Investors who are addicted to the white-knuckle ride of high-risk exploration will probably know nothing about Canadian-based, TSX and AIM-listed Bankers Petroleum (BNK). Focussed on heavy oil in Albania, the company operates at the production end of the exploration and production cycle - where risks are lower and progress is steadier and rather more predictable.
And that might be no bad thing, in today’s uncertain world. We briefly review the history of oil in Albania, as well as heavy oil, before looking a little more closely at the Bankers portfolio, its current operations, and its expansionary plans for the future.
ALBANIAN OIL - OFF THE RADAR?
Albania is adjacent to Greece, just some 50 miles across the Adriatic from southern Italy. Oil was discovered there in 1918, with further discoveries ten years later. Oil production expanded before reaching a peak in 1975 – followed by major decline due to a lack of funding and technical expertise, as well as civil unrest following the collapse of communism in the early 1990s.
Following the end of the communist era, Albania has sought to attract foreign investment in the industry, and has encouraged various companies to undertake onshore and offshore exploration. With investor attention more generally focussed on other areas of the world, Albania’s relatively low profile might offer interesting opportunities for those who don’t follow the herd.
Bankers Petroleum currently has two substantial heavy oil assets in Albania: the very large producing Patos Marinza field which is the subject of major development, and the smaller Kucova field which the company is planning to bring back into production. Patos Marinza was discovered in 1918, as Albania’s first oilfield, and Kucova was discovered in 1928. The company’s strategy includes the intended future acquisition of other heavy oil opportunities in Albania. We consider these existing oilfields separately below, but first we take a brief look at ‘heavy oil’.
HEAVY OIL – HOW DOES IT DIFFER FROM ‘ORDINARY’ OIL?
Heavy oil is crude oil which has a higher specific gravity than that of light crude, and is defined as oil having an API level below 20 degrees. Less than one-third of the world’s oil resources are light crude, and heavy oil is becoming increasingly important. It is generally agreed that heavy oil is the result of biodegradation of light oil, and is associated with the presence of bacteria, water and air. The result is that the lighter fractions of the original oil are lost, leaving the heavier fractions behind. These have a higher molecular weight, specific gravity, boiling point and viscosity; they can also have higher sulphur contents.
These factors make heavy oil more difficult to extract from reservoirs, because it does not flow so easily as lighter crude. However, it is found at shallower depths, and whilst the number of wells needed to extract it can be high - for example, as many as one well per acre - the wells are cheaper because they are shallower. The production rates can be raised by using heat i.e. steam inside the reservoir to reduce the viscosity of the oil and allow it to flow more easily, and from the use of long horizontal wells which expose a greater surface area of rock than can a vertical well; the injection of water is another technique.
The refining costs of heavy oil are higher than for light crude, and as a consequence the value per barrel is lower. Yet with the oil closer to surface, and long field lives, heavy oil fields can be economically attractive - and are attracting increased levels of industry attention.
PATOS MARINZA: TWO BILLION GROSS BARRELS
Bankers Petroleum took over this very substantial, already-producing field from the national oil company Albpetrol in June 2004 on a 25-year term. Bankers has an option to renew for additional five-year terms and a 100% working interest. Profit is taxed at 50%, less the royalties paid, which are based on a formula which reflects baseline and incremental production rates. Importantly, the Albanian hydrocarbon law allows 100% export of crude oil.
Patos Marinza occupies nearly 70 square miles (44,000 acres) and contained an estimated 4.7 billion barrels of original oil in place (OOIP). Allowing for past production – the field was discovered in 1918 - the OOIP figure for the area within the Bankers concession boundary is currently put by the company at 2 billion barrels. This is large by any standards; the proportion which can be economically recovered is unavoidably ‘geared’ to oil prices and capital availability; the higher the oil price, the more investment that can be justified to extract it. As discussed below, it is hardly surprising that the company’s market capitalisation took a knock during 2008’s financial turmoil and depressed oil prices. But company plans and budgets, and their financial backers, must necessarily look beyond the short-term and seek to take account of a more balanced longer-term environment.
The 2008 Proved and Probable (2P) reserves figure for Patos Marinza was 169.9 million barrels recoverable. This figure was been moving up every year since 2005, when it was assessed at 98.4 million barrels (this increase is net of the production). When Bankers took over in June 2004, the field was producing just 600 bopd. The company has been steadily lifting the production level ever since, increasing it more than 10-fold within less than five years, with the most recent company figure (April 2009) at 6200 bopd + 600 bopd shut-in, i.e. 6800 bopd of production capability.
The Bankers plan is to lift this level to 20,000 bopd by the end of 2010; how does the company intend to close the gap from some 6800 bopd during the next 18 months or so? The rate of progress is dependent, to some considerable degree, by the price of crude oil. The higher the price, the more capital available to support field development. Two budget scenarios were prepared by the company for its 2009 plans: Case A, with Brent crude averaging $50 per barrel, which would achieve a planned 7900 bopd by the end of the year - and Case B, at $68.75 per barrel, with a planned 9,100 bopd. At the time of writing (10 June), the oil price has been recovering strongly and is currently around the higher of these two levels. Investors will be waiting eagerly for news about the near-term development work that Bankers is undertaking.
Assuming that the 9100 bopd level is met, the raising of this to 20,000 bopd within a further 12 months looks an exciting challenge. We now look at the Bankers plans in a little more detail.
PATOS MARINZA: DEVELOPMENT PROGRAMME
The Bankers 2009 programme features a combination of well reactivations, workovers, and new vertical and horizontal wells. The two Cases A and B (see above) involve $38m/$63m of capital expenditure respectively, and 15 or 30 reactivations, 12 or24 workovers, and 10 or20 new vertical and horizontal wells. The total number of wells involved is 37 or 74, so the averaged well cost is around $1m. This cost is very modest by industry standards reflecting the closeness of the formations to surface, being broadly some 750m to 2000m.
The thicker oil is closest to surface, with the Gorani reservoir (average net pay 35m) containing 10 degree API oil, with the intermediate Driza reservoir (average net pay 32m) containing 12 degree to 15+ degree oil. With porosities in the 24% to 30% range, production from the vertical wells is some 15-85 bopd. However, horizontal well #5013 which traverses 375m of lateral pay has given a production rate of 125bopd which is increasing. A field of this type requires a carefully-engineered mix of vertical and horizontal wells, supplemented by cyclic steam and SAGD methods, which reduce the viscosity of the oil by heating it, enabling higher bopd levels and recoverability to be achieved. The deepest reservoir, the Marinza, contains lighter oil of 20+ degrees API which would not usually require thermal methods.
Bankers Petroleum has said there is the potential for ‘hundreds’ of horizontal well locations, and that the three-year plan includes the initiation of waterflood and thermal programs. Clearly, such a development programme represents a major management task - and a major capital investment. We outline the funding requirements and arrangements below.
KUCOVA OIL FIELD
Bankers has been planning the redevelopment of the Kucova field which is just 20km east of Patos Marinza, and which contains slightly lighter oil at 14 to 22 degrees API. The plan is to invest an initial $1.5m expandable to $3.5m, to test the reservoir and initiate production at a modest level while the geological and production data for the field is compiled and analysed. First production is currently expected to commence in the third quarter of 2009.
This asset contains five separate oil accumulations, with an OOIP figure of 297 million barrels. Kucova was discovered in 1928, and had over 1700 wells drilled into it. Prior to cessation of production, Kucova had produced 23.2 million barrels by the end of 2006, being some 8% of the gross field content. At that time, production was at 400 bopd. The current Proved and Probable reserves figure for the remaining oil is 10.1 million barrels, which increases to 35.5 million barrels if the Possible category is also included. Bankers Petroleum has said that the reserves might increase as the field is studied more closely.
Whilst the company has given no forecasts of production levels that might be achieved at Kucova, we note that this field is somewhere between about 6% (2P basis) and 12% (3P basis) of Patos Marinza. Using the Bankers 20,000 bopd target for the latter field as a broad benchmark, we tentatively infer a pro-rata potential of maybe 1200 bopd to 2400 bopd from Kucova at a broadly equivalent level of development. The field is geologically similar to Patos Marinza, with multiple stacked reservoirs – but these are believed to be close to surface, at some 150m to 1400m and this would imply relatively low drilling costs.
PORTFOLIO EXPANSION
Not content with having Europe’s biggest onshore oilfield and the secondary asset at Kucova, Bankers is actively identifying and evaluating further potential heavy oil and other opportunities in Albania. One of these is Block F, which contains several depleted Albpetrol gas fields. Shell operated the block prior to relinquishing it around a decade ago; the seismic work done by Shell indicates the possibility of several shallow gas targets. Strong European gas prices may have increased the commercial potential of these gas assets; Bankers has applied for the rights to explore the area and is currently negotiating terms.
FINANCIALS AND SUMMARY
When reviewing Bankers Petroleum and the capital needed to fund its substantial development programme, some pun on the name is unavoidable; who are the bankers that are going to pay for all of this work?
But firstly, the netback from the Patos Marinza oil field is worth noting. Bankers has produced a sensitivity analysis examining the netback per barrel for $40, $50, $60 and $80 Brent oil prices. Using rounded numbers, the respective netbacks are $2, $6, $10 and $17. So even with oil at $40, and the Patos Marinza heavy oil discounted by 46% against Brent, the operations still give positive netback – even if only just. And if oil prices improve in the way that many industry specialists believe, the achievement of 20,000 bopd – together with as much as $17 per barrel of netback - could provide the basis for fairly strong profits.
It is perhaps no great surprise that Bankers Petroleum announced on 19 April a $40m funding deal with a syndicate of underwriters including Cannacord, Thomas Weisel Partners, and Macquarie. Together with existing cash, cash from operations and other funding facilities, this deal enabled the Bankers President and CEO to comment that the company could now “confidently proceed with minimal balance sheet risk, in this low oil price environment, with an accelerated $60 million capital programme for 2009 and ensure timely execution of our plan of development for the Patos Marinza oil field” – Abby Badwi, 16 April 2009.
Since that announcement, the oil price has moved up significantly. During 2008, the Bankers share price was hit quite hard – like those of many other exploration and production companies – by the combination of financial turmoil and depressed oil prices. Roughly one year closer to its 20,000 bopd target, with its 2009 programme funded, and oil prices significantly strengthened, the share price has only partially recovered.
The market capitalisation, at the time of writing, is some £228m. The 2008 Proved and Probable reserves total for the Patos Marinza and Kucova oil fields was 180 million barrels giving a market capitalisation valuation, per barrel, of £1.27. Alternatively, with 182.5 million shares currently in issue, the Barrels Per Share on a 2P basis is virtually one barrel per share. With support from its financiers, and favourable comments by analysts, Bankers Petroleum may well begin to receive rather more attention during 2009 as its investment programme gathers pace. (Source: proactiveinvestors.co.uk)
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