By Amy McLellan
Anthony Robinson, the FT’s former Moscow correspondent and Oilbarrel.com’s go-to expert on Russian affairs, made a bold claim the last time he appeared at one of our events.
Speaking last March shortly after Russia took control of Crimea, Robinson pledged to eat his hat if Putin made military moves into Eastern Ukraine. Almost one year on and with Kiev locked in an increasingly bloody conflict with Russia-backed separatists in the east of the country, Robinson gamely opened Oilbarrel.com’s 70th conference and took a bite of his hat.
“Why has Putin done this? Because he felt he could,” said Robinson, who noted that President Obama’s public statement when things kicked off a year ago that the crisis wouldn’t be resolved militarily had not been strategically astute. Twelve months on and now there’s the prospect of a proxy war with the US arming the Ukrainians and Russia backing the separatists.
Robinson discussed Putin and his circle, who have a background in the secret police, and how few Western leaders understand the Russian leader. With one notable exception: the German Chancellor Angela Merkel.
“Mrs Merkel speaks fluent Russian and has a kind of relationship with him nobody else has,” said Robinson. “ She has spent hours and hours face to face with him to try and figure him out and she has come to an important conclusion: Putin is a liar.”
Robinson said this “brazen lying” was a “dark side” to Russian culture that many in the West struggle to understand. Merkel may have the measure of Putin but as well as strengthening the resolve of the “usual European backsliders” when it comes to policy on Russia, Robinson pointed out she is also battling to keep the Eurozone together – and Robinson had much to say on the likely future of the Eurozone but that would require another presentation.
“Putin is betting that Europe will divide as usual and people will forget Ukraine and get used to the idea that Eastern Ukraine is secretly under the control of Russia,”he said.
But things aren’t going Putin’s way, with the rouble in trouble and the economy feeling the heat of falling oil prices and Western sanctions. “When you combine US$50 oil price with the end of foreign investment, it’s a disaster for Russia,” said Robinson.
The country has been betting on enticing foreign players, with their technology and finances, to unlock the riches of the offshore Arctic and onshore shale plays in order to offset the declines from the mature fields in Western Siberia.
“But who now would go to their Board of Directors and say we want investment to go for a 20-30 year project in Russia?” asked Robinson, ending another fascinating presentation that could easily have gone on twice as long to cover the history, culture and politics of this region.
The next speaker focused on a region on the opposite side of the world – although one not without its own fraught geo-political considerations. AIM-quoted Rockhopper Exploration is something of a favourite with many investors.
It is the only company to have made a commercial oil strike in the Falkland Islands, which it discovered and appraised on a 100 per cent basis, before striking what increasingly looks to be an incredibly astute farm-out deal with London-listed Premier Oil, which means it is not only fully funded to develop that field but is also largely carried through a potentially transformational upcoming exploration campaign.
“Despite very challenging conditions, 2015 promises to be busy and extremely exciting for Rockhopper,” said chief financial officer Stewart MacDonald.
This excitement will start to build next month when the company begins its 2015 exploration programme. The Eirik Raude rig is on its way from West Africa to the Falklands, where it will embark on a six well programme with Rockhopper set to participate in four of these in the North Falkland Basin.
This is a big campaign, possibly one of the most exciting programmes anywhere this year, with the four wells in the North Falkland Basin targeting around 160 million barrels of net resources.
“This could double our existing resources and has the scope to be transformational to the company at a net cost of US$25 million, which is less than US$6 million per well,” said MacDonald, formerly part of Rothschild’s global oil and gas group.
The four wells are all near Rockhopper’s Sea Lion development and are targeting stacked exploration fans, offering multiple targets per well and extending understanding of the different formations.
Success here would inform future phases of development at Sea Lion: the Chatham prospect, for example, will test for a gas cap. “If it’s oil, this will add 60 million barrels to the recoverable volumes we are seeking to commercialise in Phase 1b,” said MacDonald, referring to the new phased development plan.
With the fall in the oil price since last summer, Premier took the decision to develop Sea Lion, where there are gross 2C resources of 400 million barrels (150 barrels net to Rockhopper), in phases. The first phase will target 160 million barrels in north east corner of the field using a leased FPSO and a simplified subsea architecture to produce 50,000-60,000 bpd.
Project sanction has now been pushed out to mid-2016 – although Premier says it no longer needs to bring in farm-in partners – but Rockhopper is still gunning for first oil in late 2019.
The projected price tag on the development is less than US$2 billion but the fall in the oil price means that deflation in the service sector that could make a significant dent in that total.
“Thirty-five per cent of the total is down to drilling costs and we have already seen a 30-40 per cent decline in rig rates in recent months so that could be a US$200 million saving right there,” said MacDonald.
Future phases of the development could use a cookie cutter approach to keep future costs down too. Phase 1b could develop 160-220 million barrels gross with Phase 2 targeting 80 million plus.
Importantly, Rockhopper is funded for this through its farm-out to Premier. In addition to the US$48 million for the 2015 exploration campaign, Rockhopper will have a US$337 million development carry for Phase 1a with a further US$337 million development carry deferred to the next phase of development.
The company also has a standby loan arrangement with Premier of up to US$750 million, which ensures it is fully funded for the development. While this is a useful backstop, MacDonald said the company is actively seeking cheaper sources of funding.
The company isn’t just a Falklands play. Last year it acquired fellow AIM company Mediterranean Oil & Gas, which added 2P/2C resources of 32.5 million boe at a cost of less than a dollar per boe, which, said MacDonald, was less than the finding costs on Sea Lion. The acquisition added a second core area, with interests in Malta, France and Italy with minimal spending commitments.
In the Mediterranean an exploration well is planned on the Faseto prospect in Q3, a sidetrack is planned on the Guendalina field in late 2015 and the Civita gas field is due onstream in Q4. Further out there will be seismic offshore Malta and on the recently awarded new licence offshore Croatia.
But this is for the future, loading the hopper with projects ready for when the cash starts flowing from Sea Lion post-2019. An exciting time ahead – and this was borne out by the interest in the company from oilbarrel.com’s audience, with many questions for MacDonald in the Q&A and over coffee.
Click here to see the Rockhopper Exploration presentation
Read part two of our conference write up for details of presentations from Green Dragon Gas and Tangiers Petroleum