counterparts that may have a different cost structure and/or culture.

Second, the economics of potential involvement are crucial. That means that for independents to have the best chance of participating, they need to know in a timely way what the rules are-what the contracts or bid packages will look like. Bids based on work commitments and with a degree of flexibility for independents to propose innovative approaches to designing and fulfilling commitments are most attractive. On this point, I want to emphasize that independents look for assurance that, while they will strictly adhere to their contract commitments, their national oil company partners and host governments are open to continuing dialogue and new ideas on restructuring commitments as more is learned from ongoing projects. They like to know that, as more is learned, the door is open to discuss new approaches that may bring greater returns to all parties. And, transparency with regard to laws and regulations on taxes, repatriation of funds and the like is very important.

Third, independents pay great attention to the notion of "above ground risk". As we have become painfully aware in our own country, changes in government policy, or undue regulatory burdens can stifle even the most promising concepts and projects. Certainty in an investment-friendly environment will go a long way toward providing an edge in seeking independent involvement for the future. And, here again, timely and efficient contract administration is a key factor in providing certainty.

A footnote: I'm certain you have noted that timeliness is an important consideration for independents. They have little, if any, organizational layering or bureaucracy themselves, so they are prone to making solid decisions in the shortest time. To them, time is money. Evaluations of competing opportunities do not wait long. Opportunities are to be pursued as efficiently as possible. "Fast-tracking" is a way of life. So I urge that this be recognized in planning and carrying out new ventures in which independent participation is sought.

I also want to say a word about natural gas, despite this being a "petroleum" panel. Independents are natural gas exploration and production leaders. Our large DPC independents are primarily gas producers in the U.S. and oil producers internationally. Independents are excited about the growing importance of natural gas as a fuel of the future. They are excited about the increasingly frequent announcements of new gas projects throughout the hemisphere. And they realize that open, competitive private sector gas transmission and distribution systems hold the best promise for development of the markets that they can and will help to serve in the future.

In conclusion, the message I would like to leave you with is this:

• The independent exploration and production companies can and will contribute to a strong petroleum sector throughout the hemisphere.
• The independents have the entrepreneurial spirit, financial strength and technical know-how to be outstanding partners in achieving that goal.
• They are increasingly being sought as exploration and production partners around the world, so their investment decisions will depend on
  • maximizing their access to resources on which to focus their E&P skills,
  • ensuring sound economics and fair returns on their investments; and,
  • minimizing uncertainty and risk "above ground".
• Independents also understand the need to work with governments and in the political arena toward sound public policies dealing with all aspects of energy and trade-and in ensuring appropriate environmental practices and rules.
• Finally, independents understand that personal relationships provide the basis to consider the future together, so I encourage you to get to know them-and I would be glad to help in that regard.

I hope these thoughts have been useful and that they may provide the basis for further discussion. And I look forward to what we will all learn from other panelists and with formal and informal discussion with others at this important Conference.

Thank you.

Domestic Petroleum Council contact: Bill Whitsitt, 202 544 7100