Because capital is always a limited resource, Pentagon makes exploration commitments carefully to both maximize upside potential and minimize risk. To accomplish this objective, the Company developed a very clear approach:
1. Focus on international prospects with large reserve potential. To create substantial value, Pentagon targets large prospects, where success can make a significant impact. International opportunities and operating conditions fit well with Pentagon’s objectives and strategies: many under explored basins with known petroleum potential; prospects with very large reserve potential; sizable trend acreage positions; and opportunities to invest where the Company’s expertise is needed and valued.
2. Focus on the earliest stages of the exploration process. Although exploration capital is relatively small compared to development requirements, the absolute dollar commitment for exploration can still be quite high. To maximize exposure while limiting capital investment, Pentagon puts resources into the very early stages of research and negotiation thereby creating high quality drillable prospects. Risks are very high at this stage, since much of the Company’s work goes into ideas that may not generate drillable prospects. However, the capital required at this stage is relatively low.
3. Use the Company’s operating strengths to leverage capital and reduce geological risk. Pentagon has the exploration expertise to identify high potential exploration projects, rigorously evaluate them for opportunities that have the greatest chances of success, negotiate mutually beneficial exploration agreements with host countries at an early stage, and attract industry partners to participate in drilling exploratory wells, which require substantial amounts of risk capital. This expertise allows Pentagon to operate with a disciplined approach to risk taking. In most cases the company earns a carried interest without further investment.
4. Keep the cost of success as low as possible. Geological success without economic success is no success at all. To create substantial value, the cost of success must be kept low. Pentagon accomplishes this goal by maintaining a lean and efficient organization that leverages the skills of every professional. Today, Pentagon’s core staff can support the Company’s growth for many years. In addition, the Company’s strategy is designed to increase the probability of success and reduce the cost of unsuccessful ventures.
HOW PENTAGON EXECUTES ITS STRATEGY
Every step in Pentagon’s international exploration strategy is designed to increase the probability of success and reduce risks. The Company begins with the big picture. All available data on the world’s petroleum prone provinces are evaluated, including seismic data, satellite maps, drilling information and production records. This process helps Pentagon narrow the focus for more detailed studies. Pentagon constantly monitors industry developments and updates internal databases for new opportunities. This ongoing effort is the main reason Pentagon can compete effectively with larger companies that have greater resources. Pentagon has a reputation for acquiring large acreage positions in emerging basins before competition heats up.
Pentagon’s initial worldwide screening process is the first step in a program to methodically reduce exploration risk and leverage resources by eliminating regions that do not pass rigorous criteria. Areas of interest must meet basic geological requirements: sufficient source rocks for generating petroleum; reservoir rocks that can hold oil and gas; structure or tectonics to accumulate reserves; and seals to trap hydrocarbons.
However, Pentagon has two more demanding criteria First, the prospective provinces should already have demonstrated hydrocarbon potential. Although the Company will occasionally commit resources to an unproven area where the risk/reward is compelling. Pentagon’s strategy is to make high risk commitments in relatively low risk areas. Second, the prospective basins must have potential for significant accumulations. The Company will sometimes pursue opportunities that do not meet this requirement; however, resources are focused primarily on high potential projects.
As the areas of interest narrow, Pentagon applies its expertise in geological and geophysical disciplines by acquiring and enhancing data to develop drillable prospects. With more information, the Company can enhance its probability of success. Given the high potential of the prospects being evaluated, this investment represents an excellent opportunity for Pentagon to create value.
Political and economic considerations are also critical in identifying projects to pursue. Political considerations are fundamental. Pentagon must have confidence that agreements with host countries will be honored. In tum, economic considerations must be established at an early stage. Pentagon must know what portion of the reserves can be retained by the Company. In addition, the Company must be certain that there will be markets for the production so that the reserves will have economic value.
PARTNERSHIPS WITH HOST COUNTRIES:
A BLUEPRINT FOR SUCCESS
As the evaluation and selection process proceeds, Pentagon personnel initiate negotiations with host countries for exploration and resource sharing agreements. To Pentagon, every agreement represents a partnership in which both the Company and the host country will benefit. As a result, the Company has developed long-term end successful relationships with host governments throughout the world.
For the host country, Pentagon offers more than simply production, royalties, taxes and balance of payments benefits. A partnership with Pentagon is an opportunity for innovative and timely evaluation of the country’s resource base. The partnership offers jobs, training, and technology. Pentagon works with host countries to insure that the Company is making a contribution to the growth and development of the country.
For Pentagon, the benefits are also significant. The Company has the opportunity to evaluate and explore very large acreage tracts. By working with large acreage positions, Pentagon can conduct more effective exploration, gain economies of scale and pursue successful exploration ideas beyond an initial discovery. Upfront costs can be reduced or eliminated, allowing capital to go directly to evaluation and drilling. In addition, Pentagon can operate with the knowledge that efforts will be supported by the host country, investments remain secure, and agreements will be honored. These benefits from strong host country relationships support the Company’s strategy of maximizing exposure while reducing associated risk.
Pentagon’s success with host countries also reflects persistence and patience.
The consummation of a complicated agreement that will be fair to both
parties sometimes takes much longer than expected. Pentagon always works
for the right agreement in the right country.
SHARING RISK WITII INDUSTRY PARTNERS
By leveraging capital and professional staff, Pentagon creates high quality, high potential prospects, for which there is great industry demand. The objective of many oil companies, particularly larger companies with greater access to capital, is to drill for new reserves. Because Pentagon’s a reputation for producing excellent prospects, industry partners are often willing to pay a large share or all of the drilling costs. As a result, Pentagon can substantially reduce financial exposure in prospects, while maintaining a significant equity interest. This strategy helps achieve Pentagon’s objective of maximizing exposure while reducing risk.
THE GOAL: MAXIMIZE UPSIDE POTENTIAL,
Every aspect of Pentagon’s exploration process is geared toward gaining the greatest possible exploration exposure while using every tool available to reduce associated risk and increase the chances of success. Pentagon’s approach to exploration, prospect evaluation, host country relationships, industry partnerships and capital markets activities all contribute to this goal.