By David Chance
NEW YORK, July 29 (Reuter) - Cash-poor and victim of
skepticism over past disappointments, American International
Petroleum Corp faces an uphill struggle to develop
what could be one of the largest oil finds in oil rich
Kazakhstan.
The tiny company announced earlier this month that it had
won a license to explore an area onshore in the Former Soviet
Republic of Kazakhstan which local geologists say could contain
more than 1.1 billion barrels of oil.
Shares of Nasdaq-listed American, whose Kazakh unit has a
70 percent stake with two local Kazakh groups and an group of
businessmen in a venture known by its acronym MSUP, have risen
from around 50 cents to over $3.00 since the reserve
announcement.
But American faces a diverse group of obstacles in making a
success of the project. Besides lacking capital to carry out a
comprehensive drilling program, American faces credibility
problems from performance in less than successful previous
ventures which could color investor opinion, as well as the
commercial viability considerations inherent in any oil and gas
production venture.
At a meeting of investors and potential investors, chief
executive George Faris said that American, a company whose only
tangible asset is a 27,600 barrel per day refinery in
Louisiana, could realize some of the potential of its 4.7
million acre concession for shareholders.
"We have enough capital to drill two exploratory wells,
which we could start in the first quarter of next year," Faris
told his audience.
American, with total market capitalization of $130 million,
must take a partner, issue debt or attract a bank to raise
sufficient capital to advance the project. But in doing so, it
must ensure that it holds on to sufficient assets to generate
returns for shareholders.
Faris says that the project has already piqued the interest
of major oil companies.
American's size is Lilliputian compared with its neighbors
on the adjacent tracts. Holding vast neighboring tracts are
Exxon Corp , Chevron Corp and the huge Russian
oil company LUKoil .
"We have received offers, one major said that it would
would provide finance in exchange for a 50 percent stake but
that was too much, too soon," said Faris.
One oil company, which Faris said was not "among the top
six or eight" which lost a Kazakh license had $104 million to
spend in Kazakhstan and had approached American.
Faris said that the Begesh field is the most likely
candidate to be developed first due to its proximity to
existing transportation infrastracture. Begesh, which has
reserves estimated at 350 million barrels of oil, straddles an
oil pipeline which is operating at only 25 percent of its more
than 200,000 barrels per day (bpd) capacity. Begesh will be
drilled to a depth of between 9,000 and 12,000 feet.
He has had offers from bankers. Canada's First Marathon
offered to raise $25 million in equity for American,
but Faris said no, he wants a straight debt deal.
Like the other fields in the concession, Begesh has never
produced, but American showed investors small phials of oil
which have leaked from the capped well as proof.
"This well has never even been tested for oil, these wells
were just drilled and plugged," Faris said.
Assuming there is oil, Faris and his Kazakh partners reckon
they could get $9.50-$10.50 at the wellhead for a barrel of
light, sweet crude that the well could produce.
"It does not surprise me that someone can say they have
vast reserves, they are relatively easy to come by and a lot of
western companies have been able to negotiate huge licenses,"
said Mark Redway, analyst at T Hoare, a London broker which
specializes in research on resource companies.
The problem, says Redway, is getting oil out of the ground
at an economic rate and having a market in which to sell it.
But, most analysts say that possessing reserves which have
been validated by Soviet era geologists is not enough as these
surveys often took little account of the cost of production.
American also has to negotiate a production license with
the Kazakh government which will want royalties on any output
of six- to 28 percent of production.
So far, Faris has resisted the idea of just drilling out
the concrete plugs which the Soviet geologists used to cap the
wells and going for a quick buck as he said that could ruin the
reservoir.
American itself also faces something of a credibility
problem, which Faris freely admits, one partnership in
Indonesia which could have provided investors with massive
gains went bad when a local partner backed out on American.
"We have had bad luck for a number of years, but I too have
lost money," Faris told his audience.
During April, a debenture holder asked for his debenture to
be redeemed in stock and threatened to sue, forcing Faris to
stump up the cash.
Faris said he and another major shareholder had sold some
of their stock, although not that from the debenture purchase
as that is restricted, as the shares rallied.
If the company and its shareholders are to see any rewards,
they must convert potential reserves into production as soon as
possible say analysts.
Some independent oil companies have foundered in situations
similiar to this. In May, Houston-based Xavier Corp
announced it had raised approximately $6.8 million in interim
financing through placement of convertible debentures to
continue to fund the development of its Kamennoye West license
in Western Siberia, but at an admittedly substantial dilution
to existing to shareholders.
But others have succeeded in such straits. Canadian-based
Hurricane Hydrocarbons Ltd is such a success story
currently sitting on a 90 percent stake in Kazakstan's
Yuzhneftegaz deposits which are estimated at 581 million
barrels of oil.
"Until you have the reserves proven to western standards,
until you have the capital and the backing of a major, this
remains a speculative play by a small company in a very
complicated part of the world," said another analyst.
For his part, Faris said he believes that the company can
succeed, without losing its shirt to another larger and more
powerful player in the region.
"I am doing my very best to take the proper steps to
protect the interest of shareholders," hge said. |
