Valeura shifts to London
The Turkish gas producer joins Toronto peers in an LSE listing
Canadian independent Valeura Energy, which is focused on conventional and unconventional gas production in the Thrace Basin in western Turkey, became in April the latest in a series of previously solely Toronto-listed oil and gas firms to also make a London market debut. Petroleum Economist spoke to CEO Sean Guest in London in May about the motivation for the new listing and about the firm's ambitious plans for unconventional gas in Turkey. Edited highlights follow.
PE: What is the motivation for your London listing?
SG: We have been a main board Toronto company for the whole nine years of our history. Toronto has always been a great market to fund international resources, both energy and mining. But we have seen a change in the past number of years; the appetite to support international oil and gas has really decreased. The past couple of years have seen a lot of Canadian international E&P companies move over here, whether it is Serinus, Transglobe, SDX or Jadestone. We are moving along with that group.
When we raised about C$60mn ($45mn) for our activities just over 12 months ago, almost all that money came from UK institutions. That underlines the support we see for the business over here. As a business focused on Turkey and gas, the UK and Europe gets that European gas story and has much more awareness of Turkey-where it is at, and how it's interlinked with European gas. So, for us, it was a natural move to come over here.
PE: So, despite London oil and gas IPOs not being plentiful, you still see investment appetite?
SE: Certainly, when we did the raise, we saw really good UK institutional names coming into a story that, at the time, was just Toronto-listed-they were willing to buy it there. We felt it was important to get the UK listing to allow a much broader suite of UK institutions, including smaller ones which, due to compliance rules, could not buy in Toronto, to come into the story. When we did the listing here, we did not do a raise-we have all the capital we need into 2020. It is more about a broader institutional shareholder base understanding the story and being ready so that we can do a raise over here at some point in the future.
PE: Are you looking just to reduce the number of shares listed in Toronto, or would you look at de-listing?
SG: We have seen a few of the other movers to London start to de-list from Toronto. That is not in our plan, we still have quite a strong shareholder base in Toronto and will, in the near term, maintain that listing. We also believe that we have very strong compliance under our Toronto listing, e.g. quarterly reporting, reserves updates, and so on, that we think will be appreciated by shareholders, whether they are in Canada or in the UK.
Value in the deep
PE: If we look at the asset itself, is it fair to say it has two stories, the shallow conventional production and the deeper unconventional?
SE: Maybe not two full stories, but the shallow is a good magazine and the deep is a huge novel, like War and Peace. We really like having the conventional production because it delivers us a positive cashflow. It covers our organisational expenses and is spinning cash into the company, which helps underpin what we are trying to do going forward.
But the real value in the company is going to be generated in the deep. We are talking about 10tn ft³ equivalent of gas, net to Valeura on an unrisked basis; the value prize there is massive and that is why we maintain our primary focus on that, while our core Turkish staff manages the shallow conventional production. In the most recent quarter, we have upped production fairly significantly and our netbacks in Turkey have increased substantially, because our price in USD terms has gone up and our costs in USD terms, looking at the drop in the exchange rate, have reduced.
PE: What is current production looking like?
SG: For Q1 19, we estimate production of over 750bl/d of oil equivalent, which is a nice material uptick and good value-add to the company.
PE: What is the production potential for the deeper reservoirs?
SG: If we look at the volumes that [consultancy] D&M gave us, on a project basis-as we have Equinor and one other partner in there-you are talking 25tn ft³ recoverable gas, unrisked. If we look at the 51pc risk that D&M put on it, you get to roughly 12-12.5tn ft³ recoverable. And you can work out that, when you are looking at a 20-to-30-year production profile, you need to be doing about 1.5bn ft³/d (42.45mn m³/d) of gas. So, you can get a good idea of the kind of scope we are talking about here, on a risked basis. Unrisked, you can double that number. This is the type of project that, on success, companies like Equinor really strive for-massive reserves, big capital projects with long-life production. And, very importantly, this is gas right on Europe's doorstep.
PE: How is the testing and appraisal going on the basin-centred gas accumulation (BCGA) discovery?
SG: BCGA means gas under pressure in sandstones, so it is not shale. We went into a programme starting late last year planning to drill two-to-three wells. We have completed drilling two wells-one, Inanli-1, went to 4900m, then we moved 20km (12 miles) to the west and we drilled Devepinar-1, which went to about 4800m. We now have three brand-new wells with between 1km and 1 mile of vertical gas-charged sandstones, and with 20km between these wells. Drilling another vertical well right now was not going to change the story and, for that reason, we are now making plans, probably around the end of May, to start fracking stimulation and testing of these wells and to do zone-by-zone testing.
With such a long column, we really want to understand how the rock behaves, from the very deepest sections right up to the shallowest sections, and to see what flows into the well. We are not trying to achieve a headline-exciting flow rate, just to demonstrate which of those zones continues to flow gas into the well and where to target next year's programme in 2020. We have the equipment, we have the capital and we have the partner to be able to test these wells for between three and six months and see where we are going to focus in the future.
PE: What is the exciting stuff to look out for in 2020 and beyond?
SG: The flow rate we get from different zones in this year's testing will define the 2020 project. With successful flow, we envision going into what we call an early development project. We would look at going to a pad, put four, maybe up to six, horizontals off that, to really see how the horizontals behave, and then, given that we have such a large area here-we are just under half-a-million acres in the basin-we will probably need a few more vertical wells just to drill around to see any variations in the rock quality. When we went 20km away from Inali-1 and drilled Devepinar-1, we got the reservoir and the gas we expected, but we actually had slightly better porosities there than we expected. So, a few more wells just to check that lateral variability.
Source: Petroleum Economist
PE: What is the attraction of the Turkish market?
SG: One of the reasons that we went into Turkey is that it is a big, captive market for oil or gas. It has excellent fiscal terms, which are a simple 12.5pc royalty and 22pc corporate tax. And, while current production was relatively small, there was that potential appetite for any increased volumes. Even if we have the best project possible in terms of production, we could only get to a number that would meet about half of Turkey's gas requirements. So, we see Turkey as continuing to be a major importer and a price taker on gas.
PE: Turkey is therefore prepared to pay quite an attractive price, in global terms, for this gas?
SG: In terms of our gas price last year, the Turkish lira fell significantly, by c.30pc, but our gas prices went up c.30pc in USD terms. To see that the government was correcting the price every month was very important for us, because it was a difficult year for them. There were national elections, there was high inflation, but the government did not take any opportunity to try to subsidise to keep the electorate happy. They took what we saw was the right action, charging the people internally what it cost them to buy the gas and import it to the country.
PE: So, you are getting price parity with imports?
SG: That is roughly correct. We track the price that we realise in-country, in USD, against a proxy EU price for the past eight years. And we have achieved a dampened EU price, because we do not have as much volatility, due to the government setting the price, so there is a bit of a lag.
PE: And the Turkish government has shown good commitment to a more liberalised gas market?
They definitely seem to be heading towards a more market-driven price for gas. On 30 September last year, they also introduced a gas trading market in Istanbul. We can see that is creating, even for us, a currently small gas producer, contact from Turkish buyers wanting to know how they can access our gas in this system.
PE: You already have a network and a customer base for your existing production. But, as your production grows going forward, becoming more active on a nation-traded market is an option for you?
SG: The advantage of having our own network is that, this work we are doing on the unconventional resource-bringing on appraisal wells, even if we were to go next year into an early development project-we can put all that gas into our own system and produce it immediately. We do not have to negotiate major new gas sales contracts. And our system even now has a connection to the regional grid, which we do not currently utilise, but we could open that up and market our gas further.
PE: So, you have existing access to an extensive domestic demand as and when your production grows. But you are, as you say, on Europe's doorstep too, so are exports beyond Turkey also a potential option?
SG: Turkey's petroleum law allows you to export up to 35pc of production. And, with government agreement, you might even be able to go above that number. We have some major Russian import lines supplying gas into Turkey just to the north of us, and just to the south is TANAP, a pipeline from Azerbaijan through Turkey and, from 1 July, opening the section through Greece and Albania-and ultimately, through another pipeline under construction, to Italy. That new line, very close to our blocks, could take us right into Europe.
PE: Turkey has, though, shown signs of being a potentially challenging environment?
SG: Turkey has been in the news a lot and there has been uncertainty around it. But what we can say is that, having worked there for eight years, we still find it a very good area in which to work. We are dealing with the same people in the ministry that we have been dealing with since before the last election. They are very supportive on getting us our approvals and other things that we need to operate. And we are working in an area of western Turkey, European Turkey, where there has been decades of oil and gas production and we have worked with that community for a long time.
PE: So, the public support is there?
SG: The people are used to seeing drilling rigs, used to us laying pipelines. There is a set process on how you work with the community, how you compensate the community, that is well known.