Croatia’s Krpan touts new bidding rounds as means to boost output
In recent years, officials in Croatia have become concerned about the slow-but-continual decline in the country’s oil and gas production. Indeed, output is scarcely half what it was 20 years ago, and even then, the production rates were relatively modest. Accordingly, Croatian Hydrocarbon Agency (CHA) President Marijan Krpan (Fig. 1) said the government is taking steps to remedy the situation. Key among these are two new licensing rounds, one to close in June 2019, and the other to finish in September 2019.
Licensing situation. Looking at the history of licensing in Croatia, the country’s 1st Onshore Bidding Round was held between July 18, 2014, and Feb. 18, 2015. In that round, five of six exploration blocks on offer had licenses awarded, including four PSAs to Vermilion Zagreb Exploration Ltd. and one PSA to national operator Industrija nafte Plc (INA). Now, comes along the 2nd Onshore Bidding Round, Fig. 2. “We actually opened that round up on Nov. 2, 2018, and it will close on June 28, this year,” said Krpan. “The deadline for granting licenses is Oct. 31, 2019.”
2nd Round details. The round consists of seven exploration blocks in the “remaining” part of the Pannonian basin, the primary producing region in Croatia. These blocks include Drava-03, Sava-06, Sava-07, Sava-11, Sava-12, Sjeverozapadna Hrvatska-01 and Sjeverozapadna Hrvatska-05. It should be noted that Drava-03 also was offered in the first round, but it did not attract a PSA. “We have more than 10,000 km of 2D legacy seismic and nearly 1,800 km2 of 3D legacy seismic available in our data room,” said Krpan. “The total acreage on offer in this round is 14,000 km2. Keep in mind that a majority of our current, active fields are in the Pannonian basin, and most of our production is also there. In fact, more than 1 Bboe have been produced in this basin since World War II. We have 57 licenses from which there is production.”
At the same time, the country is facing a decline in production, both oil and gas. “That’s the main reason why we’ve put on this licensing round, because we have to do something,” explained Krpan. “The only way that we can do it is through exploration. Four of the blocks in this round have already shown oil and gas potential, while three are more on the edge, so additional acquisition of (seismic) data is going to be needed to find their prospectivity.”
3rd Round details. And then CHA also announced the launching of its 3rd Onshore Bidding Round on Feb. 8, 2019. The round comprises four blocks in the Dinaridi area that runs along the border with Bosnia and Herzegovina, in the southern half of Croatia, and also between the Pannonian basin and the Adriatic Sea. “These blocks are completely geologically different from the Pannonian basin, and this area is completely underexplored,” said Krpan. “So, we have four blocks on offer, and this is geologically a thrust belt.”
The CHA president said his agency is trying to find a company with sufficient expertise in thrust belt exploration. “And there are some companies out there with this experience,” continued Krpan, “but the last job that was done was a study by Amoco at the end of the 1980s, back when this was part of Yugoslavia. But they never did anything after that, because soon the war started. Anyway, the last seismic acquired in this area was 45 to 50 years ago, with only a few wells drilled and profiles showing some oil and gas shows. So, on the surface, we have elements of the source rock, we have elements of the reservoir rock, we have elements of the cap seal rock, so it’s just a question of whether or not you can combine these three elements, subsurface, to find a working petroleum system. But this is a task for the future exploration.”
Krpan said that these four exploration blocks—Dinaridi 13, 14, 15 and 16—cover total acreage of 12,134 km2. However, the problem here is a lack of data. “We only have about 442 km of 2D legacy seismic available,” he noted. “And that is why we would like to start off with the airborne collection of data over 12,000 km2, to better define structures. And this can save money and time for the future explorationists. This is why we came over here (to Houston), to see if there are any companies that can do this. So, this (third) bidding round is open, and it will last until Sept. 10.”
Attracting operators. Krpan said that in the blocks of the 2nd Round, there are 37 unevaluated oil and gas shows. And in the 3rd Round blocks, nine wildcats have been drilled, with seven of them registering oil and gas shows. “We may be a small country, but when you look at the total acreage, combined—14,000 km2 and 12,000 km2—overall, 26,000 km2, this is the biggest acreage on offer today in Europe right now.”
“We’ve been here (Houston) to try to find investors,” added Krpan. “We opened a data room. They (companies) have been able to come study the data and see for themselves. The interest in the Pannonian basin is significant. We have had 11 companies that have visited the data room already. Some of them are big international players, and others are small, independent companies. The companies tend to be interested, because they are central European players. And we are quite sure that out of these 11 companies, we will sell data packages to four or five of them. The biggest interest is for Drava-03, because this one combines both gas and oil prospectivity. This area is characterized by the presence of gas-condensate fields. The size of the Drava area is 2 Tcf.”
CHA has adjusted the bidding criteria to fit the characteristics of the various blocks in the bidding rounds. “That’s because we have these four blocks (SZH-01, DR-03, SA-06 and SA-7) with proven potential,” said Krpan. “We adjust the bidding criteria to promote investors, who would like to shoot 3D seismic and who would like to drill. The key is to acquire as much 3D seismic as possible, and process it and then drill. On three other blocks (SA-11, SA-12 and SZH-05), the accent is on 2D seismic, because they are relatively underexplored, in comparison with these other four.”
With regard to the three blocks in the 2nd Round that Krpan terms “more on the edge,” they are underexplored and without discoveries. “They only have these seismic profiles, and this seismic is very old,” explained Krpan. “The one block has had some gas shows. Overall, in these seven blocks, we found 37 wells that showed oil and gas potential, but they were not evaluated properly, so we can call it undefined or underestimated potential. Because the operator that went in there previously was doing smaller things. They were really not interested in trying to find something bigger.”
License periods/exploration costs. The overall term of the exploration phase is five years. “So,” elaborated Krpan, “the first exploration period lasts three years, and the second one, two years. You can extend it twice for six months. The total duration of the contract is 30 years. And in the Dinaridis, the situation is different, because we said, okay, the exploration period could last up to seven years.“
Due to the geology and type of acreage in the Dinaridis blocks, CHA is trying to find a firm that has experience in the exploration of thrust belts, while in contrast, for the Pannonian basin, CHA needs an operator that knows how to deal with mature oil plays. “There are some bigger companies that would like to combine certain blocks, and create their own portfolios,” noted Krpan.
The well cost (in some parts of the Pannonian basin) can be relatively high, acknowledges CHA. “And that’s because some of these wells can be deep, as much as 5 km,” said Krpan. “So, you have reservoirs that are below 2.5 to 3 km, and you can find good gas-condensate fields. In that case, the cost of a dry well could be $7 million to $8 million. But with exploration wells, it’s sometimes hard to define what the cost may actually be. Now, in Blocks SZH-05, SA-06 and SA-07 (2nd Round), the costs are lower. You can drill a well for $3 million to $4 million. So, if you win the bid and want to figure the cost of being in a block, you can calculate the cost of three wells and maybe some seismic, if you want to be competitive. I’m sure that there will be high competition for these blocks that already have shown some proven potential.”
Stability is a plus. There are some advantages to investing in Croatia that CHA likes to tout. “We have good general terms and conditions,” said Krpan. And we have geopolitical stability, and now Croatia is a member of NATO and the EU. So, somebody who is investing in Croatia can feel safe and secure. And there is geological attractiveness and a good fiscal regime. We have PSAs, and the cost recovery ceiling is 70%, which is excellent. This is attractive, because it accelerates the pay-out time for the investors. On the oil profit side, the split is 90% to the investor, until he is fully recovered. So, this should be attractive enough.”
Current operations. In the last 20 years, domestic firm INA has been the only operator. And INA’s output is down to just 34,000 boed, of which oil comprises 17,000 to 21,000 bpd, and the rest is gas, with some condensate. “We are covering only one-fifth of our oil demand with indigenous production, and only about 40% of our gas demand,” explained Krpan. “Only five years ago, we were covering 80% of domestic gas demand. So, that’s the reason that we have to find a way to replace this now-missing production. That’s the reason that we’re thinking about LNG development. That’s the reason why we’re doing these bidding rounds. These processes are complementary. On one hand, you are assuring the diversification of the supply of gas for your country. On the other hand, you are opening yourself and the country to investors for future exploration and discoveries.”
The CHA president acknowledged that there has not been a lot of drilling in Croatia in recent years. “Yes, that would be a fair statement,” said Krpan. “They (INA) drilled two exploration wells recently, within the last year. And every year, they are drilling four to five production wells on existing developments. So, there is activity, particularly in terms of how to extract as much oil as possible from existing reservoirs. INA is using—and we are helping them—EOR technology on the two biggest Croatian oil fields, and there is the injection of CO2. And there has been significant success with this—the decline was stopped successfully. And there even has been a small increase in production, thanks to the use of CO2 injection. So, there is a lot of potential on existing acreage.”
Offshore situation. The offshore sector of Croatia is not a priority at the moment, noted Krpan. “Due to the fact that the oil price went down, no PSAs have been signed,” he said. “So, currently, with this range of oil price, we don’t see an immediate need for opening this acreage. This year, we would like to focus ourselves on the onshore, hopefully allowing the oil price to go up a little higher, and then we can consider whether to open the offshore acreage. In the meantime, we will do some specialized studies and things like that.”
Krpan said these offshore blocks could be subject to the so-called “open door” policy. “So, yes, we can open it directly, immediately, if we find some investor,” he said. “If someone came to our data room, and convinced us that he’s really ready to invest, we could go ahead and send a message to the EU Gazette, and open this acreage without organizing a bidding round, because, according to EU regulations, we don’t need to do that any longer.”
The president confirmed that there is still some existing gas production offshore, that was developed by Eni. “In 1996, the PSA between INA and Eni was signed,” recalled Krpan. “And then they formed a joint operating company, with the name “INAGIP.” This company was established and then developed production, but now these fields are almost depleted—they are very close to being depleted. And in the meantime, Eni sold its share to INA (in 2018), and now INA is the sole owner of these fields. All gas produced offshore goes into the Croatian gas supply system. The gas produced in the Marica area is transported to Italy, under a sales contract with Eni.
“So, we are focused on the onshore, but for the offshore, I think we need a better oil price!”
