A cluster of mobile homes huddles together in the midst of the Patagonian plains, only a few kilometers from the Magellan Straits. Center stage, a Chinese-made drill moves towards its goal: reaching down 2,990 meters. In one of the mobile homes, adapted as a laboratory, Jim Park looks anxiously and enthusiastically at the data that the drilling probe sends to his computer screen. Park hopes to find natural gas in the well and trades thoughts with the geologist on duty, a huge Cordoban who could be a prop for the Pumas, the Argentine rugby team who at that very moment were beating France in Paris for third place in the World Cup. Drilling had started six days before, Saturday October 13, and the operators were hoping to reach their goal in one more week. Between machine rental and payments to service companies, each day of drilling means US$50,000 in direct costs for Geopark.
The scene is played out in Nika, part of the Fell block that Geopark won in the south of Chile in 2006 and which has become the company’s center of operations. Geopark, a small-scale oil company that trades on the London stock exchange, believes it will find commercial reserves at Nika. “We hope to end 2007 with nine wells drilled in the Fell block,” says Park, the company’s CEO. “Plans for 2008 are far more ambitious: 24 wells, with an estimated investment of US$50mn.”
Geopark is a good example of the socalled junior oil companies, small outfits focused on oil and gas reserves that don’t interest large hydrocarbons companies. In Latin America, the countries with the most potential for juniors – as much because of their geological conditions as their regulatory environment – are Colombia, Argentina and Peru. Chile’s geological potential is modest, but its legal framework and juridical stability - not to mention its gas-thirsty market – provide adequate compensation.
Geopark was established in 2002 and as this article goes to press had four concessions - three in Argentina and one in Chile. At the end of 2006, Geopark became the first and to date only private producer of hydrocarbons in Chile. Its Chilean adventure has been fashioned by the restrictions that Argentina has placed on gas exports and which have jeopardized the operating continuity of one of the largest methanol plants in the world, which lies 100km from Geopark’s fields, close to the city of Punta Arenas and which belongs to Canada’s Methanex. The plant produces some 10% of world demand for methanol, and Argentine gas represents 60% of its raw materials supply.
For Methanex, ventures such as Geopark’s are its best hope of resolving its long-term problems. The Canadian company has indicated that it would like Chilean gas to supply 100% of its Punta Arenas plant within two or three years, and in 2007 it signed a memorandum of understanding with Geopark that includes a 10-year supply contract. The contract allows Geopark to secure financing against its future supplies to Methanex for expenses including its investment program. Together with the Wintershall oil subsidiary of giant German chemicals company Basf, Geopark and Methanex also associated to bid for new hydrocarbons concessions that state oil company Enap offered in the south of Chile in October 2007.
CGC’s Diego Garzón Duarte expects independents to play a frontline role in the development of the region’s oil businesses.
NEW GENERATION
It’s not easy to find figures, but in the industry the consensus is that junior oil companies are gaining importance in South America. A report from the Argentine Oil and Gas Institute, for example, includes 39 new operators in the country, 25 of which produce less than 1,000m3/day, some 6,300 barrels. Meanwhile, an April 2007 report by consultant Tristone Capital, details 41 independent oil companies in the region, 16 of which operate in Argentina, 14 in Colombia and seven in Peru.
Although easily outpunched by the sector’s heavyweights, there are many expectations that the juniors’ importance will rise. Diego Garzón Duarte, CEO of small Argentine oil company Compañía General de Combustibles (CGC), looks at the United States and Canada, where 3,500 companies with market capitalization of between US$10mn and US$1bn, control more than half of reserves and production. “We’re talking about 3 million barrels of oil a day,” he says, “which is more than the total production of Venezuela.” In contrast to the US oil industry, which started in the 19th century as a private activity, Latin America only really opened its oil market during the wave of privatizations in the 1990s. Free of restrictions, Garzón Duarte expects the independents to play a front-line role in the development of the region’s oil business in the next 30 years.
What juniors are looking for are small oil producing properties with development potential. They want to acquire projects already in production that they can use as a steppingstone to other growth opportunities. This is the route followed by Petrolífera Ltd., a company created in 2004 by Canada’s Connacher Oil and Gas Ltd as a vehicle for its activities in Argentina. After buying its partner, assuming the rule of operator and changing its exploration strategy, the company drilled 16 wells on its first property without any turning out dry. It is now on the point of becoming one of the 10 largest producers in Argentina, with production of some 11,000 barrels/day and with plans of reaching 15,000b/d in 2007 The company has bought new properties in Argentina, Colombia and Peru and plans to invest US$135mn in 2007. Despite the pace of its investments, the company has generated sufficient cash flow so as not to need to dip into the funds it raised in an initial public stock offering on the Toronto stock exchange in 2005.
LITTLE CHARMS
Villa O’Higgins is a small town that lies in Geopark’s center of operations in Chile, and is where the cattle cooperative that grazes the Fell block’s concession is also based. At midday, Park and his two colleagues have a simple lunch in the town. The table is set with a plastic breadbasket, soda, water and powdered juices, and lunch is simple: silver smelt, known locally as pejerreyes, freshly caught that morning in the nearby waters of the Magellan Straits by the cook’s husband.
This adaptation to conditions, unimaginable for a major, is one of the advantages that juniors hold. Park personally knows everyone in his technical team, as well as the main professionals in the service companies - such as Halliburton and Schlumberger – that operate in his concessions.
The human scale of the junior is today an advantage in the market in which the greatest scarcity is for qualified labor and professionals. At the start of the decade, Geopark put together a good team of professionals from Petrolera San Jorge, an Argentine company that Chevron bought in 1999. According to Park, on buying smaller companies, large companies often leave valuable intangibles – including people – to one side, and so lose them. “We can motivate people better than large companies. Each of our workers is a shareholder,” says Park.
Operational experience, a culture geared towards high yields and political intelligence are some of the competitive characteristics juniors possess, according to a 2007 report by consultant Accenture.
After bringing in the people from San Jorge, Geopark capitalized on the accumulated experience of the professionals and their experience in the oil company. The same happened in Chile, where the company has been able to bring in local professionals with extensive international experience, and who at the same time know the geological structures of where they are operating down to the fi nest details.
A 2007 report by consultant Accenture highlights other competitive characteristics of junior and independent oil companies:
- Operational experience: smaller oil companies are more agile in making decisions and getting work started.
- Culture geared to high performance: this is easier to achieve in smaller groups.
- Political intelligence: Junior and independent companies tend to attract local executives and technical staff that know the reality of the country in which they are working and have good contacts in the oil community and in related government bodies. The smaller size of juniors moreover helps them to keep a lower profi le in the political debates that typically surround the oil business.
This does not mean that junior and independent oil companies always win. Their smaller purchasing power puts them at a disadvantage compared to the bigger companies in a market in which availability and times of equipment and materials has become a major problem. Some of their costs moreover, can be higher than those of the majors. According to CGC’s Garzón Duarte, the majors are the most profitable companies in the industry, followed by the independents and then the medium scale oil companies.
Nonetheless, juniors and independents have caught the attention of venture capitalists and some multilateral lending agencies. The IFC, the World Bank’s private sector arm, for example has bought minority stakes in companies such as Petrotesting Colombia, Geopark, and Venezuelan operator Petrofalcón. IFC investment offi cer Deema Fakhouri says that the corporation has an appetite for different types of risk and gets involved in countries that banks avoid and in industries such as oil that have high levels of uncertainty.
The case of Geopark is a good example. According to Fakhouri, the US$10mn investment in this company in February 2006 could have been seen as a risky bet. At the time, the company was not producing anything, and had only its assets, which it was analyzing. But through the analysis of its own technicians and evaluating the company’s technical and administrative team, the IFC felt sure of reducing the apparent risk. “It could be that the company does not have a story behind it, but its people can have a record of developing reserves and managing a company. The IFC’s analysis process is strict, but at the same time it is like a stamp of approval of good management,” Park says.
A bet or not, the performance of Geopark since the IFC’s entrance, which was followed by an initial stock offering on London’s Alternative Investment Market (AIM) in May 2006, is encouraging. By November the company was well on the way to reaching its goal of closing 2007 with a production of 4,000 barrels/day of oil equivalent, and has promising fi elds in which to implement its aggressive drilling campaign in 2008. In September last year it started operations at a processing center and dew point brought from Bolivia, which allows it to feed its production directly into the gas pipeline network in the south of Chile. The company’s share price has increased from around US$300 when it launched onto the market to a little over US$400 in mid- November 2007. It’s a sign of good times. Welcome to the new world of the oil juniors.
