with Iain McKendrick, Chief Operations Officer, Ithaca Energy (UK)
Ithaca is a prime example of a Canadian company betting on the North Sea at this point in time, there are several others like Nexen, Oilexco, Petro-Canada. Why do you think Canadians are so attracted to the UKCS?
I would say, first of all, that Canadian oil and gas corporations are somewhat entrepreneurial in their outlook and willing to diversify overseas and internationally. Secondly, is in terms of the kind of reservoirs that they have been dealing with, the North Sea is well suited for Canadian companies’ technical capabilities risk profile. So it’s a real mix of Canadian desire and drive to move to locations where they can do good business, together with good technical backing for the type of operations the North Sea requires.
Which would you highlight as Ithaca’s main milestones and achievements since starting operations in Aberdeen?
Quite frankly, Ithaca has had many milestones over these last several months. The company acquired its first assets in the UKCS through the licensing round system in 2003, and also made a very small acquisition shortly afterwards. From there, it has undergone an accelerated building period, which led up to our IPO in 2006.
One of the main milestones has been, without a doubt, our appraisal/exploratory success with the Athena and Jacky fields, which represent major discoveries for a company of our size. More recently, Ithaca has made important two significant acquisitions which have added to our asset base in the UKCS. The first was the Stella field, which was bought from Shell and Esso, and the second is with regard to assets belonging to Talisman (Beatrice and Nigg facilities) which is being finalized. These movements are a classical case of majors or semi-majors moving out of ageing fields or small discoveries and leaving opportunities for smaller dynamic companies such as Ithaca to develop them.
So in summary I would say that the two major discoveries and the two acquisitions of assets are Ithaca’s main achievements since beginning operations in the UKCS.
What are the main things going on for Ithaca in 2008?
Ithaca is currently busy drilling a third development well in Athena, where we have some fantastic test results already. We are also about to complete the process of acquiring the Beatrice and Stella assets. In addition, Ithaca has been focused on raising equity which will allow us to carry out our numerous development programs. We are happy to say that we have been very successful in raising equity and also arranging banking, despite the state of the financial markets today.
There are many new independent players in the UKCS hungry for financing from the investment community. What do you think makes Ithaca Energy stand out from the rest?
There are two things that investors particularly like about Ithaca. The first is the quality of our portfolio and the fact that we take high equity interest in all of our assets. Ithaca has interests of 90% on Jackie, 70% on Athena, 66% on Stella and 100% on Beatrice. The second is the quality of the people who work on our developments, some of which are recognized experts in their fields. In this regard, Ithaca has assembled a very high class of people and this is greatly appreciated by the investment community.
What is the rationale behind the transaction between Ithaca and Talisman regarding the Beatrice field?
Beatrice originally belonged to BP and was then owned by Talisman. We are currently finalizing negotiations that would in effect hand Beatrice over to Ithaca, giving us a strategic opportunity to develop the infrastructure for our Jacky field which is next to Beatrice. It is actually a different kind of deal in that the contract outlines the conditions under which the assets will eventually return to Talisman, who will be in charge of the decommissioning.
I believe that in the past small companies have tended to take a great risk by underestimating the fundamental liability related to decommissioning, while overestimating the value they could extract from a field. We have observed the market closely and learned from others experience so that this will not be the case for Ithaca.
Do you believe that other companies in the UKCS may follow this as a model for future negotiations, so that the touchy subject of decommissioning liability does not become an obstacle to closing deals?
Talisman’s approach is unfortunately more of an exception than a rule within the UKCS. Since Talisman is not a major itself, it is probably more sympathetic to the situation new entrants are facing now with regard to the huge abandonment liabilities. On the other hand, many of the majors may simply be in a rush to sell their assets to a player that is financially capable of carrying out the decommissioning in the end. The recent deal which saw TAQA acquire a considerable number of assets from Shell took almost a year to be finalized, most likely due in large part to the issue of decommissioning liability.
This is a very complex problem, and unfortunately it seems to me that many of the parties concerned are avoiding the issue. The bottom line is that we have to ensure that at the end of the day there will be enough money in the pot somewhere to pay for the abandonment. The government feels that it has got some hold over the companies, based on the liabilities linked to the licenses. The minor companies which are buying the fields may have underestimated the future costs and their ability to assume the decommissioning liabilities. And the majors are acting as if they are freed from any responsibility after the sale, and are focusing on spending the money on new areas.
The only way to ensure that the money will be there when needed is to have a dedicated account which is regularly fed. Even bank guarantees are not as reliable today as they used to be, considering the liquidity problems banks are facing. So I consider that the only way of moving forward is to work towards a new model, whereby the money from the cash flow goes into a sinking fund. And this sinking fund is inherited by whoever becomes the new owner, and the government is the final recipient of that money if the companies leave.
This uncertainty is not only stopping new acquisitions, it is also preventing the development of some new properties. The people owning the major fields into which the new fields are being tied, are asking for guarantees with regard to the abandonment of the field, because they are concerned that by being tied to the new field they may ultimately be called by the government to pay for their abandonment liability.
Ithaca has already faced this type of situation directly with one of our fields, and after much negotiation we ended up going for an FPSO development instead, simply to avoid the decommissioning liability mess with the other companies. This is not really the best model to follow in the UKCS, because FPSO developments , with very high operating costs are not particularly efficient, but this is what small companies are increasingly resorting to in order to stay in the game.
How affected has Ithaca been by the rising costs of skills and equipment which is affecting the industry in the North Sea and globally?
For a company like Ithaca, the high price of oil services and the shortage of labour are in fact an opportunity. On the drilling side, we don’t rely on complete packaged solutions like the major companies; instead we are able to fill the gaps for contractors with relatively small and quick operations. This allows us to have access to the equipments and services we need at very favorable rates considering the overall market.
In terms of people, we are different from the bigger oil companies which seem to be obsessed with bringing down the average age of their employees.
Ithaca, on the other hand, welcomes experienced people as long as they are in good health and highly motivated. This in turn attracts the young graduates because they are given the unique opportunity to work very closely with highly experienced people. So Ithaca is creating a mix of generations, blending experience with youth. As a result, we get many inquiries from people who are not interested by the environment in major companies, preferring to work in an entrepreneurial company which also values the experience and knowledge of the older generation.
What would you say characterizes Ithaca’s management team and its corporate culture?
Ithaca brings together a team of people with a lot of complementary skills. A key advantage is the combined network of our management team, allowing us to always find quick solutions to most situations that may arise. Ithaca is not about the office politics you see in many other companies, it is truly a team spirit. Nobody comes to the discussion with hidden agendas, we just discuss everything from the recruitment strategy to the placement of a well openly. Our straightforwardness is probably on of our biggest strengths. We also make a big effort so that investors get to have contact with the management team, traveling between Canada, the US and the UK. It is sometimes exhausting, but worthwhile when they are truly impressed by the people we have and their background in key positions in major oil companies. Finally , I would say that the make-up of our Board of Directors truly reflects this spirit.
Ithaca recently declined a public offer by Endeavour to be acquired. What makes Ithaca such an attractive prize for other oil and gas companies?
First of all, it should be clear that Endeavour launched a non-binding offer which they decided to make public at a very premature stage of the discussions. That was unusual, to say the least, and the offer was not all in cash. After seriously evaluating the proposal with our advisors, we decided to decline. We are a very attractive player thanks to our high growth profile and the exciting times ahead with three developments coming up over the next three years. And of course, many companies would love to have access to our people.
What are your expectations regarding future consolidation of oil companies in the UKCS, and what role is Ithaca going to play?
The number of independent companies we see right now in the UKCS is unsustainable. Within the current banking situation, many are going to find themselves high on ambition but short on cash. In this context, Ithaca could potentially make future acquisitions but for the moment we are still waiting for a clear opportunity to arise. It is also very important for any target company to share our open culture and entrepreneurial spirit. Ithaca may also lean towards companies with overseas assets, because we believe that the next step will be to expand beyond the UK. The key will be to find talented people with specific knowledge in other basins. Smaller companies are probably going to have greater opportunities in the coming years in places like Russia, particularly by establishing partnerships with the service companies to take on field development more closely. Our focus remains the UK and the opportunities are plentiful, but we need to see a solution to the issues of decommissioning and access to infrastructure in order to have a clearer picture for future growth here.
As an exploration and development company, Ithaca has been quite successful. How much are you looking forward to becoming a producing company?
We have three exciting years ahead, with production coming on stream for Jacky in late 2008, Athena in late 2009 and Stella expected for mid 2010. And of course we also have the Beatrice field acquisition which is an important producing asset in its own right. Ithaca looks forward to achieving an even higher valuation from the market as it becomes a producing oil company.
What are your final thoughts on the future of the UKCS from the operators’ perspective?
Looking at the big picture, when I try to imagine the UKCS a few years down the line I have a hard time visualizing what it will look like. The majors are for the most part retreating from the area, but the proliferation of medium-sized independents is not enough to maximize the opportunities remaining in the UKCS. Something will have to happen in terms of consolidation or at least cooperation between all the smaller companies, in order to create economies of scale and ensure the UKCS remains attractive in comparison with other regions.
I also believe that the government has a big role to play in this regard, somehow leading or coordinating the companies for the overall benefit of all the stakeholders. The main issue will be about access to infrastructure, and it is going to take more than voluntary codes of practices in order to ensure that the companies willing to drill and develop fields will be able to do so.