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Interview

with Scott Ferguson, Managing Director, Vermilion Netherlands

03.12.2009 / Energyboardroom

Since we arrived in the Netherlands we have met with many Canadian companies and investors eager to replicate the success from their homeland in Dutch fields. Why have so many – Vermilion at the top of the list – chosen the Netherlands as a preferred destination for their investments?

Surely it wasn’t a mere coincidence. Just as in Western Canada, the Dutch fields are mostly mature and large E&P companies have left the country because they didn’t see opportunities for further growth on a large scale.

Hence, there are many opportunities in the Netherlands for smaller Canadian companies such as Vermilion that grew up in Calgary doing exactly the same thing when majors left Western Canada. Because this happened a number of years ago, we have been able to develop an expertise in marginal fields and make money with these smaller opportunities.

Canadian juniors like Vermilion naturally focused their efforts in marginal fields, which abound in the Netherlands. The financial industry is familiar with marginal field investments in Canada and provide necessary investments for this kind of opportunities elsewhere.

Vermilion entered the Netherlands in 2004 having acquired assets from Total and has more than 50 production wells in the country. What strategy has Vermilion employed to get the most out of these acquired assets and how successful has it been in implementation?

Our main focus when we arrived in the Netherlands was to try to optimize the production that was already in place in the country. For Vermilion that meant to modify the plants acquired primarily to reduce operating costs and to raise their production capacity to their highest potential. Total had already installed some velocity strings (small diameter production tubing) and Vermilion continued this process, always trying to increase production using more efficient procedures.

Meanwhile Vermilion has learned how to operate within a strict regulatory regime to be able to drill and build pipelines and facilities. The Netherlands has a much more complex regulatory environment than what we were used to in Canada. However as Vermilion was expecting that, we have taken some time to learn the process and come up with strategies on how to proceed in ways that give the company some confidence to find good opportunities out of its assets.

Today Vermilion has a strategy to permit more drilling wells than what it expects so the usual drawbacks from regulation won’t affect the timing and overall number of actual drilling wells.

Vermilion has drilled five wells to date, most of those in locations that were already developed and permitted for drilling. We have now permitted two new surface locations for drilling and we expect to have another 3 or 4 locations for drilling next year.

The current drilling program adds wells in the Gorredijk, Leeuwarden, and Slootdorp concessions. There is some potential to drill in our Zuidwal concession which we may pursue in the next few years.

These wells have the potential to double Vermilion’s production in the Netherlands in the next two years – and we have 5 wells in queue for permitting to drill in 2010 through 2013, so expectations are high.

Most of the juniors that entered the Dutch E&P sector stayed offshore because the licensing process is considerably easier than onshore. Why did Vermilion decide to go against the tide?

The reason behind the higher difficulty to explore onshore is that the Netherlands is a very densely populated country with a number of government levels involved in the permitting process.

Vermilion has learned how to deal with that, being quite successful with the permits in the last two years when presenting our case to stakeholders and getting them to understand what we want to do.

Indeed to explore onshore in the Netherlands is a challenge, but once you learn how to do it, it becomes an opportunity since so few other players have the capacity to do the same.

What about future assets, are you willing to further increase your asset portfolio in the Netherlands by maybe also going offshore?

It has always been an objective to acquire new assets in the Netherlands and Vermilion is not limited to onshore either. If the opportunities are also offshore then the company will head that way as well.

Vermilion will continue to apply for new exploration and production licenses. Since Vermilion has been so successful with its past investments in the Netherlands, the trend is to continue to increase our presence in the country. As said before, knowledge can lower risks while creating opportunities.

Vermilion has been changing its structural organization in Europe while also growing decisively in other parts of the globe such as Australia. What role does Europe play in your current international expansion plans?

Vermilion has been in France since 1997 and when the opportunity to invest in the Netherlands came, we saw this as a unique chance to increase our presence in Europe.

Now with a better understanding of the different regulatory and pricing regimes, the risks of further penetrating the European continent have diminished considerably and the continent seems like an even more attractive place to be.

Vermilion recently acquired new assets in Ireland and as a group we continue to look for opportunities in Europe not only in countries where we are present but elsewhere. As well , Vermilion is transforming its French offices into a European headquarter, moving some technical expertise from Calgary to France in 2010.

We will have an independent geological and geophysical group and we expect to make the organization more efficient by cutting organizational costs such as those associated with time difference betwenn Europe and Calgary.

Most E&P companies, especially in Europe, are struggling to find young professionals in the scale necessary to replace the high number of baby boomers now retiring. How is Vermilion overcoming this challenge?

Vermilion has a strong track record of performance coupled with opportunities for staff to grow their skills and expertise given the variety of assets and geographies in which we operate.

We work hard to ensure we have an attractive offering for staff including challenging roles, supporting development through training (TEE – Training, Experience, Excellence program of internal courses and external offerings) and internal opportunities such as expat assignments, and competitive compensation in the industry.

Our Long Term Incentive plan (TAP) offers employees ownership in the company through a full value plan as opposed to an option plan, many of which are currently under water therefore not paying out for employees of comparator groups.

Vermilion also supports community investment programs such as United Way encourages staff in their charitable giving and volunteer efforts toward their local communities. Last but not least, retention continues to be strong with turnover at 7%, significantly less than industry average of 11.8% for our comparator group.

A dynamic environment where younger professionals have the opportunity make the difference and where their actions clearly lead to results – contrary to big bureaucratic oil organizations where the structure swallows it all – added to a number of important economic incentives explains Vermilion’s current success is attracting and retaining the best talent inside our lines.

What would be your final message to the readers of Oil and Gas Financial Journal about the activities of Vermilion in Dutch soil?

Vermilion is a responsible, environmentally sensible energy producer that looks to successfully develop energy resources in the Netherlands while giving full consideration to all stakeholders. We want to be seen as a good company and a good neighbor.

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