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Interview

with Tom Reynolds CEO Bridge Energy

01.07.2013 / Energyboardroom

Bridge Energy is a British-Norwegian entity. Would you start by taking us through how this company came together?

Dr. Alfred Kjemperud (AK): In Norway, Bridge Energy was started in 2005 by four enthusiastic geoscientists with a long history in the oil business. We had all worked in consultancy and carried out a number of projects mainly for the authorities in emerging oil nations in Africa and Asia.
However, in 2005 we decided to venture into oil exploration as an oil company, spurred on by the new exploration policy that the Norwegian government introduced at that time. The large undiscovered oil and gas potential coupled with excellent access to data, acreage and the 78 per cent rebate mechanism was an unbeatable combination which we decided to test. Bridge Energy was capitalized in 2006 when Lime Rock Partners invested USD 50 million in the company. We began applying for licenses and farmed into exploration wells and made a few minor discoveries.

Lime Rock Partners was also the main owner in the British company, Silverstone Energy. In 2010 our two companies merged and listed on the Oslo Access exchange.

Tom Reynolds (TR): Taking a snapshot of the company at the point of integration we were combining a pure-play Norwegian exploration company in Bridge Energy AS and Silverstone Energy Ltd – a full spectrum E&P company – which was mainly focused on development and production assets in the UK gas basin. This essentially combined UK production and development options with a strong exploration portfolio in Norway with near term (24 month) high quality targets. Putting the two companies together was great industrial logic and gave us the opportunity to build a real full cycle E&P business.

How far have the two organizations merged?

TR: The company operates across two business, licensing and legislative environments. Between the two sides of the North Sea, there are completely different norms with which we have to comply. It therefore makes sense to preserve some separation on the business and administrative side. However, from a technical perspective, looking at geology and reservoir engineering, both sides of the company are dealing with the North Sea basin. Therefore over the last couple of years, we have been integrating the operational side into one team dealing with one portfolio. In this way, we have been trying to generate synergies within the organization and we are making steady improvements. It is also more interesting for the geologists who are able to work on both sides.

Bridge Energy is a British-Norwegian entity. Would you start by taking us through how this company came together?

Dr. Alfred Kjemperud (AK): In Norway, Bridge Energy was started in 2005 by four enthusiastic geoscientists with a long history in the oil business. We had all worked in consultancy and carried out a number of projects mainly for the authorities in emerging oil nations in Africa and Asia.
However, in 2005 we decided to venture into oil exploration as an oil company, spurred on by the new exploration policy that the Norwegian government introduced at that time. The large undiscovered oil and gas potential coupled with excellent access to data, acreage and the 78 per cent rebate mechanism was an unbeatable combination which we decided to test. Bridge Energy was capitalized in 2006 when Lime Rock Partners invested USD 50 million in the company. We began applying for licenses and farmed into exploration wells and made a few minor discoveries.

Lime Rock Partners was also the main owner in the British company, Silverstone Energy. In 2010 our two companies merged and listed on the Oslo Access exchange.

Tom Reynolds (TR): Taking a snapshot of the company at the point of integration we were combining a pure-play Norwegian exploration company in Bridge Energy AS and Silverstone Energy Ltd – a full spectrum E&P company – which was mainly focused on development and production assets in the UK gas basin. This essentially combined UK production and development options with a strong exploration portfolio in Norway with near term (24 month) high quality targets. Putting the two companies together was great industrial logic and gave us the opportunity to build a real full cycle E&P business.

How far have the two organizations merged?

TR: The company operates across two business, licensing and legislative environments. Between the two sides of the North Sea, there are completely different norms with which we have to comply. It therefore makes sense to preserve some separation on the business and administrative side. However, from a technical perspective, looking at geology and reservoir engineering, both sides of the company are dealing with the North Sea basin. Therefore over the last couple of years, we have been integrating the operational side into one team dealing with one portfolio. In this way, we have been trying to generate synergies within the organization and we are making steady improvements. It is also more interesting for the geologists who are able to work on both sides.

Most of the exploration activity appears to be concentrated on the Norwegian side. Will we see a gradual balancing out with more operations on the UK side?

TR: When we first integrated, Norway was the exciting destination for exploration and it continues to be so. We have made additional investments in growing the UK team and we have made additional licence applications in the UK. We would therefore expect to see the UK contributing some of the exploration wells as we go into 2014 and beyond.

How do you compare the two E&P environments today?

AK: There are differences between the two. The first is cost level. . In comparison to the UK, Norway is very expensive in rig rates and the cost of offshore workers. Until the government brought in the 2005 rebate, it was extremely difficult for a small company with no production to afford to operate in Norway. The rebate allowed smaller companies to have equal footing with the larger players and led to the creation of companies like Bridge Energy, Revus, Agora, Spring and so on. This measure has really had a tremendous impact on the results in Norway over the last 5-7 years.

In the UK you do not have the same fiscal incentives, but the cost level is different. When calculating the costs and benefits in the two countries we find that the two are not that different when set against the value of finds. On a full cycle after tax, the value per barrel is more or less the same.

AK: However, the prospectivity is quite different between the UK and Norway. The UK has roughly three times the number of exploration wells as in the Norwegian side The level of exploration in Norway has historically not been as great as in the UK, but for the last few years the activity has picked up in Norway and we are now drilling approximately the same number of exploration wells in the two countries. . The remaining volume of undiscovered oil and gas in Norway is by NPD estimated to be 16 billion boe, while in UK it is around 10. It is still a lot to hunt for in both countries.

Norway is a site of infrastructure-led developments but, Johan Sverdrup aside, no major transformational assets. What is your perspective on the types of discoveries you can make?

AK: In our present prospect portfolio there are large and small targets, one example of a potential company maker is the Hercules prospect which, if a success when it is drilled in 2014, will give Bridge an estimated 90 million boe. This is a high reward, but also a high risk prospect. Other prospects are smaller, but with a considerable higher probability of success It is becoming harder and harder to gain access to the best acreage because competition is heating up, but we have a very competent group of professional subsurface people in the company with the right ideas which very often allows us to access the right partners and gain good licences through the various licencing processes. We aim to stay in the mature areas where we know there is a working petroleum system and where there are greater chances to make commercial discoveries.

TR: Our focus has consistently been on areas close to where existing oil has been found, close to infrastructure. In the North Sea in particular we have tremendous access to seismic databases with data on wells and field performance. This is a very well understood province with great data access and if you find what you are looking for it should be quicker, easier and more commercial to develop than in most other places in the world. Bridge Energy has felt no need to look beyond these resources so far. Bridge Energy has a small licence in the middle of the Utsira High, with discoveries having been made all around including Johan Sverdrup and Edvard Grieg. We are currently drilling there and have indications of hydrocarbons. I see the Norwegian part of the North Sea as still having great potential.

Given that the competition has grown heavily on the NCS, how are your financially positioned to remain competitive as a player on the NCS?

TR: We are funded from current cash and cash flow to fulfil our core exploration programme through 2013.
At a basic level, there are three sources of funding: shareholder equity, debt and cash flow from production. We will fund our exploration wells from cash flow and equity.

We would consider raising additional equity from shareholders if we have a good reason to do so. Gaining greater access to the public market investment community was the objective behind the dual listing of Bridge Energy, on London AIM and the Oslo Bors, providing two platforms for our shares to trade and two investor communities which do not overlap. As a result I believe we now have better access to equity capital should we need it.

We have strong support in our shareholder register with one Canadian investment management company owning 28 percent. They have been a consistent supporter of the business and when we sought to raise money last January, they contributed their pro-rata share of this. This gives us financial stability going forward.

Alternative forms of financing include the many debt markets and for the core of our production work we have a debt facility including a syndicate of banks which lend against that production. We believe we could extend that if talking about acquiring additional production assets or funding a development project. This requires a constant balance, you do not want to have too little debt as that would leave you inefficient and you do not want to have too much as that would mean importing too much risk into the business. We remain quite prudent in approaching this issue.

In summary, we have good relations with both the debt and equity markets and are building our profile in the London exchange market as well as Oslo. I see our financial capabilities as more than adequate to support the opportunities available to us on the NCS and in our wider business.

What has been the reception of the company on the AIM?

TR: It is still early days although we were in contact with a few investors before listing. Since the listing there have been a few more institutions who have declared their interest. The feedback has been positive and welcoming. Their reception always depends on why you are coming to ask for money. We have three potential reasons to raise equity: exploration success and following assets into production – these assets are more likely to come from Norway in the short term. The second reason would be the acquisition of production assets, a goal which we are consistently pursuing. The third would be to gain momentum in our key development projects which would include the gas developments in the UK. The Norwegian exploration success story carries a lot of weight in this investor community. There have been a number of pan-North Sea players or UK focused players making their way into Norway over the last couple of years. Sharing in this success is something that the London investors are seeking to do.

What effect could the European financial crisis have on their willingness to invest?

The macro issues affect both UK and Norwegian markets and it is hard to assess what effect the European situation will have on these investment tendencies. The situation will tend to remove substantial capital from the market, however investors looking for 3-year returns, willing to invest in a good story and who like the fundamentals are unlikely to withdraw their money from a company like Bridge Energy just because of a macroeconomic movement. Where we might see an impact is if we return to the investor community requesting for example USD 50 million and Europe is experiencing some new conflagration. The number of major investors may get progressively smaller as Europe hides under the desk. So a risk exists that the market is closed, this was our original experience when we originally launched our IPO back in 2010. On day two it was clear that people were hiding under the desk because the offering coincided exactly with the first Greek default event. Broadening our access to the equity markets gives us more people to talk to and allows them the option of trading in one of two locations, which is something they appreciate. This will also hopefully bring greater trading volumes to Bridge Energy.

What does the upgrading to the Oslo Main list mean for the company?

AK: We have been listed in Oslo for two years on the Axess list. Moving to the main list is an important step in building our reputation, it is important to the investor community that we are no longer viewed among the start-ups and juniors. We have seen a regular trade volume and a different set of shareholders and I would expect more trading in our shares as a result.

You mentioned building up production. How do you ensure value creation when buying into production as you did with the Boa field?

TR: The main benefit we gain is cash flow. Bridge Energy has made two relatively small oil production acquisitions, of which Boa was the most recent. The reason for this is that we have a significant unused tax shelter in the UK, allowing our sources of cash flow to be sheltered from tax. In the case of Boa, we therefore paid a fair price for the asset from OMV and the cash flow we see from this asset will be substantial. There will be a significant uplift – for every dollar of equity we put in we believe we generate around three dollars and this will fund the next generation of exploration wells. We are using the tax shelter from investments we made historically and we are in the hunt for an additional 2,000 boepd to use the tax shelter up completely.

Where will we see Bridge Energy in the next 5 years – will you stay North Sea focused or will you look to other regions?

TR: This is a question we ask ourselves regularly. We are a pure-play North Sea focused E&P company. We have international experience among our staff, but there is a lot of potential available in the North Sea provinces and our returns to investors are stable in this politically safe region. We could of course extend our portfolio into the Danish and Dutch sides of the North Sea as well. We will never say never, but for us to venture outside of the North Sea we would have to have developed a certain level of financial robustness and that will not be for a few years. There is a reasonable bag of resources we can take care of here.

By around 2015 we seek to move the production to around 10,000 bpd which is a clear peer group marker. This will provide us with strong cash flow which will allow the company to reinvest in other parts of the business. Adding up the risked resources, we believe we can double our existing contingent resources over the next two years through our exploration programme. Bridge Energy is therefore looking to become a strong North Sea player over the coming years.
TR: When we first integrated, Norway was the exciting destination for exploration and it continues to be so. We have made additional investments in growing the UK team and we have made additional licence applications in the UK. We would therefore expect to see the UK contributing some of the exploration wells as we go into 2014 and beyond.

How do you compare the two E&P environments today?

AK: There are differences between the two. The first is cost level. . In comparison to the UK, Norway is very expensive in rig rates and the cost of offshore workers. Until the government brought in the 2005 rebate, it was extremely difficult for a small company with no production to afford to operate in Norway. The rebate allowed smaller companies to have equal footing with the larger players and led to the creation of companies like Bridge Energy, Revus, Agora, Spring and so on. This measure has really had a tremendous impact on the results in Norway over the last 5-7 years.

In the UK you do not have the same fiscal incentives, but the cost level is different. When calculating the costs and benefits in the two countries we find that the two are not that different when set against the value of finds. On a full cycle after tax, the value per barrel is more or less the same.

AK: However, the prospectivity is quite different between the UK and Norway. The UK has roughly three times the number of exploration wells as in the Norwegian side The level of exploration in Norway has historically not been as great as in the UK, but for the last few years the activity has picked up in Norway and we are now drilling approximately the same number of exploration wells in the two countries. . The remaining volume of undiscovered oil and gas in Norway is by NPD estimated to be 16 billion boe, while in UK it is around 10. It is still a lot to hunt for in both countries.

Norway is a site of infrastructure-led developments but, Johan Sverdrup aside, no major transformational assets. What is your perspective on the types of discoveries you can make?

AK: In our present prospect portfolio there are large and small targets, one example of a potential company maker is the Hercules prospect which, if a success when it is drilled in 2014, will give Bridge an estimated 90 million boe. This is a high reward, but also a high risk prospect. Other prospects are smaller, but with a considerable higher probability of success It is becoming harder and harder to gain access to the best acreage because competition is heating up, but we have a very competent group of professional subsurface people in the company with the right ideas which very often allows us to access the right partners and gain good licences through the various licencing processes. We aim to stay in the mature areas where we know there is a working petroleum system and where there are greater chances to make commercial discoveries.

TR: Our focus has consistently been on areas close to where existing oil has been found, close to infrastructure. In the North Sea in particular we have tremendous access to seismic databases with data on wells and field performance. This is a very well understood province with great data access and if you find what you are looking for it should be quicker, easier and more commercial to develop than in most other places in the world. Bridge Energy has felt no need to look beyond these resources so far. Bridge Energy has a small licence in the middle of the Utsira High, with discoveries having been made all around including Johan Sverdrup and Edvard Grieg. We are currently drilling there and have indications of hydrocarbons. I see the Norwegian part of the North Sea as still having great potential.

Given that the competition has grown heavily on the NCS, how are your financially positioned to remain competitive as a player on the NCS?

TR: We are funded from current cash and cash flow to fulfil our core exploration programme through 2013.
At a basic level, there are three sources of funding: shareholder equity, debt and cash flow from production. We will fund our exploration wells from cash flow and equity.

We would consider raising additional equity from shareholders if we have a good reason to do so. Gaining greater access to the public market investment community was the objective behind the dual listing of Bridge Energy, on London AIM and the Oslo Bors, providing two platforms for our shares to trade and two investor communities which do not overlap. As a result I believe we now have better access to equity capital should we need it.

We have strong support in our shareholder register with one Canadian investment management company owning 28 percent. They have been a consistent supporter of the business and when we sought to raise money last January, they contributed their pro-rata share of this. This gives us financial stability going forward.

Alternative forms of financing include the many debt markets and for the core of our production work we have a debt facility including a syndicate of banks which lend against that production. We believe we could extend that if talking about acquiring additional production assets or funding a development project. This requires a constant balance, you do not want to have too little debt as that would leave you inefficient and you do not want to have too much as that would mean importing too much risk into the business. We remain quite prudent in approaching this issue.

In summary, we have good relations with both the debt and equity markets and are building our profile in the London exchange market as well as Oslo. I see our financial capabilities as more than adequate to support the opportunities available to us on the NCS and in our wider business.

What has been the reception of the company on the AIM?

TR: It is still early days although we were in contact with a few investors before listing. Since the listing there have been a few more institutions who have declared their interest. The feedback has been positive and welcoming. Their reception always depends on why you are coming to ask for money. We have three potential reasons to raise equity: exploration success and following assets into production – these assets are more likely to come from Norway in the short term. The second reason would be the acquisition of production assets, a goal which we are consistently pursuing. The third would be to gain momentum in our key development projects which would include the gas developments in the UK. The Norwegian exploration success story carries a lot of weight in this investor community. There have been a number of pan-North Sea players or UK focused players making their way into Norway over the last couple of years. Sharing in this success is something that the London investors are seeking to do.

What effect could the European financial crisis have on their willingness to invest?

The macro issues affect both UK and Norwegian markets and it is hard to assess what effect the European situation will have on these investment tendencies. The situation will tend to remove substantial capital from the market, however investors looking for 3-year returns, willing to invest in a good story and who like the fundamentals are unlikely to withdraw their money from a company like Bridge Energy just because of a macroeconomic movement. Where we might see an impact is if we return to the investor community requesting for example USD 50 million and Europe is experiencing some new conflagration. The number of major investors may get progressively smaller as Europe hides under the desk. So a risk exists that the market is closed, this was our original experience when we originally launched our IPO back in 2010. On day two it was clear that people were hiding under the desk because the offering coincided exactly with the first Greek default event. Broadening our access to the equity markets gives us more people to talk to and allows them the option of trading in one of two locations, which is something they appreciate. This will also hopefully bring greater trading volumes to Bridge Energy.

What does the upgrading to the Oslo Main list mean for the company?

AK: We have been listed in Oslo for two years on the Axess list. Moving to the main list is an important step in building our reputation, it is important to the investor community that we are no longer viewed among the start-ups and juniors. We have seen a regular trade volume and a different set of shareholders and I would expect more trading in our shares as a result.

You mentioned building up production. How do you ensure value creation when buying into production as you did with the Boa field?

TR: The main benefit we gain is cash flow. Bridge Energy has made two relatively small oil production acquisitions, of which Boa was the most recent. The reason for this is that we have a significant unused tax shelter in the UK, allowing our sources of cash flow to be sheltered from tax. In the case of Boa, we therefore paid a fair price for the asset from OMV and the cash flow we see from this asset will be substantial. There will be a significant uplift – for every dollar of equity we put in we believe we generate around three dollars and this will fund the next generation of exploration wells. We are using the tax shelter from investments we made historically and we are in the hunt for an additional 2,000 boepd to use the tax shelter up completely.

Where will we see Bridge Energy in the next 5 years – will you stay North Sea focused or will you look to other regions?

TR: This is a question we ask ourselves regularly. We are a pure-play North Sea focused E&P company. We have international experience among our staff, but there is a lot of potential available in the North Sea provinces and our returns to investors are stable in this politically safe region. We could of course extend our portfolio into the Danish and Dutch sides of the North Sea as well. We will never say never, but for us to venture outside of the North Sea we would have to have developed a certain level of financial robustness and that will not be for a few years. There is a reasonable bag of resources we can take care of here.

By around 2015 we seek to move the production to around 10,000 bpd which is a clear peer group marker. This will provide us with strong cash flow which will allow the company to reinvest in other parts of the business. Adding up the risked resources, we believe we can double our existing contingent resources over the next two years through our exploration programme. Bridge Energy is therefore looking to become a strong North Sea player over the coming years.

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