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Caribbean small caps combine

BPC consolidates its expansion into Latin America with takeover of Trinidad producer Columbus Energy Resources

Caribbean-focused explorer Bahamas Petroleum (BPC) has told investors it will merge with regional peer Columbus Energy Resources, just days after expanding its portfolio into Latin America.

The £25.1mn ($31.8mn) deal will transform BPC into a full-cycle exploration and production company with additional onshore acreage and production in Suriname and Trinidad.

“The combination of Columbus and BPC will create a Caribbean and Atlantic margin-focused oil and gas ‘champion’, with assets that range across the full spectrum of oil and gas activities, from exploration, appraisal and development to production,” says BPC. The firm expects to finalise the deal before the end of August.

Making sense

The rationale for the merger is not immediately obvious. Both firms have very different expertise and backgrounds. Columbus holds low-risk Latin American onshore resources, while BPC is a high-risk exploration company with acreage in deepwater frontier basins. The move also exposes BPC to volatile oil prices for the first time.

But its top brass are confident global oil demand will recover post-lockdown and that oil prices will therefore improve. Columbus also made a significant oil discovery in April that could boost the new company’s reserve base. The Saffron well was drilled onshore Trinidad and is described by CEO Leo Koot as “transformational”. Columbus next plans to drill a test well at the Weg Naar Zee block in Suriname.

£25.1mn – Merger cost

BPC’s priority is clearly to diversify its asset base. Just days before the merger announcement, the firm added Latin American assets to its portfolio. The company successfully bid on a Uruguayan shallow-water licence for an initial four-year exploration period at a cost of $200,000/yr, with no drilling commitments, royalties or signature bonuses.

The relatively low entrance cost allows the explorer to move away from its traditional Caribbean asset base without heavy development expense or obligations. BPC’s finances are also in a strong position, with no debt, in sharp contrast to many producers struggling with looming maturity payments.

BPC says it will first assess existing seismic in Uruguay before carrying out further geological tests on its new licence. Current mapping suggests a resource potential of up to 1bn bl of oil.

Heading into the unknown

No commercial discoveries have been found onshore or offshore Uruguay. Dry wells were drilled in the licence in the 1970s by Chevron, while Total also recorded a duster at the Raya-1 prospect in 2016—at the time the world’s deepest well.

But geology similar to the prolific Guyana-Suriname basin has been encouraging fresh explorers to enter the region. US independent Kosmos Energy agreed to acquire two licences adjacent to BPC’s licence in December and has delayed agreeing terms only due to the Covid-19 pandemic. Uruguay’s NOC and state regulator Ancap still believes the deal will soon be finalised.

Across the maritime border in Argentina, many IOCs including Shell, BP, Total and Norway’s Equinor won licences last year. Offshore acreage spanning both countries is believed to be analogous.

Turning point

The immediate priority for BPC is its Caribbean exploration campaign, which has been rescheduled to December because of Covid-19 disruption. The company plans to drill the Perseverance prospect in the Bahamas’ Cooper block, adjacent to the maritime border with Cuba.

To date, like Uruguay, no commercial oil volumes have been found offshore the Bahamas. Exploration began in the 1950s with the drilling of the Cay Sal well, and decades later another well was spudded at the Doubloon Saxon prospect. Neither led to a major oil discovery or significant proven reserves.

Updated seismic data has more recently revived hopes for the oil potential of the Bahamas foreland basin. Three of BPC’s four blocks have multiple stacked plays buried deep within the cretaceous layer with oil potential.

Another promising sign for BPC is that the geology in the basin is strikingly similar to several world-class plays. It is analogous with Mexico’s Ku-Maloob-Zaap field, the most prolific in the country, and the Zagros mountains, which stretch from southern Iran into the Kurdistan region of northern Iraq and are the Middle East’s second-richest oil and gas region after the Central Arabian basin.

“First oil could coincide with a supply deficit and higher oil prices” Montgomery, Welligence Analytics

An independent third-party resource assessment, carried out in 2017 by upstream research consultancy Moyes & Co, valued BPC’s unrisked ultimate mean recovery in the basin at 1.6-3.3bn bl of oil, with an upside potential of 11bn bl. The consultancy estimated the chance of success for drilling at each stacked reservoir was 25-35pc—a moderate rate.

Timing it right

But BPC must hope that any material discovery  in a virgin province coincides with a significantly less gloomy outlook than currently—lest its success is met more with a shrug than an uptick in investor sentiment. It could be in luck.

Consultancy Rystad Energy estimates a shortfall that will emerge as and when oil demand recovers owing to the Opec+ alliance’s production cuts will reach 4.6mn bl/d in July and rise to a peak of 5.2mn bl/d by January. “We believe Opec+ is attempting to create a mini-bull-cycle by quickly tightening the prompt market, helping depressed prices,” says Bjørnar Tonhaugen, the firm’s head of oil markets.

And, if a hit with the drillbit coincides with economics that make the project viable, “BPC may be able to benefit from lower development and exploitation costs”, says Ruaraidh Montgomery, director at Latin American research consultancy Welligence Analytics. Further along the line, “first oil could coincide with a supply deficit and higher oil prices”, he predicts.

But, for BPC to keep the project moving, it must secure further financing and, potentially, a larger partner to carry its costs. Even in the current challenging conditions, that search remains ongoing, says Montgomery, particularly given the crucial technical expertise needed and the cost of a floating production storage and offloading (FPSO) vessel. 

While the Bahamas does have some existing oil infrastructure in place, to become an oil producer the country would most likely need to follow the Guyana template. Major ExxonMobil has largely single-handedly funded its oil development and already brought an FPSO online at its Liza oil discovery. The company has plans for at least a further two, which significantly improves the economics for other drilling prospects offshore Guyana.

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