Due Diligence

Due diligence in appraisal and early development Projects – a dual perspective

How do Operators and Financiers manage risk in pre-development? Do they have – or need – the same data, understanding, skills or processes? What differentiates their approach, or indeed, what do they do the same?

Once a discovery has been made, there is a definite change of gear, as the excitement of discovery yields to the serious business of taking it through to production. For both oil companies and investors it is vital to maximise the value of the discovery, at the same time as minimising the risk involved in taking the asset to full production. In order to achieve that, there are some fundamental processes to set in place. Both need to bring together multi-disciplinary teams to quantify and assess the opportunity – well-structured teams for optimal opportunity evaluation. Both need to understand the data available, and how best to use it to maximise the ultimate production potential of the asset.

It is at this stage that there is a divergence in the processes of a financier or an operator. A financier effectively takes a snapshot of the data, and is limited by what is available to him at that stage – the unanswerable question of “how much data is enough” has been pre-determined by the seller. Essentially they have access to the data room as it is at that point, and, going forward, have to base all their assessments on that alone. “As a financial investor, one might view a project as a “shopper” insomuch as one reviews and assesses the asset as presented” says Phil Marlow, Partner, Gemini Oil and Gas. “Once the investment is made, there is often limited scope to influence the project scope and delivery. This introduces some specific risks, which need to be mitigated through a meticulous due diligence process”.

An operator however, is now in a very different position. “We are able to exert a much greater degree of control in defining the scope, progress and direction of the project” says Nigel McKim, Director of Pre-Developments at Hess. “We can add to the data, even to the extent of commissioning additional studies and acquisition. Additionally, and perhaps most importantly, the team structures from this stage on need to be more fluid – they need to focus on the right thing at the right time, and this requires different people with different areas of expertise and different ways of thinking – not focussed on a fixed set of data, but allowing space for new ideas and approaches, and the ability to generate viable alternative options from which the optimal development solution is then chosen”.

Nigel and Phil will be sharing their experiences, highlighting the differences and similarities required by their approach to pre-development and discuss the dynamics of team structures in their different disciplines at the SPE London Conference on 27th and 28th June. More details at www.spelondonconference.com

Nigel McKim has 25 years of experience in field development planning and production in the oil and gas industry. He is currently Director Pre-Developments for Hess, is based in London and has global responsibilities for appraisal and early field development planning in Hess’ conventional oil and gas business. Prior to joining Hess, he was employed as West Africa Asset Manager at Vitol, Subsurface Manager for Business Development activities and the Liverpool Bay Project at BHPBilliton and started in the industry working as a Reservoir Engineer for Shell International in Oman, The Netherlands and Gabon. Nigel holds a BSc (Hons) in Civil Engineering from Bristol University and an MSc in Petroleum Engineering from Imperial College London.

Phil Marlow has worked in the oil and gas industry for 27 years and started his career as a petroleum engineer in Aberdeen with BP in 1985. He has subsequently worked with Svenska Petroleum, Statoil ASA, Hess Corporation and Gemini Oil and Gas Advisors LLP in a variety of commercial and technical roles. In addition to working extensively in the onshore and offshore sectors of the UK sector, he has lived and worked in Norway and SE Asia. As a partner at Gemini, he has reviewed many appraisal and development projects from across the globe whilst seeking investment opportunities for the Gemini Oil & Gas Fund III. Phil has recently established Prism Energy Limited through which he provides technical and commercial advisory services to the oil and gas industry. He is chair of the SPE Production Forecasting Global Integrated Workshop steering committee and mentors petroleum engineers via the SPE’s e-mentor scheme