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Interview

with Jan Ostby, Managing Director, Finder Exploration Pty Ltd

30.06.2010 / Energyboardroom

What are the origins of Finder Exploration and the overall strategy of how it has come to be where it is today?

DP: Finder Exploration was founded five years ago with a fairly straightforward vision: to find oil and gas. We are a private company so we operate in a space which allows us to leverage our relationship with other companies. Jan and I have backgrounds in seismic so we have relationships with many of the major seismic players giving us access to vessels and other useful seismic-related technologies.

Our business is based on a mixture of three key components.

The first component is opportunity. The opportunity for us lies in assessing and acquiring new gazettal acreage which we can apply our knowledge, and generate industry interest. The second component is technology, particularly our capacity to use the appropriate technology such as 3D data or quantitative interpretative technology at various opportunity levels. The final component is our people. We attract good quality people, with strong, but different, experiences in order to mold together a team that can look at our opportunities in unique ways from our peers.

JO: As our mission statement attests to, we have a strong emphasis on high impact plays.

DP: A basin or opportunity that we get involved in has to be material. Picking up acreage that might be 5 million barrels or 100 bcf in the offshore Northwest Shelf is not material. When presenting opportunities to oil and gas companies, we want them to consider it to be of sufficient size that is worth their investment. Going to talk to the major players about something small is of little use and it limits our farm-out capacity.

Junior exploration companies tend to veer away from offshore areas because of the high costs they carry. What was Finder Exploration’s initial funding that allowed it to venture offshore in its acreage?

DP: We have a strategic alliance with a subsea services company called Fugro giving them the right to participate in some of our projects. Our strategy has been to bid a level of work program which is not so significant that it incurs the massive costs of commitment wells. We go for acreage on a relatively low bid level and do our work to risk mitigate it. We may even farm-out for the seismic component of a work program and then also farm out for a well down the track.

JO: We have farmed-out to a number of companies. We farmed-out to Murphy and PTTEP for their first entries into Australia. Also we have recently farmed-out to Perenco, Woodside, Hess, and Sasol. We have a well-established track record of farm-out success and there have been a lot of supermajor companies coming into areas in and around our acreage. We believe that we do things differently and in more detail than the majority of other small players.

Many of the junior explorers we have been meeting with pride themselves on these three core components: opportunity, technology, and knowledge. In utilizing and applying these three components, what does Finder do different that distinguishes itself from similar sized exploration companies?

JO: It is about regional context and our experience. I came to Australia to set up a regional office of a company called PGS. Don comes from a similar seismic background. We also have staff members who have been working in the oil industry with major companies such as Santos and Woodside for many decades. We all know the value of applying the right technology at the right stage. A lot of the key technology is being developed by the seismic companies with whom we are very well connected to. As new things come up we apply the appropriate technology. So it is not just the use of technology, it is technology combined with knowledge accumulated over a long period of time and applied at the right time that gives us sharper results.

DP: We are a team all coming from different backgrounds, experiences, and opinions. When we sit around in a room trying to discuss what to do, you can imagine that we get some interesting and sometimes robust discussions – all good, fair, and part of the process – to make sure we thoroughly considered everything about acquiring an opportunity, when and how to divest it, and how to assess the risk(s) that are facing each one.

Jan and my background is in multi-client seismic and we were active in promoting a lot of the gazettal rounds in the late 1990s and early 2000s which gave us exposure to and an understanding of a lot of the basins that have been offered for competitive bidding. What we have done at Finder is to move one step further along the value chain. Instead of providing data, we are trying to acquire the opportunity, understanding that the key to developing the opportunity will be both in the data itself (whether through reprocessing existing data or acquiring new 2D or 3D seismic) and the regional geologic context. The simple logic is that if you cannot see it on the seismic, it is impossible to meaningfully explore for it! The better the data the better chance you have of working up your prospects.

JO: Quite often there is one well that kills off a large area raising the question of whether oil and gas could still be discovered in that specific basin. We challenge these paradigms and investigate backwards and may conclude that the area should not been killed off. We often conduct studies on wells and send actual rock samples to forensic laboratories for feedback and interpretation. They in turn may reach the conclusion that the area is still prospective. Only new data can lead you to a different conclusion. We go in and provide new data, otherwise the conclusion would always be the same if make decisions were based on existing data.

DP: We challenge the conventional paradigm, in other words. A lot of the acreage we acquired is located on the periphery of proven or known basins. We have to play in the area where we can be competitive and use our competitive advantages. That generally does not sit in the heartland of where the majors are located and are drilling wells. The first reason is because the bid level in those areas will be too high for us to acquire acreage. Second, the knowledge base of the supermajors can be far greater than ours so it is hard to be competitive.
Being that a lot of our acreage is on the edge of supermajors’ core areas and basins, many companies approach it with an unenthusiastic perception because of previously unsuccessful wells. So when we first acquire the acreage we try to understand the whole petroleum system: what are the major risks and what type of data or technology can we throw at it to challenge the paradigm that get people to think differently about it.

Does that imply that your acreage acquisition is by default; that no one else is interested in it?

JO: No, we pick it up based on our current thinking and prospectivity, and how we believe we can challenge conventional thinking.

DP: We are active in and around where the major players are. We try to stay away from too much frontier acreage since there are obvious difficulties in areas where there are only one or two wells.

JO: We like proven basins and stacked multiple targets.

DP: We pretty much allow ourselves one frontier basin at a time. That frontier area at the moment for us is Jamaica where we have five blocks which we have been working on for the past four years. It naturally raises the question, “why Jamaica?” It was on the back of new data. The Jamaicans opened for bidding an area that needed 7,000 km of new 2D data. So we got in early, picked it up, and shot all that data.

Did you find Jamaica or did Jamaica find you?

JO: We were at a conference where the Jamaicans were promoting their acreage. We gave it a look and saw that it had some potential in the form of oil source rocks. All of the elements to find oil and gas are there but the data was just atrocious.

DP: The area had poor data, a lack of activity, no recently drilled wells, and question marks about the petroleum system. It was sitting in a prime frontier area for someone to enter and we are trying to farm it out now. What the area needs is a well to test the petroleum system and find out has about the prospects.

JO: The area contains some very large structures, and it should be charged with hydrocarbons. But there is so much uncertainty without wells in the basin itself. However, Jamaica remains our secondary focus. Our primary focus is on the proven basins of the Northwest Shelf and taking them one step further.

DP: The further we move up our value pyramid the closer we get to our value delivery which is “participating in wells”. Interesting, however, is that there is currently nothing beyond “participating in wells” on our value pyramid. Beyond a discovery, our strategy is undefined because our focus is purely on the exploration end. A discovery will be a nice problem to have when we get to it and we understand that it will be a game changer for Finder.

JO: If we make a discovery we would have multiple options. One would be to take the company into a public forum having an asset that can generate cash flow. We would need the appropriate finances to do that. Second would be to divest the asset. That is an issue we will address when it arises. But what we did not want to do was set up the organization with production and commercialization operations in mind because we would end up requiring a range of very different skill sets – for example reservoir and production engineers – when we have not gotten to that point yet.

We also did not want to go through the roller coaster of floating the company. We can stay in the private space and have a focussed group that does not get distracted by the ups and downs of the share market. Our goal is to focus on one thing and be the best at it.

Are farm-in partners typically more attracted to Finder because of the exploration cost savings that you offer or the resource potential of the basins you explore?

DP: I think it more driven more by resource potential and the opportunity to get involved in something which has materiality and a reasonable probability of success. We are playing in a risky business by nature. What we try to do with our work and data is address the key risks. If the key risk is source, then we will spend all our time and energy on addressing how source can be a problem if we drill prospect A, B, or C.

JO: Our market is those companies with funding who can afford to drill wells and who are looking to grow in Australia. The prospects that we offer have to be material for their bottom lines. The risk has to be at a low enough acceptable level, but at the same time they have to have structures large enough to make sense.

DP: We have two permits in the Bonaparte Basin – permits NT/P 79 and WA-446-P – one of which we acquired in May this year. These permits are close to infrastructure that is in place or is currently being built and close to significant near term exploration activity, which with success will positively re-rate our acreage. They are strategic in terms of the holding in that context. We have a fairly low work program on both these permits. An Indian company has two permits nearby and is committed to acquire 1,700 sq km of 3D seismic and drill three wells over the next 12-18 months. With activity there, the possibility exists for wells to be drilled that are similar to plays we are chasing in the Finder permits. This means that if they drill with success, it will significantly re-rate our neighboring permit. We have another permit which borders a permit owned by Total where they will drill two wells starting later this year. Similarly, their success in drilling can again positively re-rate our nearby permit.

Are the logical starting points for farm-ins, therefore, your neighbors?

DP: Yes and no. If they are successful in their wells then they will be interested. But others will then start to take interest as well. The industry being what it is, everyone will follow where big plays are discovered. Everyone today seems to be following big Triassic gas plays in the Exmouth basin whereas five years ago interest was elsewhere. It is the nature of how the industry moves and flows.

The Browse Basin is where Finder first started. The first permit we had in Australia was AC/P 36 which was the permit that we farmed-out to Murphy Oil and PTTEP for the Abalone Deep-1 well in 2008. Unfortunately, it was a non-commercial gas discovery but we are now working with the operator to understand what that means for the prospectivity of the rest of the permit. There is another big gas prospect in the southeast of the permit called Basset Deep which is an attractive and very large four way structure. The downside is that it is a shared prospect, spilling into the permits to the south. It has a good chance of getting drilled; but to drill something which is a shared prospect upon farminee entry into the permit was not be ideal, hence the decision to drill Abalone Deep-1.

Subsequent to that we picked up two permits to the north in AC/P 44 and AC/P 45. Late last year we farmed them out to a French private company called Perenco.

JO: We also acquired the AC/P 52 permit, to the west of AC/P 36 in May 2009 and farmed it out to Sasol.

The Browse Basin is very interesting. There are a lot of sizeable gas fields already discovered in the Browse Basin with LNG gas commercialization options. The fact that we have Sasol on board through a farm out also gives us a possible entry into gas-to-liquids or GTL.

How did you convince Sasol to join Finder?

DP: Sasol has been involved in the Australian market for quite some time looking for opportunities. They farmed into a permit in the northern Carnarvon WA-388-P with Oilex some time ago.

What we generally do is develop an opportunity to a certain point and then decide internally if we want to farm-out. In this case we wanted to farm-out for seismic. We invited companies in, spoke to Sasol, and they liked the opportunity presented to them. Regarding its materiality, it could be as little as one TCF or as big as twelve TCF. Even if it is somewhere in the middle you can see how they would want to commercialize it. With their gas-to-liquid plant plans it is a different option to monetize than the “standard” LNG route.

Is Finder interested in any of the new offshore acreage recently released by the Ministry of Resources, Energy, and Tourism?

DP: Yes. That, in essence, is the continuation of our business model. We will look at all of the gazettal blocks, decide what we think is worth going for based on our understanding and database, and determine what we believe to be the appropriate bid levels for them.

JO: We evaluate each of the blocks independently and for one reason or another some will not make the grade. We look at them differently than Woodside, Shell, or even another small player would. We looked at all the blocks in the last round and we won three of the four blocks that we bid on.

DP: Heading into the Bedout Basin, we picked up four permits with Carnarvon Petroleum, a junior mid-cap Australian exploration company and hold a 50/50 equity with them on each one. That acreage contains a gas field called Phoenix which has about 700 meters of gas sands in the well. BP drilled it in 1980 when gas was not really seen as commercially viable in this region, plus it had a reservoir of questionable quality. We picked it up and plan to acquire 1,100 sq km of 3D over it in July. We will see if we can work out where a sweet spot is for a reservoir and if it is in our best interest to drill a well in it. The beauty of that field is that there could be up to three or four TCF of gas that is only 100-150 km from the coastline. From a domestic gas viewpoint the potential size of that field is very attractive.

Who are the other companies in Australia that are as unique in its exploration approach as Finder?

DP: Our core competency which creates the niche that we are in is, first, that we first want to acquire the acreage. Second we want to do real, genuine exploration work on it with data. Some of our competitors probably do not have the same access to databases or the people experienced enough to be able to do it to the same degree that we do. We do regional work. Everything we do is put in a regional context which is the way our explorers think. They understand the basin and its history. Our exploration manager will reconstruct the basin to understand every discovery, how it came about, and why holes are dry and wells are successful.

While the company is small now, with new acreage to acquire and explore does the team need to expand as well?

DP: We are adding another person to the team in August. With 3,000-4,000 sq km of new 3D seismic to interpret in the next 12 months there is quite a bit of work ahead of us! We do not necessarily want to be a 100 person company, but we need to have enough people to be able to manage the opportunities we have and the opportunities for the companies such as Sasol, Perenco and Carnarvon on whose behalf we are operating the permits. We have obligations in terms of maintaining and meeting timelines to keep the permits moving forward. Human resources for us is a moving feast because on one hand it increases your overhead. We try to find the balance between what we need and hiring people just for the sake of expanding the team.

The focus is clearly on northern and northwestern Australia. Is Jamaica an outlier or a prelude to a future in which Finders applies its technological know-how and basin synergies around the world?

DP: Ideally, yes, we would like to do that. The challenge is to get an area that fits how we operate. Wherever we go, we will need significant seismic and well database to understand the historical context of a basin or region; and then we will need people to focus on that area. It is all about your competitive advantage and we believe we have a competitive advantage in Australia because of the people, experience, and database. We are able to acquire these permits and do our work because of our historical knowledge here. To get up the curve in another country, be it Norway or Asia is also possible; but you have to commit the resources and the time to doing it.

JO: As a private company we play in a slightly different field as well. If we were public then over the past two years we would be busy answering to shareholders about why we did and did not do things a certain way. The reality is, given our portfolio at the moment, if we were listed, the one thing we would suffer from is lack of activity at the drill bit. Shareholders would be penalizing us for a lack of drilling whereas we think we are doing things the other way around, and hopefully the right way – we are trying to get enough acreage with enough opportunities and material size to acquire data (we are doing just that this year with the proposed 3,000-4,000 sq km of new 3D seismic in 2010) and de-risk it to the best possible point to see what parts of the portfolio are drillable. At that stage, if we can get multiple drilling prospects out of the whole portfolio then we are in a good position to maybe go out to the market or do something else in the future to fund the next phase.

DP: We will take that decision to commercialize any discoveries when we get to it. As we get closer to the drill bit and if we can get a number of these prospects in the various permits to stack up, then we will need to get ourselves prepared for the eventuality of drilling. If we want to participate in the wells, we always have that option and would have to raise money to do it and develop a new range of expertise. Right now our expertise is in the exploration phase and we are playing in that space.

That is the flip side of the pure exploration space is playing the exploitation game. If you play material gas, then monetization of it can be very long and costly. From a small company viewpoint you have to ask, “Am I going to staff up expertise and raise enough funds to be able to get my way through it?” Or, “Is there an alternate option for a known or recognized gas player who wants to get into the market who might be of interest in my percentage of a major gas field?”

Are there any final messages you would like to convey to our readers about Finder Exploration and its competencies in the Australian oil and gas industry?

JO: If anyone is looking for some upside to their current exploration portfolios, then come and talk to us!

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