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Interview

Peter Youngs – Managing Director, CalEnergy Resources Ltd, Australia

Peter Youngs - CalEnergy Resources

CalEnergy Resources Limited is a subsidiary of Berkshire Hathaway Energy with offices in London, Warsaw and Perth. Managing director Peter Youngs shares the company’s upstream oil and gas projects in the North Sea, Baltic Sea, as well as in Western-Australia, where expertise and knowledge from Perth has been leveraged for international endeavors.

You have been managing director of CalEnergy Resources since 1997. What was the strategy that led to the current asset portfolio of the company?

We are a very value-based organization, meaning that we are driven by value opportunities. Historically, our strongest region has been in the UK’s southern North Sea, which is where much of the early development of the company occurred, leading to our expansion into the same basin in Poland. At the time, we were owned by CalEnergy Company Inc, which later became Berkshire Hathaway Energy, and we were looking together at international gas and power opportunities in Asia. Australia presented what we found to be some of the best gas opportunities in the region, and the company positioned itself here in 1997.

Our main technical office is actually now situated in Perth, as we see the city as an oil and gas technical center. Compared to other technical hubs such as Aberdeen, Perth may not boast as high a number of projects, particularly in regards to offshore developments, but the city certainly upholds its own niche areas of expertise. Despite project sizes being large in Perth, these projects are still relatively few in number, and it is the number of projects that is a major factor in driving innovation. This is not to say that innovation does not exist in Perth, but rather that the expertise here is very niche in focus.

What are the competitive advantages of being part of a holding company like Berkshire Hathaway Energy?

Naturally, Berkshire Hathaway’s capital strength is something that is of great importance to our company, particularly considering our size. More than this, however, is the overall credibility of our entire organization in terms of the ethics of our underlying business and our commitment to environmental and safety performance. In all of these aspects, Berkshire Hathaway truly maintains high standards for excellence.

What are your current main strategic priorities for CalEnergy?

Being a value driven organization, we are currently pleased with our geographic centers of focus, and we are presently looking for the right opportunities to grow. We try not to be too fixated on our assets, so if we are in the marketplace and we see that an asset holds greater value in someone else’s hands, we are flexible and can enter into transactions on this basis. This is part of the reason that we exited our Southeastern Australian portfolio in late-2010. We saw that those assets presented greater value to other people. Since that time we have looked at building up our operating capabilities so that we can be more involved in outcomes. In fact, we drilled our first well offshore of Northwest Australia in 2014.

This build-up of capability has been an important part of our development, and allowed us to leveraged off these capabilities (in Perth) to operate on behalf of the Baltic Gas Project, offshore of Poland, cooperating with LOTOS Petrobaltic S.A. in the development of the B4 and B6 gas fields. At the moment, the engineering for this project and most of the subsurface has been led from Perth, demonstrating how we were able to leverage the expertise that we developed in Australia for our other international initiatives.

Looking at your Australian activities, CalEnergy is currently taking a fresh look at the Whicher Range gas field, which is one of the oldest fields in the country as the site was discovered by Union Oil in 1968. What attracted you to this field?

This is rooted in our ownership structure, in that we can look at projects that have a longer-term time span, and we are not held under the same market pressures that other companies listed on the stock market encounter, where they are expected to have results almost instantly. The field is very complicated and we have been able to take the time to fully dissect the subsurface issues in a way that other companies may not have had the time to do. As a consequence, we believe that we have a greater insight, in terms of what is driving the historical results from the wells and has allowed us to determine that fracking does not appear to be a good tool for this reservoir.

The sidetrack well we recently drilled and tested was conducted using managed pressure drilling. The reservoir has a particular clay mineral within it that is quite reactive to water expanding on contact. By using managed pressure drilling technique, we were able to keep water away from the reservoir.

In the Baltic Gas Project based off Poland, the total quantities of natural gas originally in place may amount to as much as 200 Bcf. What have been the latest developments on this field?

We are currently in the process of completing the FEED and the first stage of detailed design, and are now out tendering for equipment. However, given current commodity prices, costs will be critical to determining whether the project remains viable. At present, commodity pricing is a leading challenge for all projects. If we are unable to secure the good results from the tendering, which we are hoping to receive, one option is to delay the onset of the project. We have already proven at historic pricing levels that the project is quite attractive, but the question is whether we are able to drive it to the point of attractiveness where current commodity prices and current cost structures stand.

In December 2014, CalEnergy was notably awarded an exploration license in the UK situated on the northern margin of the prolific Witch Ground Graben in the North Sea. When do you expect to make a decision regarding the drilling of a first well?

For this initiative, we are only one of the partners, and in this regard we have only a part input on the decision. As with every asset that we see in the market place, everyone is keenly contemplating timing, particularly given where commodity pricing is at the moment. To respond, cost structures must change fundamentally in this industry. Too many projects have been initiated, and set up at the moment based off an assumption that the price for a barrel of oil would maintain at a level of USD 80 to 100. This outlook is clearly not sustainable in the current market. In our situation, where not all partners have the same access to capital, it is a question of all partners getting together and deciding the best time to conduct our joint project.

Do you feel that CalEnergy will maintain its focus primarily on natural gas?

Historically, CalEnergy has been a company focused more on gas. We view natural gas as the natural transition fuel from fossil fuels to more renewable resources. That said, if there is a suitable opportunity found in oil, we will definitely consider the value proposition. We do not have a quota of projects in any region; we simply wish to invest in projects that offer the best value available to us.

CalEnergy has a long history of partnering with companies proposing joint ventures for accelerated project activity. What kind of partner does the company strive to be?

One of our key priorities is to contribute technically, as we do not see ourselves as a partner that participates only financially. We have an, albeit, small but very competent team in Perth, and this allows us to fulfil our ambition to contribute technically. The fact that we have been able to develop the Baltic Gas Project to nearly-FID status demonstrates the capability that we have within our organization.

What the current market has displayed is the fact that there is a lot of vulnerability in the oil and gas space financially. This vulnerability is very evident in both the Australian and UK market, where we are seeing the appointment of Administrators of companies regularly for the first time in my 40 years within the industry! This definitely changes the dynamics of the market – what may have been taken for granted in the past, in terms of financial stability for joint ventures, can no longer be taken for granted.

You have been part of CalEnergy since 1997. What part of the company’s culture or expertise makes you particularly confident in its ability to thrive in the upcoming years?

I believe that we are able to thrive because we maintain a good sense of what constitutes a good value proposition. Rather than seeking, and achieving a high production rate, I believe it is seeking and developing value that is a more important objective. Throughout the history of this company, we have demonstrated that this is an area in which we have excelled.

Where will we find the company in five years?

Our company has varied in size from being quite small to being quite large demonstrating that we will transact where we best see value. If this involves selling our assets and returning funds to the shareholders, then we will be prepared to do so. In this capacity, we are comfortable in this regard, and we do not feel an incessant need to get bigger. This does not imply that we are not prepared to look into other opportunities (big or small); we recognize that there are big opportunities in the current commodity pricing and cost context. The value proposition is still the most important element that we uphold in our company. If the right value proposition presents itself, we very well could be a lot larger than we are currently. If there are other markets where we foresee many positive opportunities, we are not afraid to eventually move into these markets.

What keeps you motivated after so many years in the industry?

Every day is different, and there are so many challenges that come about. As a geologist by background, geology still fascinates me. Compared with other industries, there are so many different players of different sizes, and each has such different perspectives, it keeps things very interesting. This variety within the industry creates opportunity in its own right. The challenge for us is to find people who see the same value proposition that we see, and to find a way to establish transactions on this basis.

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