Despite the sluggish world oil market, Italy's Agip SpA is stepping up its worldwide exploration efforts.
Raffaele Santoro, chairman of the national oil company, said Agip takes a contrarian view of world oil investments and is aggressively spending money while prospects are underpriced.
The current retrenchment in the world oil industry means there is a further slowdown coming in the pace of investment in exploration and development.
For example, Santoro said,
"We have an enormous burst of activity right now in the North Sea, but this is the result of choices made 5-7 years ago. If you look forward 24 months, you see a slowdown ahead in modules, platforms, and jackets. "
Today's low international rig count foretells a shortage of productive capacity ahead.
"No matter the current level of reserves, if the rotary table is not turning, sooner or later reserves will get smaller," Santoro said.
"If the rig count dips a little more it's going to be very interesting for companies like us, which are sort of contrarian. We have increased our investment programs. We are investing more than companies with strong histories of global exploration. We probably are investing more than Chevron, Mobil, or ARCO.
"France's Elf is the supercontrarian of them all because it is investing at a fantastic pace."
Santoro predicted said the international rig count may sink a little lower.
"If we have another year of depressed consumption and Iraq comes back on production, we may have another year of lower prices and discouragement, which means lower investments. But the longer this lasts, it is obvious that the steeper will be the bounce back."
Agip will spend nearly $3 billion this year, about 8% more than last year.
Despite Agip's bargain hunting, Santoro said, "We are very strict in our expectations for return on investments. We adopt very conservative scenarios, and we want a very high rate of return before we invest our money. We wouldn't consider anything less than 1618% return in real terms. Even so, we are able to find enough opportunities to keep up a high rate of investment."
The company's spending plans are hinged to oil price increases at the pace of inflation from $16/bbl 2/2 years ago.
Agip is a subsidiary of Ente Nazionale ldrocarburi (ENI), the state oil company. The Italian government July 10 disclosed a plan to sell a majority interest in Agip and several other state owned companies. The plan is under review.
In 1991, Agip had net income of $956 million and production of 488,000 b/d of crude and 1.8 billion cfd of gas.
It held proved reserves equal to 4.5 billion bbl of crude.
KAZAKHSTAN PROJECT
Agip and British Gas plc recently agreed to a joint venture to develop supergiant Karachaganak field in Kazakhstan, a former Soviet province. They will form a separate operating company to run the project (OGJ, July 13, p. 24).
Santoro said the $3 billion project is one of Agip's largest.
"But what you have to look at is the maximum exposure you expect. The project will start generating capital from day one. Maximum exposure is considerable-as much as $700 million for each of the two parties. That is something we are used to. We are out more money than that in the North Sea right now.
"This is a major undertaking for us, but I don't think the risks are going to be higher than they would be in any other country where we are producing."
Karachaganak field has estimated reserves of 20 tcf, which Agip says is conservative. The field is producing 450 MMcfd of sour gas and 80,000 b/d of liquids.
Agip and BP plan to increase that volume greatly through more drilling and better well stimulation and completion techniques.
Santoro said, "The problem is that transportation out of Kazakhstan is not quite clear, and that will involve Russia."
Gas is expected to be exported into the western European grid.
"Kazakhstan is very far away when you start to think of it, but when you compare it with other major hydrocarbon basins in the former Soviet Union, it is among the closest to markets."
"We are also interested in exploration in western Siberia. There are many ideas being tossed at us. But it is hard to say at this stage. We're certainly looking at more than one prospect.
"It will not be cheap hydrocarbons. There is transportation to be taken into consideration, and major infrastructure must be created. It is good because you have very large scale fields, but it certainly won't come as cheap as anything in the Middle East."
AFRICAN PLAYS
Agip, which has subsidiaries in 24 nations, is particularly enthused about operations off western Africa.
Santoro said, "We are near conclusions on two offshore blocks in the deep waters of Nigeria, and we will be participants in new plays off Angola, including deep waters.
"West African waters have a very high potential. We have a major discovery with Chevron off Congo. The potential for very light, high quality hydrocarbons is very good. The oil is much better than we would find closer to shore.
"This discovery is almost conventional, in about 200 m of water.
"Blocks we are getting in Angola and Nigeria are in deeper waters, on average 500 m. So it's going to be expensive oil.
"Still, the potential is very large. You could find a giant or a supergiant there, and the quality of the hydrocarbons is very high. If we can have intelligent agreements with these governments, as we are fairly confident we will, we can make a good profit there. "
Santoro said Agip has a good discovery, Bir Rebaa Nord, in Algeria's southern deserts, south of the Hassi Massaoud producing area.
"It is a fairly subtle Mesozoic play that had been overlooked 20-30 years ago. We have a fairly good potential there. It is very fine oil and there is infrastructure near to it.
"Elsewhere, we think we have found the key to what may-and I repeat may-be another oil play in an old province of Algeria."
Libya also is a major province for Agip, which produces about 280,000 b/d there.
"After we conclude a broader understanding with the Libyans, we probably will have a number of projects there that will be interesting."
EGYPT, U.K.
Santoro noted Agip has been active in Egypt since 1953 and has been producing 200,000 b/d from Belayim field in the Gulf of Suez for many years.
"It is a big operation for us. We are keeping production up very well. Together with our Egyptian friends, we are developing a number of exploration tools that are more and more sophisticated, so we are finding new and subtler traps every day so the field doesn't go down in its life expectancy. "
Agip also is active in the Nile Delta, where it operates a couple of gas/condensate fields.
"We think we have very important potential-onshore and offshore-for wet gas finds, mostly in the western part of the delta."
He noted Egypt is trying to develop domestic natural gas consumption so it can free liquid hydrocarbons for export.
"But the domestic market is not up to absorbing the entire gas potential. I think sooner than we expect there is going to be a liquefied gas export project out of Egypt."
Agip has been a partner in the Ekofisk oil field development project in the Norwegian North Sea from its inception. "It's been a very big peg in our cash flow for a long time."
Agip, as operator, plans to begin production in April 1993 from Tiffany oil field in the U.K. North Sea. Top production will be about 86,000 b/d.
U.S. OPERATIONS
Agip is pleased that its small U.S. operation is finally turning a profit.
"After paying a very high price for many mistakes in the states for more than 20 years, we are now able to confine ourselves to good quality fields strictly in the Gulf of Mexico, Santoro said.
Agip has developed a small, specialized team of explorationists who focus only on the gulf, where the company has 20,000 b/d of production.
"The organization is sized properly, and we use outside services in an intelligent way. We are making ends meet."
Agip has no intention of imitating some U.S. majors and shifting its U.S. operations overseas. "We should never move with the bandwagon. You can make money anywhere if you are low cost and efficient."
He said the deep Gulf of Mexico plays are not profitable now, "but we know there is major potential, and we are positioned to take part if it becomes interesting one day.
"We have the necessary exploration know-how, minimal logistics, and a profitable operation that makes us well positioned for what may again become a major play."
He said Agip has a 20 year history of entering, then leaving, Latin America.
"We now have a discovery with ARCO in Ecuador that looks promising. We discovered oil with the first well, and the confirmation was tested 2 months ago. We have 14% of that play.
"If this goes ahead-and I give it more than a 60% chance-that will be our first production in Latin America. We also are fiddling in Argentina but on a smaller scale."
ITALIAN OPERATIONS
Agip has just completed an 11,000 sq km 3-D seismic survey of the northern Adriatic Sea.
"A project of this size, as a single contract, probably is the largest project ever done," Santoro said. "Such extensive 3-D is done in very mature areas, like the Gulf of Mexico, but under many smaller contracts."
Interpretation of the seismic data has been under way for 6 months.
"We are starting to see things. This should contribute a great deal to Agip's northern gas production, which is one of our mainstays. We are producing 1.5 bcfd from onshore and offshore Italy, mostly from the Adriatic. "
He said Agip labors under very strict environmental requirements in Italy.
"We drill about 15 wells on the average in the Italian offshore, mainly in the Adriatic. We are forced to bring back to land all our drilling effluents for treatment. We don't lose a drop. That's at a big cost.
"All our drilling effluents from land drilling are segregated and treated. There is not a drop that goes into a stream anywhere. That adds quite a bit to our operating costs, but we have no problem with it as long as we can make ends meet."
He is less patient with Italian environmentalists' concerns that production of Northern Adriatic fields might cause seabed subsidence and aggravate flooding problems in Venice.
He said study of seabed subsidence has become a scientific discipline of its own in Italy, involving universities and oil companies.
"So, depending on the nature of the reservoir and fluids and the weight of sediments, we now have models that can tell you very precisely what to expect.
"We are aware that for certain reservoirs with certain sediments on top of them and certain fluids, there is going to be subsidence. In many cases there will be no sinking at all. but we must remember this is a scientific question, and it shouldn't be a witch hunt."
TECHNOLOGICAL STRIDES
Santoro said his main goal for Agip is to push new technologies as much as possible.
"Our research and development budget is concentrated very closely with our day to day work and not pies in the sky. In the last 4 years our R&D budget has more than doubled. It is now getting close to $60 million and will be $75 million by 1994-95."
Agip has seen its R&D pay off in the areas of seismic interpretations and well completions and stimulations.
Much of its research is in joint ventures.
"We are beginning to work together with other companies more and more. We have a long standing alliance with the French. We are beginning with BP and Amoco. We try not to do research singlehandedly if we can help it, except for the very few exquisitely proprietary tools, mostly seismic."
But he said the interdisciplinary approach to problem solving is more important than technological improvements.
"The real difficult challenge on a project is to assemble all the information you have, look at it from all sides, disassemble it, put in different assumptions, reassemble it, and reexamine it with teams of people.
"I find it silly to pinpoint any one technological tool as being decisive. The interdisciplinary approach is the most difficult-and most productive way to overcome problems."
He said this method has improved seismic exploration. But the benefits of horizontal drilling have been overstated.
"It still is a very useful tool. You can drain a carbonate reservoir better with a horizontal well than you can with vertical wells. In other reservoirs it wouldn't make sense. Its a specific tool for a specific purpose."
MANAGEMENT CHALLENGES
Santoro said the thing that takes most of management's time is trying to retool every day and keep the company up to date in organization and technical skills.
"We don't aspire to be different from other oil companies. We simply aspire to keep up with the best, which is always a very hard target."
He said Agip's 66 year tradition is an asset.
"We have great team spirit. Our people feel very much a part of one another. This is the glue that many times helps overcome faults in our organization. "
He said although it is basically an Italian company, Agip has not been reluctant to promote non-Italians to management positions in recent years.
"What we always seek is talent. You don't find people with exceptional talent and drive every day."
Like so many other oil companies, Agip is becoming leaner, although it has 12,000 employees.
"We are growing out of the old system of accretion, which means that when you have more to do you hire more people. Now we do more with fewer people. This does not mean we cut down on the workforce but get leaner with shorter communications and command lines and more responsibility at lower levels.
"This is a major undertaking for us. If we are lucky enough to stay on this track, we will get to the point that we are as little labor intensive as those that have been through major layoffs-but without having gone through the trauma of major layoffs.
"I think then we will be a little better than companies that have adopted more brutal policies.
"No matter how smart you are, no matter how well you are organized, if you have to cut so many jobs within a certain period of time, you are inevitably going to lose talent."
THE MAN
Santoro, 57, was named Agip chairman and chief executive officer Aug. 10, 1990.
He began his career with Anoinima Petroli Italiana and joined ENI's international department in 1961. In 196370 he had overseas assignments in Tanzania, Kenya, Mexico, and Venezuela.
He was named ENI's Middle East commercial relations manager in 1971, deputy director for international activities in 1974, and international division director in 1980.
From 1985 until 1990, he was Agip's deputy chairman and managing director for exploration and production services, purchasing, and contracts.
Santoro recently attended a Baltimore, Md., ceremony in which Agip endowed a chair in international economics for Johns Hopkins University's Bologna, Italy, center.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
