Oil and gas exploration can be a risky business, which is why Northern Petroleum PLC (LON: NOP) has spent the last year transforming itself into a simpler, wealthier and more focused company. It has sold off weaker assets, based its growth strategy on production revenue and given its senior management team a shake-up.
A sustainable strategy
One result of this was the promotion of Keith Bush, Chief Operating Officer since May 2012, to the position of Chief Executive Officer in July 2013. An engineering veteran with nearly 25 years in the oil and gas business, Keith has extensive experience of working in the North Sea, North Africa and Norway. But his first year leading Northern Petroleum was nevertheless a steep learning curve.
“It’s been an interesting year, it’s been challenging, and I think it’s shown that while we can certainly make progress in areas we have under our control, it’s difficult when things aren’t under our control,” Keith remarks.
“We have two key asset areas, Canada and Italy. We’ve been able to move Canada forward efficiently with wells being drilled, but our operations in Italy have stagnated due to political difficulties. The key learning point for me has been the importance of retaining control.”
Having most of the Northern team in London puts the best engineering, geoscience and modelling tools at their fingertips, but running many international projects from here is not easy. Realising this led Keith to begin simplifying the company’s portfolio. Last year Northern sold its assets in the Netherlands and earlier this year it sold its assets in the UK. The company is now considering the options for its minority share in a Joint Venture in French Guiana – the only project it doesn’t own 100%.
“Our new strategy is to grow sustainably via production, and selling these assets gives us more money to spend on establishing strong production in Canada,” explains Keith. “As we grow that production, we grow our revenue stream and that should lead to sustainable growth in shareholder value – as well as a strong platform from which to realise our exploration and appraisal upside in Italy.”
Northern only entered Canada last year, attracted by the country’s well established service industry, good infrastructure and political security. The ability to acquire land and drill wells there relatively cheaply was another major attraction, particularly for a company targeting a quick route to production-led growth.
Northern now has 30,000 acres of mineral leases in Virgo, northwest Alberta, containing a carbonate reef formation previously developed in the 1970s. The intention was to test the viability of reinstating production there through a redevelopment project.
“When the area was originally developed only 2D seismic was used, so we saw a lot of potential for additional recovery dependent on interpreting 3D seismic of the area,” Keith explains. “The average recovery factor in the area had been about 18%; our mission initially is to increase that by 5%, which we can do just by putting wells in the ground.”
Northern drilled two new wells and re-entered an existing one early this year to establish proof of concept. These three wells are now producing, while another three are being drilled.
“Our aim is to get all six of the wells tied in by the end of the year, in which case we should achieve a production rate of 500 barrels of oil per day [bopd] by the end of this year,” says Keith.
Each well costs about C$2 million (US$1.84 million) to drill and the tie-in cost is closer to C$0.5 million. The fact that “you don’t need that much money to get into the ground,” Keith comments, enables Northern to achieve small-scale production quickly. But the story in Canada doesn’t end there.
“There’s much more there in terms of the redevelopment – we’ve got potential for a 64-well case,” Keith remarks. “I think we’ll be drilling there for three to four years, and each well will have a lifetime between five and ten years.
“But for now we’re taking it steadily: getting these wells producing, ensuring they’re ok and then looking at how we can increase the production rate and revenue. At that point, the project will become self-funding.”
Italy and Australia
Northern has been in Italy for more than 10 years and has six permits there, including two onshore in the Po Valley, two offshore in the Sicily Channel and more in the Southern Adriatic. The company’s main acreage lies in two permits containing the undeveloped Rovesti and Giove oil fields within the Southern Adriatic, and a further five permit applications covering 4,700 square kilometres adjacent to the two permits. Northern has used proprietary seismic data to map a number of exploration prospects here, the most significant being the Cygnus prospect. Unfortunately, this is where progress has stalled.
“We’ve been wanting to shoot a 3D seismic survey over our two licences in the Southern Adriatic for the past year, but our application for an environmental impact assessment [EIA] has stagnated,” explains Keith.
“The technical commission was very happy with it, but the environmental minister of the time wasn’t prepared to sign any EIAs. New ministers have been appointed since then and communication has improved, so we’re hopeful of getting the 3D seismic approved before the end of the year – after which we can finally start making progress.”
Of Northern’s remaining prospects, Australia seems to hold the most promise. It holds a 5,800-square-kilometre licence in South Australia’s “lightly explored” Otway Basin, where five exploration wells have been drilled and some 4,468 line kilometres of 2D seismic data made available.
“Our Australian operation is interesting, because a couple of wells have been drilled in the same basin by Cooper and Beach Energy and these have yielded encouraging results for both conventional and unconventional oil,” Keith remarks. “But we’re looking for a farm-in partner who can run it for us.”
While Northern is keen to progress in all its operations, for now the production-led Canadian project comes first. Once it has reached a targeted 500bopd production rate at the end of 2014, the next target will be 1000bopd by the end of 2015. “That will give us a very stable company, with the revenue coming in with which to move into other projects,” says Keith.
Assisted by a farm-in partner, Northern hopes to be in a position to drill wells offshore Italy by the end of 2016, eventually achieving a significant production rate from its existing Italian acreage. Combined with increased production from Canada of 3-5,000 bopd, seven years down the line Keith would like to achieve a company-wide production rate of 30,000bopd. “It will require some deals with other companies, but I see Northern becoming a very sustainable, continually growing production company with additional exploration upside,” he remarks.
From that point, Keith is keen for Northern to pursue new opportunities – “these could be in North America or elsewhere in the world, but they’re likely to be onshore and somewhere politically stable – which I think is a strength of our current projects,” he adds. But the most important thing for Keith is avoiding the pitfalls of the past.
“The company has had some bad press in the past, perhaps because it hasn’t always delivered on expectations,” he says. “So what we want to do more than anything this time is deliver on what we say we’re going to do – and hopefully investors will choose to join us on this exciting new journey.”
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