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Interview

Ian Hewitt – CEO, PICO Cheiron Group, Egypt

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Ian Hewitt, CEO of PICO Cheiron Group, outlines the mandate he was given in February 2016 to take the family-owned company into the next level as an international oil and gas entity, the focus of PICO Cheiron on exploiting their mature assets to the fullest, the critical role that independents can play in securing Egypt’s oil and gas future, as well as his positive analysis on the investment climate in Egypt.

Ian, you joined PICO Cheiron in February 2016. Were you given a particular mandate?

“Our current production is around 35,000 barrels per day (bpd) barrels equivalent (boe), around 60 percent oil and 40 percent gas. We believe we can grow this to around 60,000 bpd boe in the next two to three years.”

The mandate was to rebuild the Egyptian oil and gas business of the group, which was split into two companies, PICO International Petroleum and Cheiron Petroleum Corporation, which I merged into PICO Cheiron Group. While I joined on 1st February 2016, I have actually sat on the board of directors since 2013. I stepped in as CEO upon request of the shareholders in order to improve the resilience of the company and help take it to the next level, essentially – at a time when the oil price was in a very bad place and the entire industry was shrinking.

We initially narrowed our investment focus on the more profitable opportunities in our portfolio, reduced costs and improved production efficiency, which has provided a good base for the future. We then reevaluated our own portfolio from a subsurface perspective, understanding, modifying and updating our models, and rebuilding our prospect inventory. We decided that we would not cut staff but would instead grow the company to further improve its underlying robustness through growth, taking advantage of the distressed M&A market at the time. We have extended a couple of concession agreements and also signed a couple of sale and purchase agreements (SPAs) to acquire a new operated positions that we are hoping to complete in the not-too-distant future.

We have also put a lot of effort into improving organizational effectiveness, looking beyond people and skills to the larger organizational structure by broadening the leadership base, deepening leadership at multiple levels within the organization to enable more effective delegation and decision-making.

Our current production is around 35,000 barrels per day (bpd) barrels equivalent (boe), around 60 percent oil and 40 percent gas. We believe we can grow this to around 60,000 bpd boe in the next two to three years.

Internationally, we have assets in Mexico and Romania; We have been producing oil in Mexico for over three years prior to the sector opening up, and we expect to further grow our business there. Romania is in the exploration phase we are currently reflecting on next steps. We are concentrating on rebuilding the home base Egyptian business as a priority for now and do not expect to be entering another country in the near term.

Ultimately, we have agreed a business plan with our board for the next five years, we are fairly clear on where we are going and now the next step is delivery.

What is PICO Cheiron’s current positioning in the market?

We are the seventh largest producer in Egypt and definitely the largest local producer by far. PICO has for many years been a mature asset player and a development company. We are not an exploration company, we are an exploitation company. Exploitation is about developing what you can see in near field satellites and exploring within the constraints of your concession area. This fits very well with where the environment is and we sit very comfortably alongside some of the larger players that are more frontier in nature and carry out multibillion projects.

We are looking to diversify our portfolio of assets within the country itself because doing business here makes sense for us as an Egyptian company. We see a very long-term future and many opportunities in Egypt and as a local company, we are proud to help the country prosper. Previously, we have exclusively been in the Gulf of Suez, a relatively mature region of Egypt. We are now moving into the Western Desert and the shallow waters of the Nile Delta.

As a smaller local company going after mature fields, what technical strengths do you have in order to exploit fields that larger international companies have relinquished?

The staff in this company have the experience and expertise to deal with mature assets given that the company has always specialized in them. Most of the necessary technology is also available in the market. That said, a caution in any business for someone who has been in the same location for a long time is that he needs to look very closely at his activities and freshen up his thinking occasionally. The only way to do this is to find ways to bring in new ideas to stimulate the staff.

One of the things I have done in the last year is bring in some new internationally experienced people into the company to share new ideas and to bolster the competences, not only in the joint ventures we have but in our technical and commercial teams here at PICO. It is always positive to have a broader perspective and to supplement local expertise and skills with some international experience and vice versa.

As a smaller local company, we benefit from having a lower cost base, economies of scale of our operations and agility to capture opportunities as they present themselves compared to some of the larger international players.

Coming to the broader Egyptian oil and gas landscape, as attention focuses on the headline Zohr gas discovery and the country works to attract substantial foreign investment, what role is there for companies like PICO Cheiron to play?

We have been in Egypt for a very long time, we were one of the few companies that continued to invest throughout the different revolutions and we will continue to invest. Over the next five years, for instance, we are looking to invest around USD 1 to 1.5 billion dollar.

There are some very large companies with very deep pockets drilling for big gas that is stratigraphically deep and in deeper water – the likes of Eni, Shell, BP, Total, perhaps, and previously, BG. With the Zohr discovery and a number of the expected major discoveries coming in within the next few months, there is the sense that Egypt has solved its domestic gas supply problem.

While these will probably solve the gas shortage issue for the short-term, strategically, it is clear that Egypt requires a diversity of gas supply in order to build a sustainable long-term energy sector. Gas powers around 85 percent of the national electricity grid so gas is fundamental to the economy, to running the country. Diversity provides security of supply and security of supply promotes sustainability in your energy portfolio. In the past, Egypt relied on the West Delta Deep Marine field to supply nearly half of its domestic gas needs – 2.5 billion cubic feet (bcf) in a 6 bcf market – and now it is pinning its hopes on Zohr. Having a big discovery is simply not the only answer; Egypt needs to move beyond seeking short-term clarity and priorities to make sure it has a robust gas development project pipeline to guarantee its gas supply in the longer term.

Furthermore, these discoveries do not solve Egypt’s oil problem. Egypt is already facing a shortage of oil and a large part of Egypt’s oil sector is in the second stage of evolution with many maturing assets. Many of the larger companies I mentioned above are quite passive in developing oil opportunities in Egypt because the fields tend to be smaller, some of them might be redevelopment fields and some may require a company to have a low cost base in order to be profitable. The larger companies will also inevitably sell out of their existing positions in the next few years. For instance, the BPs of the world will eventually leave the Gulf of Suez, a relatively more mature region for Egypt, as maturing assets cease to be material for large IOCs.

As a result, the region needs a second wave of smaller companies with a much lower cost base that are happy to invest. There is a lot of running room there for us. If larger companies are chasing the bigger projects, it makes sense for independents like us to focus on smaller accumulations and maximizing hydrocarbon recovery. We can walk among the legs of the larger companies, like a David among Goliaths.

Ultimately, it is very important for the environment to have differently-sized companies doing different things to maximize recovery. To do so, Egypt needs to encourage more independents to invest here.

Egypt seems to be rebranding itself as an underexplored country with huge potential for major discoveries along the lines of Zohr. How realistic is this?

This is definitely true. A few years ago, I remember looking at a map of the Mediterranean and overlaying the North Sea onto it. In a particular area, the North Sea had 10,000 wells drilled while the Mediterranean only had 300 in a similar area, which was very striking! Egypt is a very attractive investment destination. There are vast tracts of unexplored area across the Western Desert where even 2D seismic data does not exist, especially further south. The question that needs to be asked, however, is why these areas have not been looked at or developed in Egypt’s 160 years of oil and gas exploration?

The rhetoric I am not hearing in this country is the need to maximize hydrocarbon recovery and lower barriers to entry for new players, particularly independents, which is absolutely essential to the long-term sustainability of the oil and gas industry in Egypt.

H.E. Minister Tarek El Molla has done a very good job in raising the game on communicating the opportunities available in this country, and it is very encouraging that he has the full support of H.E. Prime Minister Sherif Ismail, who has extensive experience in the sector too. The right things are absolutely being done. The caveat I would like to add is that many things are being done and being done correctly, but not everything is being done which will help all types of investors.

The Ministry of Petroleum is implementing a new modernization program to optimize the sector further. What are your hopes as a local operator?

For me, Egypt can reflect on what other countries are doing to attract investors to consider how it can be competitive in relation to other countries. Egypt is not competing with Egypt and companies like us here are not competing with other players. Egypt is competing with other investment destinations with lower barriers to entry. Egypt needs to have the lowest barriers to entry to get the maximum number of players in the country. It should evaluate the sort of opportunities present here, the kind of players they need, and how other countries are attracting these players. Are we missing anything, essentially?

As a simple example, when oil & gas companies want to enter Egypt, they need to be able to commercially register very easily, qualify as operators very efficiently, have simply efficient procedures for decision making with the NOC and so on. There could be something like a one-stop shop for new companies entering the oil and gas sector. I appreciate that the General Authority for Investment and Free Zones (GAFI) is acting somewhat in this capacity but something tailored to the oil and gas sector would be helpful.

Furthermore, in maturing basins around the world like the North Sea, Malaysia and Indonesia, it is not unusual for them to be incentivized with revised fiscal terms like mature asset terms or small field terms to attract a second wave of investment from smaller companies like PICO. You already have Apache here doing very well, and in the North Sea, they pursued a similar strategy very successfully as an independent coming in on a second wave in redeveloping fields. One size fits all concession terms is not optimal for Egypt.

Currently, the licensing rounds tend to be smaller, offered for a limited period of time, and with barriers to entry coming across as being less attractive. For instance, if you want to look at the seismic data for three concessions in a licensing round, it may cost USD 1 million, which is a risky expenditure to justify to the Boards of small companies when they might not even bid for the assets. The NOCs here could definitely consider making seismic data available for companies for free, which is what has been done very successfully in the UK North Sea.

The North Sea is of course far more mature than Egypt but they have done very well in attracting investment to what is a high-cost environment. Egypt is fortunate that it is a low-cost environment, so it is all about helping companies see the opportunities without spending too much money, so that they can enter the country in a cost-efficient way – and the country can recoup the investments in the work programs and production terms.

The production sharing agreements (PSAs) in Egypt are already helpful in reducing investors’ sensitivity to oil commodity prices because of their dampening effect. There has also been some adjustment in the latest terms with regard to the excess and the cost recover mechanisms. Companies are now able to recover their investment within the duration of the concession whereas previously, companies would be increasingly disincentivized to invest as they approached the end of their concession agreements

Having worked in various positions over a span of three decades in and out of Egypt, how would you assess the current mood in the Egyptian petroleum industry today?

“Having run companies in the North Sea, Southeast Asia and North Africa, it is clear that as far as North Africa is concerned, the only real investment destination is Egypt.”

Having run companies in the North Sea, Southeast Asia and North Africa, it is clear that as far as North Africa is concerned, the only real investment destination is Egypt. As far as Egypt is concerned, it is getting more attractive and people are starting to see the opportunities here.

In order to sustain the interest, however, the country still needs to make things easier. The thing that would help most is efficient decision-making in the NOCs. To be frank, there are companies that are put off not just by the existing receivables but also by the inertia that exists within the system. H.E. Minister El Molla’s enthusiasm needs to be cascaded down throughout the sector, there needs to be leadership at multiple levels of the various petroleum organizations and we need to see NOC staff taking a little more risk in decision-making to get things moving.

PICO/Cheiron Group have always done our best to help the government and we will continue to assist the Egyptian government and the various NOCs to make the best decisions. Our goal is to do our best to maximize our investments and opportunities as well as contribute to our host’s successes, because reflected glory shines brighter!

Finally, with such exciting transformation plans planned, where will we see PICO Petroleum in five years?

I believe you will see a very robust, exciting company that people love to work in, a company twice its current size running extremely efficient operations.

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