Hydrocarbon Exploration: The Story of Greece and Croatia
It is no secret that the recent decline in oil price levels has led most international oil companies into a process of rationalisation of their exploration and production projects. Anyone even remotely active in the industry is experiencing, in one way or another, the impacts of corporate restructuring, cancelation of projects and cuts in capital expenditure.
Various analysts and commentators have highlighted the impact that this environment has had on the financial performance of most, if not all oil companies, as well as that of countries, which are either direct producers, or consumers of oil and gas.
To be more specific, while the national budgets of most countries have been affected, either positively or negatively, by the dramatic fall in oil prices; a number of countries have also suffered from the freezing or cancelation of investments in upstream projects, which have become uneconomic in the current oil price environment.
Global oil and gas companies have announced capital expenditure cuts totalling some $349.2 billion, while it is believed that over $164 billion of investment plans in exploration and production are currently at risk.
In this context, the recent results of the 2nd onshore licensing round in Western Greece do not come as a surprise. Although the participation of Total, Shell and Repsol was rumoured, it never materialised. Nor did that of Enel, whose interest incentivised the former Greek government into launching this tender. Instead, the only bids submitted were those from two Greek companies, Hellenic Petroleum and Energean.
It is clear that the recent plunge in crude oil prices has led many oil and gas companies to cut back on high-risk investments, prioritising projects in their portfolios strictly based on returns, protecting shareholder value. Even though this is an unavoidable reality for the industry, the low oil price environment has not been the sole driver behind the failure of the recent Greek bidding round in attracting international players.
Looking at the recent licencing round in Croatia – an EU country with comparable geological risks, as well as licensing systems – which received 10 bids for 15 exploration areas from 6 companies including ENI, Marathon Oil, OMV and INA (co-owned by Croatian government owned and Hungary’s MOL) in 2014, the oil price environment did not act as a prohibiting factor.
Thus, the following question is raised: what lessons can Greece extract from this turn of events, in order to ensure the success of the re-launching of the 2nd Offshore Licensing Round in the Ionian Sea and the South of Crete? Any answer to such question, requires us to look at a number of issues.
Examining the factors which drove the success of the Croatian international exploration round, on the most obvious level: their newly established legal and fiscal regime was an outcome of adopting best practices from other EU countries – as claimed by the Croatian ministry – where transparency with regards to policy and the regulatory framework was a central theme (this was achieved through the publication of block maps, fiscal terms and a model contract).
That being said, the recent messages from the Prime Minister of Croatia regarding the possible referendum on hydrocarbons exploration in the country illustrate the difficulties of launching hydrocarbon exploration and production activities in a country ‘new’ to the industry.
Secondly, one has to consider the strong social and cultural ties that Croatia has with its neighbours Austria and Hungary, being part of the Austro-Hungarian Empire until 1919. These long standing geopolitical ties take a different meaning when looking closer at the companies prominent in the region, that participated in Croatia’s international tender. Those were Austrian company OMV and the Hungarian MOL, through its local subsidiary and ex National Oil Company of Croatia INA.
While MOL is well known in Greece, OMV is relatively unknown to us, but not to the rest of the Southern and Central Europe, and the wider Balkans. OMV is present in 10 Central European and Balkan states with a huge portfolio ranging from upstream activities to downstream. MOL, in turn, shares a similar business model with regards to its geographical scope of operations. It is evident that any company with presence in this area wouldn’t like to miss out on the opportunity provided by such a bidding round, especially when it takes place in the heartland of its activities.
At the same time, what is often overlooked is the competition between these two companies. After OMV’s failed attempt for a hostile takeover of MOL, the two companies have entered into a state of fierce competition, and the Croatian bidding rounds offered the perfect stage for a showdown, with the Croatian blocks as the prize and the Croatian Government being the ultimate benefactor.
Approaching the issue from a different perspective, one should also examine the factors that drove the performance of the Greek licencing round. Some will argue that had the timing been better for the Greek Exploration Round i.e. the bidding submission was six months to one year earlier, the situation would have been completely different. Timing hasn’t been great for Greece, that’s a given.
The previous Coalition Government in Greece worked tirelessly on the two bidding rounds for more than two years. The oil price was a lot more favourable 12-18 months ago and although neither the Ministry nor the markets could predict the fall of the oil price, the previous Coalition government (New Democracy/Pasok) could have accounted for the political stability in the country.
It is also clear, that the very well documented GRExit fears following the recent elections in Greece, coupled with the orientation of the new Government towards changing the licencing model put in place for the 2nd International Exploration Round from a Lease Acreage Agreement into PSA (Production Sharing Agreement), alienated a number of companies which were interested in submitting bids.
Transparency and guarantees over the fiscal and legal stability are central in reducing risk. The oil industry is not unfamiliar to the risk of changes and has demonstrated high resiliency in several occasions; however, the risks have to be quantifiable, and uncertainty works in a prohibiting factor when it comes to such investments.
Although the current oil price environment has made the criteria for investment more stringent, this does not mean that economically viable projects with low or manageable risks will not go ahead. On the contrary, it means that the legislation and tax packages on offer have to be internationally competitive in order to attract the available capital.
This means that reassurance mechanisms have become a necessity in order to bypass the current risk aversion sentiment in the market. The Greek officials have to adopt an extrovert approach towards the industry, replicating the international best practice examples and shaping an attractive (predictable and stable) political, legislative and fiscal environment which will enable them to unlock the country’s potential. Similarly, the recent investment patterns illustrate that aggressive marketing strategies are becoming increasingly important in a highly competitive hydrocarbon exploration industry.
In the words of Lionel Robbins "Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses." If the Greek Government wants to attract foreign investment in hydrocarbon exploration, and the know-how and expertise that come with it, it has to make sure that it adapts to this competitive international market environment.
By: Dr. Angelos Gkanoutas-Leventis, Daria Nochevnik and John Stamoudakis
Dr. Angelos Gkanoutas-Leventis is Vice Chairman of the Greek Energy Forum. Daria Nochevnik is deputy head of Greek Energy Forum in Brussels, and John Stamoudakis is head of Greek Energy Forum engineering & technology group in the UK. The opinions expressed in the article are personal and do not reflect the views of the entire Forum or the companies that currently employ the authors.