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with Mark Paton, Chief Executive Officer, Cue Energy

29.04.2011 / Energyboardroom

You are the new CEO for Cue Energy having assumed office just within the past few weeks. You come to the position with a wealth of experience in the industry which has taken you from the North Sea to the Middle East and down to Australia. What were the key points in your professional trajectory that led you to this position?

I graduated from Leeds University in 1980 with a first class honors degree in chemical engineering. While I was offered several jobs after graduating, upon the advice of my father, to “take the job that pays the most,” I joined BP in the North Sea. Oil was trading very high in the early 1980s and I began to learn my trade working out of Aberdeen, Scotland. I initially went into the production side of petroleum engineering as a Production Engineer on offshore platforms. My very first job offshore was to grease a 32 inch ball valve which isolated a pig launcher on the main Forties pipeline. Valve integrity was necessary for pigging the line which in turn was required to keep oil flowing at 600,000 barrels per day. You could say that I come from very humble beginnings!

As part of my initial training I spent about three months as part of an environmental group on a pollution control vessel before joining the hookup and commissioning team for the Magnus platform, the largest and most expensive platform in the North Sea at the time. I was then transferred from Aberdeen to the London office where I joined the production technology group. In 1986 I was sent to the Netherlands to commission an offshore unmanned gas platform and processing facility.

From the Netherlands my professional experience took a different turn when I relocated to Qatar to become a planning engineer. My role expanded to be part technical and part commercial in order to plan for the country’s future gas supply. I was involved in the very early planning stages of the North Field which eventually became the Ras Laffan LNG complex. It’s an interesting fact that during my career, Qatar has gone from zero to being the largest LNG exporter on the planet.

My time in Qatar came to an end when low oil prices led many of the national oil companies to re-evaluate their budgets and replace BP engineers with cheaper alternatives. Still wanting to continue my travels, I moved to Australia to work for BHP Billiton as a senior completions engineer; this move brought me into the well engineering aspect of the business.

I participated in running many of BHP’s numerous subsea well completions on the north coast of Australia. I then moved into the productions area and worked my way up through the ranks to become the operations manager for three assets called Jabiru, Challis and Skua and then general manager for BHP in Darwin. However, in 1997 BHP closed the Darwin office and relocated its operations to Perth.

Because of family circumstances and a personal preference, I remained in Darwin and founded a service company called Upstream Petroleum with my business partner Cam Rathie. We began as a consulting organization which took us all over the world. We promoted ourselves as an operations and maintenance provider, operating assets on behalf of major operators. We noticed that this practice was popular in the Gulf of Mexico and was gaining traction in the North Sea, but had yet to take hold in Australia. Since both Cam and I had operations management experience and knowledge we knew that we could successfully introduce this service to Australia.

The unfortunate and catastrophic explosion of Esso’s natural gas plant at Longford, Victoria in September 1998 proved to be a major turning point for us. The explosion demonstrated to the government the overreliance on a single source of gas in Victoria and created a political imperative to reduce that reliance. The Western Underground Gas Storage Project that had been on the drawing board for years was finally to be built. We tendered for the operations and maintenance contract for the plant and were successful in winning it. That resulted in organizational growth from 15 to 60 people and because success breeds more success, once we got our first runs on the scoreboard new projects in operations, maintenance, and commissioning started to roll in.

The niche that we thrived in was providing services for operating companies who had no local presence in Australia or for very small companies with minimal capabilities anywhere. While looking through the newspaper one day in 2004, I serendipitously came across a company called Crystal Production ASA. This company had the notoriety of being the “biggest loser” of the year having lost 99% of its share price in 12 months. When I looked further into the history I discovered that Crystal Production owned two dynamically positioned FPSOs. Upstream Petroleum promoted itself in providing expertise for companies in smaller field developments, I saw at once the potential of these ships being a great early production system for a smaller asset.

After Crystal Production had gone into liquidation I asked the Singaporean owners of the vessels if we could become their agent to market the FPSOs in Australia. The pieces fell into place and we signed an MOU on March 12, 2004. A week later, I received a phone call from the chairman of Anzon Energy informing me of their bid for Woodside’s assets in the Bass Strait. He asked my advice on what they could potentially do with two small oil fields called Basker and Manta. It was very fortuitous that our company had become the agents for exactly what was required just one week earlier. Anzon’s transaction went through and we worked together to raise money to promote the early development scheme of the concept. When Beach Petroleum came on as a founding investor in the project and Anzon a major shareholder, the game changed and the float raised $45 million to do the Basker Manta field development. I was appointed as the project manager and Upstream Petroleums workforce increased yet again from 150 to about 350 employees in less than a year. Upstream Petroleum managed the whole field development for Basker Manta from the initial meeting to first oil in 363 days. It was a very exciting period in my career which had the feeling of being on a wild roller coaster ride. My time spent growing a company from the ground up taught me the great importance of solid business relationships. The business owners and senior executives made an incredibly cohesive team and when the pressure was on we achieved spectacular results. We sold the business to the AGR Group of Norway at the end of 2006.

Cue started the search for a new CEO at the retirement of Bob Coppin, Steve Koroknay, the director of Anzon Energy at the time of the Basker Manta development, and a director for Cue Energy Resources proposed that I apply for the position with Cue Energy

Cue Energy obviously saw a strong technical expertise in you. What did you see in Cue Energy that convinced you of the good mutual fit?

I am not an explorationist. I come from the other end of the spectrum, I bring knowledge and experience in how to further develop and extract value from producing assets. This balances the current skill set this company has, which is the ability to find oil and gas.

What attracted me is the significant upside in our portfolio, albeit with some exploration risk.
Bob Coppin, my predecessor, did an excellent job of creating a company with a very solid foundation for growth. We have money in the bank, solid cash flows, minimal debt, no project complications, and a small, closely knit number of employees. Given our very solid foundations from which we can grow, this is a manageable first step for me in terms of moving from the services side to becoming the CEO of an oil and gas company.

Similarly, Bob did a tremendous job of building up a diversity of producing assets which provides a strong degree of security. Having built that base the board felt that it was time for someone to drive the company on to the next level, which is what I am expecting to do. Depending on the day our market cap ranges from $200-300 million but there is significant scope to push this to $1 billion in 3-5 years.

It is comforting for a new manager to have positive cash flow. It is very smart for small growing companies not to rely solely on exploration success since it is at the high risk end of the portfolio. Having some small production to cover overhead is a strategically sound position to be in.

What are your main priorities for achieving the next level of growth for the company?

I have a natural bias towards development and producing assets. My first job is to look at what we have and to maximize the value from existing assets. There are a number of opportunities within assets that we already hold which have a production and development component that I can personally add value to through new ideas of how to commercialize static resources. While most new CEOs make the mistake of throwing out the old playbook and beginning with a blank sheet of paper, we are going to build a solid house on top of a wonderful foundation.

After analyzing our assets in place my next task is to seek viable growth opportunities. We will see a significant production boost when the Wortel field – operated by Santos with Cue Energy as a joint venture participant – comes onstream in December in Indonesia. There are lower risk things to look at which perhaps will not give the same immense return as a pure play exploration success, but we can build capacity and profitability nevertheless. Rather than meteoric growth from a zero base asset, we see value in assets that are near to or in production. We are long on exploration opportunities but short on near term additive production opportunities. I do not want to wholly rely on exploration success for growth.

What are your expectations and strategies for maximizing Cue Energy’s assets in the Carnarvon Basin – the mature, “hot,” and lucrative gas province for offshore Australia?

We have extremely good partners in these blocks. While we previously had a higher percentage interest in our Carnarvon Basin acreage, we reduced our equity in order to help finance other exploration and production activities. We farmed down and picked extremely competent partners in Woodside and Apache, both of whom are significant players in the Northwest Shelf. They have invested in infrastructure which is absolutely vital for the commercialization of the gas resources in Northern Australia. There is an awful lot of static gas on the north Australian coast that has nowhere to go. The key is not just finding hydrocarbons, but commercializing them. Being in partnership with them puts us in a favorable position for when we do make a discovery. It is important to increase the probability of bringing gas to market and extracting the most value from the fields. Having established these partnerships with the companies who have infrastructure and are looking to aggregate additional gas and build more LNG trains speaks a great deal to the fine work done by my predecessor.

What additional partnerships are you looking to establish for Cue Energy to further round out the company’s portfolio and provide that additional security of investment for shareholders?

While it would indeed be great to have an Australian producing asset, the general rule of thumb for our focus area is to look for assets that are within an eight hour flight from Melbourne. A perfect example of an asset that strategically fits this description is our share of the Maari oil field in New Zealand which is a significant contributor to our cash flow. Amongst all of our operations, since we are a “passenger in a car,” our main priority for partnerships is to make sure that we are riding with an extremely good driver. We are indeed fortunate that all of our producing assets have competent operators who are efficient and technically savvy in asset management and maintain strong asset integrity in an environmentally sustainable way; it gives us tremendous security of cash flow.

How long before we see Cue Energy as its own operator?

Operating assets does not frighten me as I come from the production, operations, and maintenance side of the business. The next stage in our development will require building our capabilities in that direction. We will gradually increase the number of people we employ and develop a skills base so that we can satisfactorily take on an operated asset if and when the opportunity presents itself.

How does the bullish price on oil over the past few months impact your commercial strategy going forward?

We are staying with conventional hydrocarbon production and are not looking at alternative sources of oil and gas such as coal bed methane or shale gas. It is essential to know the business that you are running and the Cue team do not have any competitive advantage or fully understand the drivers of the coal bed methane industry. We will therefore “stick to our knitting” and focus on conventional oil and gas assets.

Australia’s energy industry has the ongoing goal of become a top-2 LNG exporter over the coming decade. You come from the North Sea and have worked in Qatar – two regions that Australia’s energy sector either leverages know-how from or strives to surpass in production. What is your assessment of the organization, regulation, and efficiency of the Australian energy sector compared to these other regions where you have professional oil and gas experience?

Australia is very politically stable and there is a strong regulatory framework that sometimes appears over-controlled. Ultimately however, it is perhaps better to be over-regulated than to have no regulations at all. Furthermore, regulations here are applied in a consistent fashion to create a level playing field for all players. If you are going to invest several billion dollars in an LNG plant then Australia is about as secure as it gets. Inevitably, Australia will fare pretty well when competing with the rest of the world for investment dollars in LNG.

Something in the recent past was the government’s proposed “super profits” tax which has now been scaled back to an expansion of the Petroleum Resources Rent Tax. I believe that the government needs to be careful about killing the goose that lays the golden eggs. Whether politicians like it or not, the resources and mining industry are what keeps Australia’s standard of living where it is. While other industries circulate money around the economy, it is the resources sector that attracts new money.

Planning long-term investments involve long cycles between discovery and first gas – up to 10 years in some cases. The Australian government needs to provide a consistent framework for resource development. If the fiscal regime changes with each new government, it can scare off investors. There also has to be balance. Clearly, the wealth of the nation’s resources belongs to the nation and need to be distributed to the people in a fair manner. But at the same time the people who invest in these projects need to be able to make a good return on their investment. Companies like BHP Billiton need to make big profits. It is healthy for them to make big profits so that they can pay taxes and dividends. The government therefore needs to temper its enthusiasm for getting more money and instead let the industry prosper. Our democratic system is indeed healthy but the challenge for any democracy is maintaining a robust consistency in policy that benefits industry.

The political framework in the Middle East is completely different. While Qatar lacks the fully democratic system that exists here, they benefit from the consistency of one leader’s policy. Sheik Mohamed has been head of government since the early 1990s and has established a policy which makes people feel comfortable investing there. Investors can put the fiscal terms in their economic models with minimal risk. If you have a good, solid leader who stays in charge for a long period of time it makes for a good environment for business to prosper. Similarly, Singapore, for example, has had a consistent regime since the country’s founding as an independent republic by Lee Kuan Yew. You can see the consequences of that stability in terms of economic development. I firmly believe that our democratic system is good and right. But from an industrial perspective, the changes that come with democracy inherently add unpredictability and therefore an additional element of risk.

The Australian oil and gas industry enters a very critical stage over the next 5-7 years with new projects coming online and further investment flowing in from abroad to develop large scale resources. What can we expect from Cue over this time period?

People do not invest in oil and gas stocks to get ordinary returns. We are currently at a solid stage now but I would certainly like to take us further. I am focusing on a $1 billion market capitalization over the next 3-5 years. I do not see us doing anything radically different in terms of how we achieve that. As I said before, we will stick to our knitting and continue with the successful practices that have brought us to the great position in the market that we find ourselves in today.

Over the next 3-5 years I would like to see us operating an asset somewhere in our geographic area of focus and possessing a “jewel in the crown” asset to the tune of a 50-60% equity stake. We will be looking at acquiring assets which are not wholly reliant on exploration wells.

Our shareholders expect to see performance and returns. You cannot get those without taking big risks such as exploration. But we are at the size now where we must temper that enthusiasm for risk with other operations in our portfolio that will generate superior returns. I want to provide a little more balance to our operations. Maybe that is why I was selected as CEO – because I come from a different background and can bring balance and new perspectives to the challenges ahead.



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