MANY will be familiar with Guyana’s classification as a “frontier” region when initial offshore exploration was taking place just a few years ago. While the term is often taken to have a negative connotation, in industry parlance a frontier is simply an area that is non-producing and under-explored.

While frontier regions do tend to be remote or underdeveloped, an important distinction is that the frontier label refers to the extent of successful exploration and production in the area, rather than a socio-economic description of the location or region.

Generally, upstream exploration is considered an extremely risky, yet highly rewarding segment of the global energy industry. This is when companies search for hydrocarbon reserves beneath the ground. Frontier exploration is a unique subset of exploration, taking place in entirely new and generally unexplored locations – essentially, the riskiest of the riskiest in financial terms due to the relatively low likelihood of finding commercial quantities of oil and gas.

Most oil and gas companies, being profit-oriented, try to avoid risky investments and instead prefer to invest their time, capital and capabilities in safer options. The result is that a lot of exploration and production activity occurs in areas where reserves have already been identified nearby or where other operators are also invested, like the U.S. Gulf of Mexico. This allows a company to leverage existing knowledge about the reserve potential. They can also rely on existing infrastructure, personnel and logistics to help facilitate their operations.

In sum, these more favourable circumstances significantly reduce the potential costs of exploration in a given area and increase the possibility that the operations will be successful and profitable. For that reason, these types of regions are often referred to as “de-risked” – to some extent, the potential gains are known, and the risks are quantified. This makes it a safer investment for companies with a low-risk profile.

Frontier regions, on the other hand, present high risk for companies. Exploration activities need to start from scratch to assess reserve potential, and there is ultimately no guarantee that profitable reserves will be found. The exploration and appraisal phase of an upstream petroleum project represents the high-water mark of uncertainty regarding petroleum prospects.

This means that the companies involved in frontier exploration are often quite different from the large, integrated international companies that dominate the global industry. While large operators do conduct pure exploration and take calculated risks in frontier regions, that tends to be a smaller part of their business activity. Most frontier exploration is conducted by a mix of smaller companies that are more risk-oriented, often private equity financed, and base their business model on obtaining rights to explore unproven areas.

pure-play exploration companies usually operate with a small staff and limited overhead.

They are often built around a small group of industry experts who try to leverage individual knowledge and existing professional networks to identify opportunities. Their focus is on conducting some of the initial steps in the exploration process, like conducting seismic surveys, to reveal potential reserves. They attempt to de-risk and add value to the prospect, and then often exit by divesting or finding other larger operators that are drawn by the improved prospects created by the smaller company.

A primary example of this model was Cove Energy, a London-based company that started as a £1 million vehicle for investment which bought up assets in East Africa in 2009 and 2010. Significant discoveries were then made over the next three years, resulting in Cove being purchased by Thailand’s national oil company– PTT Exploration and Production– for £1.2 billion in 2012. The company was started and led by Michael Blaha and John Craven, two industry veterans.

Other explorers (such as Cairn Energy, Kosmos Energy and Africa Energy) use a similar model, concentrating on exploration of frontier areas and early monetisation of discoveries. Garrett Soden, CEO of Africa Energy, explained that the company’s “strategy is to be early in these frontier plays and not to get into long, expensive development projects but to prove the resource and potentially sell to a larger company to develop.”

Guyana’s status as a frontier region earlier this decade certainly attracted a range of interested companies, from large operators like ExxonMobil to a handful of small, risk-oriented companies similar to Cove Energy. This diverse ecosystem of invested parties helped to generate interest from other larger investors in the early days of exploration activity in Guyana. Today, with the Stabroek Block’s prolific finds, Guyana is moving away from frontier status and generating interest, and investment, from some of the largest energy companies in the world.