Oil Prospectors Shift Back to Wealthy Lands

Firms Find Developed World’s Stability, New Incentives Yield More-Predictable Returns

WELLINGTON, New Zealand—In this land of towering peaks and gurgling streams, Simon Bridges wants to be lord of the rigs.

As New Zealand’s resource minister, Mr. Bridges is the man behind New Zealand’s big-oil aspirations. He travels the world to pitch New Zealand to petroleum prospectors.

It used to be a tough sell. New Zealand is remote and among the world’s most expensive places to drill offshore. Big prospectors largely avoided it.

Today, it is experiencing an exploration boom that is part of a broader shift: After decades of focusing on less-developed nations, big companies are tilting toward wealthy countries when hunting for oil and gas. Such places have higher costs and tighter regulations, but their political stability offers more-predictable cash flow.

Developed-world governments like New Zealand’s are trying to tap into the shift. Five years ago, New Zealand’s government decided the economy depended too heavily on industries such as sheep farming and tourism inspired by the “Lord of the Rings” movies, Mr. Bridges says.

It saw opportunity in oil companies “wanting to extract themselves from problematic sovereign-risk issues,” he says. In 2009, New Zealand announced a “Petroleum Action Plan” to lure oil companies, and it hired an Oklahoman oil executive to woo prospectors.

“We want to be speaking the language” of oil companies, Mr. Bridges says. Companies spent about $1.27 billion exploring there in 2012, the latest government data show, up from $346 million a decade earlier.

New Zealand’s campaign came as Royal Dutch Shell RDSA.LN -0.45% PLC and others were re-evaluating their exposure to unstable regions. Shell decided about seven years ago to increase spending within the Organization for Economic Cooperation and Development, the club of the world’s richest economies, to more than 60% of its exploration-and-production capital, says Shell Chief Financial Officer Simon Henry.

At the time, Shell says it was spending 57% of its exploration-and-production capital in OECD countries. Last year, it spent 67% there. “It would be good if the majority of our cash flow came from OECD countries,” says Shell Chief Executive Ben van Beurden. OECD countries carry little political risk, he says, making cash flow more predictable.

For decades, big oil companies bet that risks of violence and corruption in developing countries were worth the trouble. Governments there often cut attractive deals, regulation was lax and labor costs were low. But in recent years, violence, tension with governments and harder-bargaining state-controlled oil companies have hurt profits from North Africa to Central Asia.

Exxon Mobil Corp. XOM +1.15% says costs for its Papua New Guinea natural-gas project rose more than 25% from 2009 to 2012, due partly to poor infrastructure, rough terrain and angry locals. Italian firm Eni ENI.MI -0.25% SpA was hit by violence in Libya.

For decades, Shell invested heavily in finding and pumping oil in Nigeria’s Niger Delta. But in early 2006, militants began attacking Shell facilities, kidnapping workers and blowing up pipelines. Thieves drilled holes in pipes to siphon oil. Shell says it lost money there in some recent quarters.

So companies like Shell are shifting toward more-predictable lands. In 2013, the world’s biggest non-state-controlled oil companies—Exxon, Shell and Chevron Corp. CVX -0.25% —spent 66% of their exploration-and-production budgets in OECD countries, estimates Sanford C. Bernstein Ltd., up from 49% in 2003.

Exxon in 2013 put 67% of such spending into OECD nations, Bernstein estimates, versus 51% in 2003. The data don’t include companies’ acquisitions of other firms; the biggest recent one was Exxon’s $25 billion 2010 purchase of XTO, a North America-focused shale producer. An Exxon spokesman says the company invests in projects with “the best rate of return.”

Those shifts are largely because companies are allocating a bigger proportion of a growing overall spending pie to first-world countries, not because they are making large-scale pullbacks from developing nations.

But in some cases, they are leaving. Chevron this year sold its Chad assets. Exxon has sold stakes in Iraq and Indonesia projects. Since 2010, Shell has sold $1.8 billion in Nigerian assets and last year began talks to sell four oil-production blocks and a pipeline there, say people familiar with the matter.

Not every big company has followed. BP‘s BP.LN -0.45% proportion of developed-world spending fluctuated over the past decade, says IHS, a consulting firm. After the 2010 Gulf of Mexico spill, it was banned from acquiring new Gulf acreage until March, limiting its U.S. spending. BP says it focuses its exploration on places with favorable geology.

France’s Total SA FP.FR +1.33% has drilled more exploration wells in Africa over the past few years than in any other region. Still, Total in January said it acquired two U.K. shale-gas exploration licenses. A spokeswoman says Total’s “exploration is driven by geology, not geography.”

Some of the shift comes from spending on North American shale assets as new technologies squeeze oil from old fields. But often, stable politics and a new regulatory openness are the draw.

New Zealand illustrates the trend well. It offers a rarity in a well-prospected world: millions of unexplored offshore acres. But exploration ships must sail from Australia or Asia, the closest places such boats are based. An offshore well can cost more than $100 million, double the cost in some areas.

Until recently, getting an exploration permit required a long process. Tough geology, storms and environmentalists delayed prospecting. “There’s good reason why it hasn’t been explored,” says Shell’s New Zealand chairman, Rob Jager.

Petroleum has been a relatively small New Zealand industry, its fourth-largest export behind wood, dairy and meat-and-offal shipments in 2009. That year, the government published its plan to “explicitly position the government both domestically and internationally as highly supportive of the development of our petroleum resources.”

That new official openness to oil was part of a broader move to ease petroleum-development hurdles that has been spreading among some developing-country governments.

The U.K. government in May proposed a new system to pay homeowners to let companies explore for shale oil and gas. It created recent tax incentives to encourage offshore exploration.

In 2012, Canada made oil-pipeline projects easier to approve. Shell and Exxon now have offshore projects in eastern Canada, where provincial governments over the past five years have acquired seafloor data to attract companies. Companies spent about $25 billion on Canadian oil-sands development in 2012, up from about $15 billion in 2007, according to Canadian Manufacturers and Exporters, a trade group tracking the industry.

Canada’s promising geology and stable government, which is easy to deal with, are attractive, says Anita Perry, government-affairs vice president in the region for BP, which is exploring Nova Scotia. “They have set good and clear regulations that we felt we could work with,” she says.

In New Zealand, the government shot seafloor images to attract prospectors and opened new areas to auction for exploration. It asked oil and gas companies for advice on shaping regulation. Chris Kilby, a civil servant spearheading the plan, proposed new structures to regulate petroleum and market New Zealand.

The government created an agency to serve both functions, and Mr. Kilby hired Kevin Rolens, an Oklahoman oil man, to use his network to market New Zealand. Government officials “definitely are supportive,” says Garth Johnson, CEO of Tag Oil Ltd., which has increased spending on drilling onshore, and “their royalty rates are attractive.”

A hitch came from New Zealand’s environmentalists, who have long fought drilling. They sparked a 2010 uproar by publicizing government plans to open certain conservation land to prospectors. The government reversed that proposal.

Brazil’s Petrobras SA agreed in 2010 to spend $118 million prospecting offshore. But a Greenpeace flotilla surrounded its drilling ship. It eventually left New Zealand without drilling. A Petrobras spokeswoman says the company’s work “showed not enough oil and gas reserves.”

Two New Zealand government officials say they believe the protesters were responsible. Bunny McDiarmid, Greenpeace’s New Zealand executive director, says she believes the protesters played a role in Petrobras’s departure.

Petrobras’s departure was a blow, and the government redoubled efforts to make prospectors feel more welcome. The resource ministry bought oil-project-tracking software to find potentially interested firms, then used LinkedIn to identify executives to woo, says ministry strategy official Brad Ilg.

Mr. Rolens invited executives from 10 oil companies to the 2011 Rugby World Cup as government guests. The event was “a showcase weekend of how things are done in New Zealand,” says Mr. Rolens, who left the government this summer to work for a small oil company. They sailed, tasted wine and listened to an oil consultant the government hired to tell executives how New Zealand’s regulations make it a good place to explore.

Mr. Bridges, the energy minister, over the last two years flew with Mr. Rolens to Houston, Canada and Norway to meet oil executives. He pushed through legislation making it a crime to interfere with oil-related vessels. The government passed regulations limiting environmental groups’ opportunities to block offshore exploration in court. Gareth Hughes, a Green Party member of New Zealand’s parliament, says the regulations are too lax.

The regulations capped spill damages at 600,000 New Zealand dollars, or about $515,000. Legislators later raised that to 10 million New Zealand dollars under Green Party pressure.

In the past two years, oil firms conducted more deep-water exploration than ever, says Mr. Kilby, the former government official. He now works for Shell, which this year took seismic images off the South Island and plans to drill in 2016. It also plans exploration off the North Island.

Difficult geology and high costs once made executives skeptical of New Zealand, says Shell’s Mr. Jager. Shell long had relatively small operations in the country but not in expensive deep-water exploration. That has changed, he says, partly because new regulations make it “one of the better countries to invest in.”

Anadarko Petroleum Corp. APC -1.43% finished drilling two offshore wells this year, the company’s first New Zealand wells. Norway’s Statoil AS STL.OS -1.36% A, which hasn’t drilled in New Zealand before, had a seabed-mapping ship off the North Island in June and plans to deploy a seismic-exploration vessel this year, says Pal Haremo, an ASA vice president.

Statoil likes the “very attractive commercial regime that has been established in New Zealand and a very stable political regime,” he says. In 2012, Statoil pulled out of an Iraq project.

The interest in New Zealand echoes nearby Australia’s experience. Big companies drilled so little there 10 years ago that they didn’t break out their numbers. But they began piling in late last decade to develop natural gas, largely for Asian markets.

Chevron says it spent 4.7% of its exploration-and-development funds there in 2008, the first year it broke out Australia numbers. It spent 22% there last year.

Chevron’s Australia spending is part of its shift away from less-developed countries like Angola and Nigeria where it spent heavily before. Chevron spent 66% of its 2013 exploration-and-production funds in OECD countries, up from 39% in 2003, Bernstein estimates. A spokesman says Chevron’s biggest expenditures are on “mega projects” in the U.S. Gulf of Mexico and Australia.

In New Zealand, companies still face environmentalists. A surge in onshore drilling caused backlash in April, when Mr. Bridges, the resource minister, opened several forest preserves for exploration.

Opposition politicians said they would rather leave oil untapped than sully a kiwi-bird habitat. One asked Mr. Bridges in a debate if he knew he opened a preserve to prospecting. “I am not aware of any of the emotive claptrap that the member is talking about,” Mr. Bridges replied. New Zealand kept the areas open.

New drilling has caused local battles. In the Taranaki region, a snow-capped volcano slopes to pastures scattered with Maori graves. While companies have long drilled near Mount Taranaki, favorable regulations and improved technology have sparked new activity.

A local Maori tribe has been fighting Tag’s plan to drill near the mountain, which it considers sacred. A tribe leader, Mahuru Robinson, says he doesn’t oppose all drilling, as it supports his community. But he laments “huge changes in the landscape” and worries Tag could drill beneath Mount Taranaki.

Tag’s Mr. Johnson says it won’t drill under the volcano and disagrees with concerns about drilling impacts.

The developed world still poses one age-old prospecting risk. Anadarko’s two wells didn’t strike commercially viable amounts of oil or gas, an Anadarko spokesman says.

“It’s disappointing,” Mr. Bridges says. Still, with North Africa and the Middle East unstable, he says, he’s optimistic companies will keep drilling. Indeed, the Anadarko spokesman says the company still plans to drill other offshore wells in New Zealand.

WSJ