Feature: Oil industry swashbucklers hit by war, disease and shale boom

East West Minerals

24/11/2014 20:43

By Nia Williams 
    CALGARY, Alberta, Nov 24 (Reuters) - The world has become a 
more difficult place for the small, intrepid Canadian oil 
explorers that roam the globe hunting for the next big petroleum 
discovery. 
    Like the big-game hunters that once ranged Africa, these 
small-cap explorers and producers (E&Ps) call their quest for 
billion barrel-plus oil deposits "elephant-hunting", and for 
many the thrill of the chase is a big part of why they are in 
business. 
    "A guy can invest in the Alberta oil sands or a Bakken 
shale-type company and they are going to make a little bit of 
money, but they are not going to hit that grand-slam home run we 
are looking for in elephant country," said Mark Sommer, 
spokesman at Simba Energy  SMB.V . 
    But Ebola, Islamic State and the Ukraine conflict have made 
an already tough market tougher for these companies, while 
potential investors are finding the North American shale boom a 
more comfortable place for their money.      
    Some of the E&Ps are trying to diversify and bring 
production back home to Canada's more stable environment. For 
most, however, that is not an option. Their expertise lies in 
finding and proving oil deposits, not asset development. 
    At Simba Energy, the bulk of its operations are in Kenya but 
it also has assets in Ebola-stricken Liberia and in Mali, where 
Tuareg rebels are demanding greater autonomy. 
    The company is trying to exit Mali and will re-evaluate its 
Liberian operations if the Ebola outbreak lasts more than 
another six months, Sommer said.     
 
    CAPITAL COMPETITION 
    The E&Ps have always faced some challenges operating in 
risky areas but only recently has the sector also had to compete 
with North American shale plays for capital.  
    E&Ps operating internationally have raised about $6 billion 
in capital this year, about 10 percent of global issues in the 
sector, according to RBC Capital Markets. The other 90 percent 
went to North America.  
    Merger and acquisition activity in the sector is at a 
six-year low. On Canada's TSX Venture Exchange, which has a long 
history of pairing risk-tolerant investors with companies 
drilling in distant and dangerous places, initial public 
offerings have been down two years in a row.  
    Chris Beltgens, corporate development manager at East West 
Petroleum  EW.V , said he has been frustrated by the way the 
conflict in Ukraine has soured investor attitudes toward 
East-West' activities in neighboring Romania.  
    And a tough market for E&Ps bodes ill for exploration 
worldwide as small caps are often first to drill in a new 
region. 
    If drilling is successful, larger companies take note and 
follow or buy the E&P outright as commodity trading house 
Glencore  GLEN.L  did with Caracal Energy and its Chad assets 
earlier this year. 
    "They (E&Ps) start off with prospectivity and follow with 
exploration success," said Sonny Mottahed, chief executive at 
Black Spruce Merchant Capital. "We have gone through three years 
in the international E&P space where this has been a fairly 
challenging outcome." 
     
    COMING HOME 
    Some E&Ps are trying to make the switch from international 
to domestic.  
    When new management took over Groundstar Resources Ltd 
 GSA.V  two years ago it decided to shift operations back to 
Canada, and it now has production in Saskatchewan. The company 
left Iraqi Kurdistan in 2013 but still has operations in Egypt. 
    "When we took over we basically said let's come back closer 
to home and develop assets over here and get ourselves to a much 
more stable cash flow company," said chief financial officer 
Shabir Premji. 
    Calvalley Petroleum  CVIa.TO  is trying to diversify assets 
so production is not solely concentrated in Yemen, where 
sectarian warfare is a danger.    
    Others are hanging on. Mena Hydrocarbons  MNH.V  halted 
drilling in Syria two years ago but CEO Magdy Bassaly said it 
will return if the country stabilizes as the company's well is a 
good prospect. 
 
 (Editing by Peter Galloway) 
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters 
Messaging: nia.williams.thomsonreuters.com@reuters.net)) 
 
Keywords: CANADA OIL/EXPLORATION