Ann: Trading Halt, page-58

I would hazard a guess that most investors are not working in the industry that they made investments in. However, most O&G majors are publicly traded behemoths with copious amounts of information available as to how they operate, how they are valued and how they are motivated to make investment decisions. Read a few investor presentations and analyst reports and you will be better informed.

But to put it into perspective, if ConoccoPhillips had a break-even cost of approx $40/bbl or North Slope oil, my guess (from looking at available data) is that about $10 of that is royalties, $10 is for development capex, about $10 is for production opex and about $6.50 is TAPS transportation costs.  Which leaves about $3.50 for acquisition costs (exploring and appraising).

Majors need to ensure that they are at the very minimum, adding reserves that replace oil being produced. Otherwise they are presiding over a dwindling asset and are priced accordingly. To do this they need to make sure they spend that $3.50 wisely for obvious existential reasons. From what I can readily see, they scatter that $3.50 over typically three types of acreage to diversify their risk and hedge their bets: 1) that they control and call the shots and hence are exposed to the majority of the risks and upside; 2) that is controlled by a peer major and they maintain a minority working interest; and 3)where they take over control of acreage (farmout) of a smaller player focused on exploration, after they have done the initial de-risking.

Clearly as a minnow explorer with a view to finding the prize, appriasing it as far as funds permit and cashing in - we are looking to be the beneficiaries of path 3).  The timing of farmout is dictated by reality.  Clearly, the further down the de-risking path we can go before farming, the better the ROI will be on funds invested. Unless of course there is no oil on a commercially viable scale.  But de-rsking takes money and the more that the shareholder base shows a lack of appetite to provide these funds, the more it looks like a early farmout is the only means forward.  Which of course will be to the farminees negotiation benefit.  Which is why we need to have more than a few coins rattling in our pocket as we conclude these farmout discussions.

Now to put that $3.50 per bbl into perspective.  That is an average and on some acreage they will need to spend more and hence on some they will seek to spend less. Striking it lucky with their own acreage and taking control over a minnows derisked acreage just prior to proof of discovery would be classic ways to lower that average.  2.2b bbls at $3.50 acquisition costs is $7.7b US. Even if a major tries to help their average by capping this at $2.50 per bbl, that is still a $5.5b investment just to acquire 88e's share of the conventional asset on the western fairway of the icewine acreage.  Of that (say) $5.5b, they may allocate $100-300m to validate the potential asset within the terms of the farmout.  Saves them over $5b if the acreage is a dud....and gives them preferential access in case it is a monster.  We want them to spend as much as they are prepared to validate as much of the asset (on a free carry for us) while giving away as little working interest as possible, this hopefully leaving more of that $2.50 per bbl for us at the end of the rainbow.  They obviously want to spend as little as is needed to validate only as much as they want to validate in return for as much working interest as possible.

Hence the negotiation.

I may be wrong.  GLTA.