Francis C. Abad, CEO and Owner, VenturOil, Philippines
Francis Abad, CEO & Founder of VenturOil, a pioneering indigenous E&P company, discusses the burgeoning opportunities for newcomers to develop marginal fields at relative low risk. He explains how improvements to the ‘cross-cost-recovery’ regulatory regime could be a game changer, and describes the favorability of the Filipino fiscal environment. He also unveils an ambitious business strategy to finance new exploration activities from the proceeds from marginals.
Your previous experience is in banks and energy institutions; why did you decide to found an exploration company in the oil and gas sector?
Principally, I founded this company because I wanted to set my own agenda and to be in charge of my own destiny. The Philippines oil and gas sector was particularly attractive because I had personal connections in the country that have been highly involved in this market for some time; furthermore, my own experience with companies as diverse as Sempra Energy Trading, Credit Suisse, E.O.N and Statoil meant this was a market I understood. Primarily, in looking for an opening in the market researching marginal fields was the most secure path to obtaining investment because oil is most readily available where it has been found before.
The Philippines have many fields where production has stopped and where extensive geological data and survey works were undertaken during pre and post production. Attracting investors to these fields now that technologies permit further extraction from them is relatively straightforward – the investment is relatively low risk because the reserves are documented and proven. VenturOil is less an E&P company, and more of a Production and Exploration business because initially pursuing extant reserves will give VenturOil cash flow, which will in turn permit venturing into exploration. Because all the shallow water fields are claimed, the Philippines will struggle to attract further investment in oil and gas until investors are confident there are further opportunities in deeper water resources than the singular, large Malampaya field. VenturOil and its joint venture partners have spent over USD 10 million investigating the Cadlao reserves and once the company has a proven record in production, VenturOil will be able to expand its business exploring for new resources.
The clear opportunities for development of marginal fields and the potential of new unexplored resources make the Philippines an obvious location to open a company like VenturOil.
Some priorities that VenturOil is pursuing vigorously include assisting the government in improving the regulatory regime to include ‘cross-cost-recovery’. This will mean that producers in one block will be incentivised to explore in other blocks, by allowing the producing company to claim back the costs of recovery whilst they produce elsewhere. Hence, companies are motivated to explore areas where the level of resources is unknown.
What comparative advantages do the Philippines have over other regions when it comes to attracting companies like VenturOil to locate here?
The Philippines market has, like all markets, positive and negative features that any business must contend with.
The main advantage here in the Philippines is that the government supports the sector with a variety of attractive fiscal levers. There are import duty breaks, tax breaks and cost recovery mechanisms which all support the sector. The situation itself should be further improved by changes to the Philippines Petroleum Act (1972) although changes to this act are currently tabled with Filipino lawmakers.
The Filipino Participating Incentive Allowance (FPIA) is another support mechanism which allows foreign companies partnering with local Filipino companies access to a beneficial fiscal programme capable of increasing profitability by a significant amount. As VenturOil is a Filipino company, this has made VenturOil an extremely attractive option for foreign companies to partner with. VenturOil would also be useful for foreign players as well because the company is based here and has immediate access to key contacts such as the Department of Energy (DoE). That being said, currently VenturOil is not seeking new partners for its Cadlao project.
The original 1972 act still creates an attractive investment climate. Over a period of seven to eight years, investors in the Philippines will usually hope to see a five to eightfold return on investment. The advantageous regulatory environment in the Philippines means that investors will find the oil and gas sector to be very attractive in terms of ROI.
Whilst the Filipino government is to be congratulated on its fiscal environment (highly conducive to attracting finance), the process of extracting oil from largely depleted fields is still an expensive business. Producing a barrel can cost between USD 55-75 offshore in the Philippines, which is high compared with Iran, or Iraq, where the cost of extracting one barrel may be less than USD 10. VenturOil is very much dependent on the volatility of the price of oil, which was threatened when oil prices fell from USD 147 per barrel to close to USD 30 back in 2008/2009.
One issue most investors have with the Philippines is the level of bureaucracy in the country. It is very difficult to attract investors if they are expected to wait months for all the necessary approvals to be in place. VenturOil was fortunate in that the approvals it needed took a lot shorter to gain than most other companies.
To give a better impression of the resources you are working with currently, what are your expectations from the Cadlao field?
The Cadlao field is expected to hold 3.1 million barrels in P1 reserves, and to produce first oil flows of 10,000 -15,000 barrels a day. This will taper off over three to five years but the key fact that will keep us in any field like Cadlao is the price of oil. If oil remains about 100 dollars, then VenturOil and its joint venture partners will continue production for a total of four to five years (the Cadlao licence was extended until 2024). Cadlao is the only production imminent field in the Philippines. VenturOil expects to spud the first new Cadlao well next year, the principal delay being obtaining the long lead items and ensuring that the field is supported by an oil tanker converted for storage purposes.
The DOE in theory prefers that oil, including that produced at Cadlao, is sold internally in the Philippines. In practical terms however, they do acknowledge that obtaining the best price is the prerogative of any company and because raising the highest possible amount of oil revenues is necessary for the Philippines as it helps with their dollar reserves. For this reason, the DOE expect oil to be sent to the highest bidding refinery, wherever they may be located.
What criteria does VenturOil bring when investing in the upstream sector?
The number one consideration is whether oil has previously been found at that location. Secondly, the level of data available on the potential reserves of oil is an important factor because this reduces the requirement for VenturOil to spend money surveying the resource and also provides investors with greater confidence and knowledge about the security of their capital and the return on said capital. Lastly, VenturOil will evaluate any information existing on previous extraction operations, particularly whether there is data that reveals the cost of extraction per barrel (i.e. field economics).
The latter figure allows an idea of the prospects for profits of any operations on site. Having access to all this information increases the speed at which production operations can commence; that is, there is no immediate need for VenturOil to explore.
VenturOil does not have access to sufficient capital to start exploration works at this moment. As I have stated, VenturOil’s business plan relies on creating cash flow from marginal fields to finance exploration at a later date. One of the key attributes that any small company must be able to demonstrate is cash flow from existing operations because once an investor has seen a return on their money they will be far more willing, eager in fact, to finance the company’s ambitions.
The Cadlao oil field was previously exploited and plugged and abandoned in 1991. What is the current status of these drilling operations?
There are a couple of small oil fields still producing in the Philippines (e.g. the Nido and Matinloc fields), although not at an international level in terms of daily flows.
Production at Cadlao decreased since first tapping upwards of 5,000 barrels per day to 900 barrels per day and was abandoned due to economic issues in 1991. VenturOil formed in 2006 and has a joint venture partnership with (then) Blade Petroleum, a Perth based company. Blade Petroleum and VenturOil acquired the right to SC6 Cadlao in 2008/2009. Subsequently, the DoE granted a 15-year extension to the licence on the field (until 2024). Blade Petroleum is the operator and VenturOil the minority partner, or non-operator service contractor with a 20 percent stake in Cadlao. Blade has since changed its name to Cadlao Development Corp (CADCO). VenturOil remains the Filipino connection at the moment, and this will continue for the life of the licence.
As far as VenturOil is concerned, the company is a free-carry, and is not required through its agreement with Cadco (Blade) to sink any funds before the spudding of the first well. The joint venture needed to fulfil a number of small requirements, such as obtaining an environmental compliance certificate, which has since been granted by the Department of Environment and Natural Resources (early 2013). Now that all the required permits from local and national authorities have been received, VenturOil is ready to go, subject to availability of long lead items.
Where do you see VenturOil in five years?
In terms of production, VenturOil hopes to have 15 years worth of reserves within a five-year timeframe. This is necessary for VenturOil to potentially float publicly because until a company is able to demonstrate cash flow from operations and have a degree of guaranteed longevity, it is unlikely to attract substantial levels of investment.
Furthermore, as mentioned earlier, VenturOil is seeking to obtain a healthy cash flow to secure finance for exploratory projects in the future. Completing the first of these exploratory projects within five years would be a significant success for the company. Beyond that, consecutive exploratory efforts will be a natural progression for VenturOil.This move to looking for new reserves will hopefully be initially funded by production from at least three new Cadlao wells, which will be spudded within the next five years.
In the longer term, expanding beyond the Philippines, particularly to the North Sea, would be highly desirable as VenturOil’s next ambitious step.
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