Mark Gidney Groves, CEO, Trapoil, UK
Mark Gidney Groves, CEO of Trapoil, discusses the recently launched 28th licensing round in the UKCS, and Trapoil’s distinctive business model based on carried interests with larger E&P players.
2013 has been an eventful year for Trapoil: The Romeo discovery, a new strategic consortium partnership formed and operatorship status secured for several assets including Orchid. What have been the main milestones of 2013?
Drilling success is always very important for a small company like ours, as this success encourages bigger oil companies to come and work with us. From that perspective, 2013 has been a good year: we have three new partners, TAQA, CIECO, and JAPEX, who are very committed to and focused on the North Sea. Financially, we are thus in a good place to drive forward for exploration.
We have an unusual business model that is based on carried interests, in which we work with our bigger partners. We do the new ventures, which means finding and presenting the opportunities to these companies. If they like what they see, they invest and carry us for a large part of the exposure, which is the most important thing for a small company like ours with limited financial resources.
However, in the last two years, exploration and new ventures in the UKCS, as opposed to Norway, is definitely decreasing, with the situation actually worsening over the last year. Firstly, the decrease results from the bigger companies leaving the space, thus creating partner drag. They do not want to drill in the North Sea because it only offers limited opportunity versus the bigger exploration opportunities available elsewhere in the world.
Secondly, the City (London) is risk averse to putting money into exploration. As such, it is difficult for smaller companies to raise money. Whether you are in a joint venture with either a big player not interested in the North Sea or a smaller player without capital, all your drilling plans get delayed. The difficulty of raising capital for exploration is a real issue for the UK. Finding a solution is very difficult, but we need to do something to stimulate exploration since what is found now comes on stream in five or ten years time. In 2012 and 2013, there was a lot of development spending, but if you do not explore, this will come crashing down in several years time.
Traditionally the smaller companies have been the drivers of new exploration in the North Sea. However, due to the challenges of partner drag and the difficulty of raising funds from the City, I wonder if the small caps are in a position to create the next wave. For the first time, we may have to rely on the mid-caps, such as Maersk or TAQA, to lead this new exploration.
How are partnerships with large E&P companies advantageous to Trapoil?
Working with larger oil companies is very beneficial to our company. Firstly, in financial terms, we can manage our cash because we receive the carries. Secondly, these partnerships help us manage our risk profile. As such, we do not have all our eggs in one basket for one drilling opportunity. Finally, we benefit from the technical expertise and input of these partners. For us, these partnerships are much more of a joint venture relationship, where everyone is contributing value. In these joint ventures, Trapoil finds and documents the opportunities for all to study.
Trapoil is playing on its relationship with seismic player CGG. How would you sum up the value that this relationship can bring to your participation in partnerships?
Our relationship with CGG brings immense value to our partnerships. Trapoil as a corporate body originated from this CGG relationship. We have access to CGG`s data on advantageous terms thanks to a long history of working with them before forming Trapoil. This data allows us to create our opportunities and is an add-on for our partners since they only have to purchase this data if we are successful in securing an opportunity. Our partners only pay on success after capturing the land, so they know they have a valid reason to drill. Other companies have to pay for this data, do not know what they will see, and might not capture the land.
Trapoil’s current portfolio comprises a mix of carried and paying interests in 11 licences. Can you please elaborate? What have been the growth drivers for the company?
In 2011, we bought Reach, which was supposed to offer us a lot of drilling opportunities. We bought carried interest in wells that were committed to the government. Subsequently, however, these wells did not get drilled. It is very rare for companies to walk away from committed wells to the government, but this is happening now. One company simply ran out of money, while another company more focused on Norway simply left the UK well. The overriding impact of this abandoning of committed wells is more financial pressure on smaller companies.
Following the Reach acquisition and a few other strategic moves, we entered 2013 with a large portfolio compromising 45 North Sea blocks, some of which have discovered hydrocarbons but were too small to attract the attention of the bigger oil companies. We thus qualified to become an operator to control our own destiny on these discoveries. However, it has been an uphill struggle to find partners to come in and participate in the drilling of these wells.
More recently Trapoil has been qualified as an operator by the Department of Energy and Climate Change (“DECC”). From a managing point of view what are the challenges behind leading such a change?
Quite understandably the government wants to make sure that you are not simply cognizant of health and safety issues but that you actually understand the issues and have all the right documentation and procedures in place, which is later checked by the government in Aberdeen. Such preparation represents a large effort that in turn increases the human resource element, which pushes your cost up. This is the last thing that a small cap company wants if it is not drilling and thus does not have the opportunity to create shareholder value. Shareholders understandably start asking why you are spending so much money with so few returns.
As such, this year we are reigning in until we have clarity that wells will be drilled in the North Sea, that risk capital will come back, and that all the partnerships and joint ventures are cleaned up. Overall, I do not think you will see a dramatic change for the small cap environment. All the small caps are struggling, and they are all typically down plus or minus 70 percent in share prices in the past few years.
This new era of decommissioning will be extremely costly, especially for junior players. What are your expectations, and are you worried?
Decommissioning is obviously a critical issue for small companies. If a small player is caught with large decommissioning liabilities, it can kill you. When we bought our production base, a 15 percent stake in Athena from Dyas, we were very conscious of only buying production where abandonment liabilities were minimal. Our net cost for abandoning our share of Athena is only 5.5 million pounds. Smaller companies are looking at floating production vessels and/or tying into existing platforms.
However, we do not see ourselves impacted by this decommissioning wave. The sum of our problem is having to pay 5.5 million pounds to pay for the Athena project in three years’ time, which is quite manageable.
Trapoil is looking into non-conventional oil play into the North Sea, which has been extremely successful in North America but not in the UK. How far along are you in this process?
To our knowledge, this is a unique effort. Others may perhaps be working on this in house, but they have not come out publicly. This idea stems from the fracking success in North America. The infrastructure in the North Sea is already out there and paid for, so if you find something, you can tie it in using a commercially viable way. The technology that has been applied, fracking and horizontal wells, is well understood by the industry. We believe that the Kimmeridge clay of the North Sea is one of the world`s most prolific source rocks. Why couldn`t these technologies be used in an offshore environment?
Trapoil is your brain chain. How would you describe the company`s evolution?
Trapoil was founded in 2007. We were three years private and three years public, so a split life in that respect. We created the business model with these carried interests and partnerships while we were still private, which set the scene nicely for the IPO. We did chase a very big production package with the support of private equity, but, unfortunately, we did not secure that package. For that reason, we went through the public market and raised 60 million pounds.
We promised two key drivers to the shareholders: becoming an active explorer with four wells per year and buying some production to have a sustainable and tax efficient business. For the first point, in two years, we have drilled four wells. At the current rate of exploration, we would have to be participating in almost every exploration well drilled in the sector to achieve that goal. However, if we had paid for our equity in the four wells drilled so far, we would have paid 16 million pounds. However, we only paid two, which speaks to the financial importance of these carried interest and our role as a niche player.
For the second point, we made the Athena purchase to ensure that our expenditure and income is balanced. We are sustainable. Even at this moment when no one wants to raise money in the City, we have 16 million pounds in the bank and positive monthly income so we are sound.
Where do you see the company in the next five years?
A successful outcome would be finding hydrocarbons in substantial volumes. As a consequence, we would be bought out, which would bring much value for shareholders. You build a business to be sustainable and credible, however a good result in five years’ time is a buyout. The industry is cyclical, and money will come back into exploration and the UKCS. The question is when. It would also be a success if we were still here in five years’ time doing what we are good at, which is drilling wells, finding new opportunities like the non-conventional oil, and creating shareholder value. The fact that we have not gone bankrupt in these five years would also show that we are doing something right.