Conference report 1: Africa New Energies shows a new way of looking for oil, Cub Energy discusses Ukraine situation and Andes Energia highlights Vaca Muerta potential

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Conference report 1: Africa New Energies shows a new way of looking for oil, Cub Energy discusses Ukraine situation and Andes Energia highlights Vaca Muerta potential
ANE CEO Stephen Larkin

By Amy McLellan’s 71st conference saw more than 200 people through the door to hear six companies with stories stretching from Argentina’s Vaca Muerta shale to new frontiers in Africa to conflict zones in Ukraine. First to speak was Stephen Larkin, CEO of Africa New Energies, which uses proprietary algorithms to find oil.

Regular delegates will be familiar with this story as Larkin, who, along with his co-founder uses applied mathematics to crack a range of real-world problems, appeared last year as part of the EIS-registered company’s successful fundraise that has allowed it to put its theories to the test. Initial results from the company’s frontier tracts in Namibia are, says Larkin, better than they could have hoped.

Unlike traditional exploration approaches, which involve extensive – and expensive – seismic shoots to work out whether there’s the right geological geometry to hold hydrocarbons, ANE looks for the hydrocarbon charge first. “This can be done cheaply at the surface by looking at changes in vegetation, changes in electrical pulses and radiometrics and micro-magnetic surveys,” explains Larkin, stressing it’s an approach that only works onshore.

“We make a bold claim, that we can deliver a three fold increase in the chance of success for one tenth of the cost,” he says. “There’s a lot of scepticism and I do not blame people.”

The company’s Namibian acreage is the size of Wales and has barely been touched by the drillbit: conventional explorers would invest in extensive seismic and multiple wells to narrow down their search, spending US$150-US$200 million on an exploration campaign with a one in four chance of success. Put like that, it’s a wonder anyone ever backs frontier explorers.

ANE, however, avoids expensive seismic, relying instead on proven techniques that provide surface indicators of what might lie beneath – and here the buy-in of local communities has been invaluable in helping the company sniff out clues to the oil potential under their lands – and will use modified mining rigs to drill the first slim-hole wells. In all, it reckons its surface-based exploration and three slim hole wells will cost US$20 million and deliver a 50-75 per cent chance of success.

The company has now compiled eight layers of pre-drilling evidence, meeting its commitments on the block 33 months ahead of deadline, and highlighting a prospective resource of more than 1.6 billion barrels. It has identified seven high quality spectral anomalies, covering 2,000 sq km,, with one “giant” stretching for more than 1,200 sq km with seepage identified in a water well.

Now ANE wants to raise another £1.65 million to complete its pre-drilling programme to select three optimal drilling locations, before raising another £8.5 million to fund the three wells. This could be as early as next year, an exciting prospect for backers of this truly innovative company.

Click here to see the Africa New Energies presentation

Mikhail Afendikov, chairman and chief executive of Houston-based Cub Energy, did a good job of presenting bad news. His company is focused on Ukraine, where the outbreak of conflict and the subsequent fiscal changes and economic turmoil have put the brakes on Cub’s ambitions in the country.

Until last year, things were moving along nicely for TSX Venture-listed Cub, which had growing production and high netbacks from its gas fields in the East and West of Ukraine, a country that, as he rightly highlighted, is not only the third most energy intensive economy in the world but also fantastically blessed with an abundance of natural gas, with proved reserves of 39 TCF – and that’s not counting potential shale resources.

That gas is held in tight sands, however, but simple fracture stimulations can unlock the gas. To date, investment in this technology has been lacking in the country but the potential could be significant.

There was, at least until last year, every incentive to drain that gas: Cub was enjoying a gas price in excess of US$11 per MCF in 2013 with healthy netbacks of US$6.84 per MCF. By Q3 2014 the average sales price of was still US$10.16 per MCF and the corporate net back was a little under US$5 per MCF.

But the outbreak of hostilities has hit the company: it has lost offices, two of its small producing fields (just two per cent of output) now lie in rebel held territory and drilling activity was suspended for four months, before resuming in October. The company put in extra security and ensured the safety of its staff.

Yet even with these disruptions and outages and the loss of the two fields, the company still reported a 16 per cent increase in production year on year, up at 2,400 boepd as well as delivering its best ever well result, M-17 on the M Field in Eastern Ukraine, which made a new gas pool discovery in the S7 and gives a strong indication the field may extend further north than previously expected.

Even with the higher taxes imposed in the country, the outputs on this well are outstanding, with an IRR of 535 per cent and payback within four months. It’s a glimpse of what might have been.

It is not just the security situation that has proved challenging. With its economy plunged into turmoil, Ukraine has hiked taxes, with the royalty rate increased from 28 per cent to 55 per cent taking the government take towards 80 per cent. “We now have one of the worst hydrocarbon fiscal regimes in the world,” noted Afendikov, who also highlighted the restrictions on capital controls.

Looking ahead, however, there are hopes the situation may be stabilising. A ceasefire has been agreed, tax breaks on new wells have been re-introduced, the 2015 budget has been passed for 2015, with Ukraine meeting the conditions of the IMF that should unlock a US$17.5 billion loan and bring some much needed stability. Gas prices are still attractive at US$8 per MCF. “What’s important now is stability and the cease fire holding,” says Afendikov.

This would bring some relief to a company that has lost 95 per cent of its market value since hostilities broke out. “When you mention Ukraine, investors run out of the room,” he noted wryly. “I believe we have gone to the deepest point. We have minimised our G&A and we operate our properties with US$9 oil in mind.” As of January, production was still north of 2,000 boepd but the company is being cautious and is still evaluating its 2015 work plans.

Afendikov addressed the problems facing the company, and the country, in an upfront and straightforward way, which was much appreciated by delegates. It is clear huge challenges still lie ahead but with the ceasefire and IMF agreement in place, perhaps 2015 will start to bring some relief.

Click here to see the Cub Energy presentation

In the three years since it became a pure oil and gas player, Andes Energia has built a promising production business in Argentina and Colombia and positioned itself in the oil window of the world-class Vaca Muerta shale play in Argentina. Readers unfamiliar with the Vaca Muerta before be prepared to hear a lot more about it in the coming years: it’s a shale play that draws favourable comparisons with the best-in-class liquids-rich shale plays in the US.

Indeed, despite the political risk that haunts all investments in Argentina, all the big players – Chevron, Shell, Total et al – have taken big positions in the Vaca Muerta where the shales are so thick there’s no need to drill expensive horizontal wells: vertical wells are the best way to drain the resources.

There is already production from the Vaca Muerta, the only shale play in significant production outside the US: the tally is running at around 25,000 boepd, and growing every day, said Pablo Arias, planning manager for Andes Energia, which is the only AIM company with exposure to Vaca Muerta.

“Why is it so good?” asked Arias, who then went on to list its attractions. “We have found thicker net pay, we can drill vertical wells, there’s sustainable production: you frack and production comes out. The TOC is very high, higher than the US shales, the oil is about 35o API, and this is a region that has been producing oil for about 100 years so there’s capacity and services infrastructure.”

And while two or three years ago, Andes’ first vertical well cost US$12 million, the most recent well, which is now in production, cost US$5 million.

The company isn’t just about Vaca Muerta, however. It also boasts conventional production: it has, for example, a 20 per cent stake in chachahuen, the only conventional field with significant production upside in the country. Here the company has drilled more than 60 wells since 2011, said Arias, and current production is 2,500 bpd gross. The wells cost US$1.2 million, take 15-20 days to drill and payback within 10 months. “Eighty wells are planned over the next 18-24 months and I’m confident we’ll be able to take production to 7,000 bpd in the next year and a half,” said Arias.

The company also has production in Colombia, where in January it acquired a controlling stake in Interoil, helping to provide some diversity outside Argentina. Most of its production in Colombia – around 1,500 boepd – is in the prolific Llanos Basin. A drilling campaign is planned, which it expects to lead to increases in reserves and production. “This is conventional oil and we know how to find conventional oil,” said Arias.

In all, Andes pumps around 3,300 boepd (1,800 boepd from Argentina, 1,500 boepd from Colombia. Importantly, those barrels in Argentina sell for a regulated oil price of US$77 a barrel, which looks pretty good given the weakness in global pricing. The AIM company has 2P reserves of 26 million boe and resources of 659 million boe, the bulk of which, around 500 million boe, lie in that world-class Vaca Muerta.

This was a very confident presentation from Arias – investors who don’t mind the exposure to Argentina are going to want a repeat visit next year to see how that shale exposure is playing out for the AIM company.

Click here to see the Andes Energia presentation

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