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Interview

with Christopher Spencer, CEO, Rocksource ASA

03.06.2013 / Energyboardroom

Rocksource’s share price performance indicates that there is a lot of expectation being placed on your 2013 drilling program. To what extent does this drilling program justify these expectations?

Though based on a low market capitalization, the recent increase in the share price is naturally very welcome. I believe that it does express confidence in the drilling program that lies ahead of the company in 2013, but it also reflects some understanding in the investor community of our longer-term strategy. Rocksource actually has five wells due to be drilled over the next two years and this will take us further towards our target of drilling three to four exploration wells per year. This is our ambition and I am glad that we are receiving some recognition for the work we are doing.

Rocksource has a reasonable track record in exploration and though we have not drilled any wells since 2011, our last drilling program of five wells, led to one discovery – the Norvarg field in the Barents Sea. A 20 percent hit rate is not bad for exploration, but we aspire to do better and believe that we can going forward.

Erik Karlstrøm, CEO of North Energy explained that finding gas assets in the Barents Sea was not easy from the perspective of commercializing these assets. How do you see the challenge?

In the case of Norvarg, the subsurface reservoir data looks promising, and this should hopefully be confirmed with our appraisal drilling this year. All of the partners in this license have placed high expectations on this asset, but this is exploration and there is always an element of risk.

Clearly, the principal challenge for this asset lies in connecting the gas to the type of transportation infrastructure that could deliver it to the market. However, given that we are a pure-play exploration company, the issue of how and when the gas will be produced is not nearly as important as when we can sell the asset for a decent price. Rocksource has already been successful in selling 2/3rds of our interest in Norvarg for a cash payment. This sale has given us carry for our current drilling program and therefore we have already made good use of this asset from perspective of monetization.

Your drilling program encompasses the North Sea, Norwegian Sea and the Barents Sea. How do you see the difference of monetizing assets across these three different regions?

The key factor is often access to infrastructure. If you have good access to infrastructure then a much smaller discovery becomes commercial and you will soon find interested parties. The financial markets have been up and down over the past few years, but the industrial market has remained strong. There may be a few more or a few less players, but as long as you have two or three then you are generating competition for your asset.

Because of the lack of infrastructure, in the Barents Sea, you need to be looking for larger assets in order for them to be commercial. This is not nearly as important for oil as for gas discoveries. Therefore the main risk for exploration in this region is the chance of discovering gas and companies seeking an oil discovery in the Barents Sea need to understand that there is a reasonable chance of finding gas instead.

And this is what happened with Norvarg…

That is true, though there is still a chance of finding oil in this reservoir. I would add that all of the license partners were expecting gas from this prospect prior to drilling and the issue was simply how much. You need to have a very large gas asset to make it commercial and we believe that Norvarg has this potential.

Given the challenges of the Barents Sea, both technical and political, there are likely to only be a few players taking discoveries through to development. Is this not a restricted market for a pure-play exploration company?

We feel that there is enough market for assets in the Barents Sea. The 22nd Licensing round elicited a very strong response and many of these companies are full life-cycle E&P players, seeking to take discoveries through to production. This industry revolves around access to assets, and if you make good discoveries then a lot of companies will start to include these licenses within their upstream strategies.

Unlike the North Sea, the Barents Sea is a frontier region and one, which, in my view, suffers greatly from the way that cartographers draw maps. If you flatten the globe so that it represents its true size on a map then you will see how big the Barents Sea really is. There is a great deal of exploration to be done and a lot of potential, which I believe is becoming increasingly apparent to the industry.

Rocksource’s exploration technology is based on innovations from Bergen University. How does electro-magnetic (EM) technology add value to your exploration approach?

EM is an important part of our e0xploration technology ‘tool-kit’. However, over the last couple of years we have also increased our focus on advanced seismic techniques, which companies like Lundin and Spring Energy have been actively pioneering. We believe the real value comes from integrating these different techniques.

The main difference between these two technologies is that seismic surveys use sound waves to collect data on the subsurface structure and EM measures the resistivity. Saline water in a prospect will have low resistivity and high conductivity; oil and gas will be the opposite. If you can understand this profile in the resistivity of the structure then you can better understand the subsurface. Integrating both seismic and EM technologies allows us to gain a more comprehensive geological understanding.

Rocksource is active internationally in two main regions: the Gulf of Mexico and the Norwegian Continental Shelf. How would you compare your activity in these regions?

Following the reset in our strategy in 2012, our primary focus is now the NCS.The NCS offers cost efficient exploration in a politically stable and prospective region. Further, now that we have the focus of both advanced seismic and EM, Norway is also a good place for us to apply our technology.

Rocksource has exited several positions to focus on the NCS, but if I see potential value in assets then I do not like to give them away and we do see significant value in our remaining leases in the Gulf of Mexico. We are trying to hold them in the portfolio as high upside options and the key will be to manage our spending on those assets very carefully; we are actively seeking operating companies to come in as partners on those assets.

In particular we have two assets next to the Mexican border, which lay either side of Shell’s Great White development. These assets are very exciting with significant potential resources of several hundred million barrels. Pemex has made some major discoveries just over the border from our assets, the Supremus and the Maximus fields. In addition, one of the US independents Stone Energy has just filed for an exploration lease in that area. Activity is returning to that area, which is exciting for us, as a small company, because we do not need much activity before we can extract value in the area.

How do you see the balance between the Gulf of Mexico and the North Sea shifting for the industry as a whole?

The focus has already begun to shift back to the Gulf of Mexico. There have been some fairly large discoveries in the deep-water Gulf of Mexico. However the asset trading has not fully returned, because the operators have been drilling the deep-water production wells, which they could not drill during the post-Macondo drilling moratorium. Now the principal operators are drilling their backlog of prospects and the deepwater rig count is already up to pre-Macondo levels.

In addition, to Macondo the other aspect, which was suppressing the industry, was the rush into shale gas. However the interest in shale gas has dissipated almost as fast as it started, due to the obvious impact of production growth on the gas prices. There is business in onshore liquids but a lot of exploration managers are remembering why they were in the deep-water in the first place.

How do you see the company developing in the next few years?

We are developing as an exploration company in Norway. In the longer-term we know that our advanced geophysical techniques and EM technologies are applicable in many settings in the world. That prospect excites me and while I do not believe that a small company can go out and conquer the world, I am interested in identifying potential partners, which we could work with internationally. There will be international companies, which are more asset rich, but with less in-house competency than us, who could value our technology. That could be an exciting opportunity for Rocksource.

There has been an explosion of exploration companies on the NCS over the last five to ten years. How do you see Rocksource standing out in this picture?

The way that we will stand out is through the application of our advanced geophysical and EM techniques. We have very good dialogue with the industry and even though our technical team is smaller than those of most other companies, it is high quality. This technical competence differentiates us from many of the other small players. The second aspect is that we are an operator, which again sets us apart from many other players. As an operator we can ensure that our techniques are applied on our licenses.

We have a lot to contribute. Rocksource as well as many other small companies have an excellent track record of maturing prospects quickly into drilling wells. We often do this much quicker than you typically find with the larger companies and this is ironic because when the smaller companies were first allowed onto the NCS the foremost concern was that they would not have sufficient resources to take prospects through to drilling.

Having worked in large companies, I know that they often have the money, but that it gets shifted from budget to budget and projects get delayed. At Rocksource, if we want to drill a prospect then we go ahead and do it. One of our wells in 2011 went from award to drilling in 18 months and we will continue our focus of mature assets quickly on the NCS.

Do you have any final message?

Exploration is a long-term business, and while we have two wells to be drilled between now and the end of the summer, our future does not depend on them. Our focus is on a sustainable exploration program, year on year, and we are on track to meet that objective.

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