PDM – What was the driver behind Virtual Prospect?
Decatur - A year ago we realized that we had to speed up the exploration process, but we were faced with the problem of limited staff. With conventional means, it would have taken 3-4 years to go through all BP’s GOM Shelf acreage, so we decided to use the net to advertise and push data out to geoscientists.
PDM - How does Virtual Prospect work?
Decatur - Potential venturers apply to BP for the rights to propose, or pursue a variety of deals. If they are accepted, then they have exclusive rights to work up the acreage for a three-month period. After this time, they have to show what they've got to BP. If BP likes what they see, they are then paid fees according to the deal they signed up for (see below). IF BP doesn't like it, then they get another two months to find another partner to drill. BP maintains a list of companies who have expressed an interest in such participation. So we can put the prospector in touch with potential investors. If this second way goes ahead, BP keeps a 5% overriding royalty interest in the prospect - with an option to convert this to a working interest in the discovery, if significant.
PDM – If BP does like what they see, what are the terms of your regular deals?
Decatur – We talked to a lot of small companies and independents to find out what sort of deal would attract prospectors and came up with an optional payment schedule where the reward depends on the risk to the prospector. There are various options as follows.
1) - If BP decides to purchase the prospect - we pay the prospector a guaranteed $10,000 fee (assuming that at least there are some maps to justify the work) plus $20,000 for each prospect drilled. For each successful prospect drilled, we pay an additional $20,000.
2) - There is no guarantee, but $50,000 is paid for each prospect drilled with another $50,000 for each discovery.
3) - Again, no guarantee, and no money changes hands for a drillable prospect. But for each discovery $150,000 is payable.
4) – Finally, we have an open option. Prospectors can write in and offer other deals.
PDM – Virtual Prospect seems to have begun in a very discreet manner.
Decatur – Indeed, we went live on the 22nd November 2000, with an invitation to apply posted on the IndigoPool website. No other advertising was used. Forty companies trolled the site and had a look at what was on offer - a pilot of producing GOM Shelf properties. We received expressions of interest from a number of very well qualified prospecting companies. Five were selected and awarded different deals as above (all deal categories were filled - two took option 2). They are all currently working on the data.
PDM – So prospectors don’t actually access data on the website.
Decatur – At the moment, but IndigoPool is planning to offer companies the use of interpretation tools over the web. So in the future you will be able to work from your mountain retreat.
PDM – Is this acreage ‘surplus to requirements’ - are these second grade plays?
Decatur - They are not BP’s ‘core’ properties, but they are not bad, they just haven't been looked at in a while. We did not want to put poor acreage out there. We truly want to generate prospects. We would have worked on them later. One block includes the second largest field on the GOM shelf with 300 million cu. ft. /day production. The GOM Shelf is prime exploration acreage for BP.
PDM - What is the economics of this as opposed to hiring a few more geoscientists?
Decatur - Actually the cost of doing it either way is insignificant compared to the cost of drilling a well.
PDM - So why don't you take on more people or use consultants?
Decatur - We don't like to take on more people because of the cyclical nature of the industry, and the possibility that we might have to lay them off. As for consultants, they do not have the same incentives as under this kind of deal. This is the real carrot.
PDM - What about the risk equation for the consultants?
Decatur - Consultants actually have less risk than they might have otherwise. They do not need to assemble the data - or get the land together. It is a great opportunity for retirees, some of whom may have 20+ years of proven experience.
PDM – Are other parts of BP getting involved?
Decatur - Yes in Alaska and the North Sea.
PDM – And what does the regulator – the MMS - think about this activity?
Decatur – The MMS has not commented so far. We have been careful to keep them informed as well as the seismic contractors and data brokers. We have arranged for a spec license fee to be paid in the event of a discovery. All prospectors sign confidentiality agreements.
PDM - Historically, many majors have neglected farm out opportunities and sometimes seem to prefer to hand their acreage back to the government. This proactive stance is quite a change.
Decatur - It really is an attractive business model for us. A new proximal discovery lets us defer abandonment costs and reduces ongoing, per barrel operating costs. I am personally very impressed by the reception this has got from BP - it could go world-wide .
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