₪ David Pescod's Late Edition July 9, 2007
AN INTERVIEW WITH RICHARD GUSELLA
OF CONNACHER OIL AND GAS
(From July 5, 2007)
“Never judge a book by its cover.” It’s a common saying but few of us observe it and a giant example is yours for a suggested look/see at:
youtube.com.
An ungainly young man is a contestant on “Britain's Got Talent” and when it is announced that he is to sing opera, you can see the look on the faces of the judges, which includes the total naysayer Simon Cowell of “American Idol.”
One look at Simon tells you he’s got an opinion before the young man opens his mouth. And then he sings.
It’s one of those magic moments in TV history and you really do have to see it.
Not magical though, has been the just-announced news that Petrolifera Petroleum has recently seen production drop on occasion to 7,000 barrels per day in Argentina—despite talk of hitting 21,000 boe’s per day by year end. It should be noted there were lots of valid reasons given for this temporary reduction but nevertheless we though we should follow this up.
So we caught up with Dick Gusella, Executive Chairman of Petrolifera Petroleum and President of Connacher Oil and Gas for an update to see if he’s busy! After all, it was Gusella that sent us that You Tube piece…
Dave: So what’s with the Petrolifera update?
Dick: We’ve had some operational issues, we’ve had some productivity declines, we have cut back production, in some cases we are waiting to install pumps, in some cases we have new wells that have been drilled that are not yet on-stream, so it is what it is. We expected a drop down in the second and third quarter anyway as we completed all our facilities. I think to just focus on the downside and not what lies ahead, is misguided.
Dave: Back to the fact that you still expect 21,000 boe’s per day by year end that would be an absolutely enormous amount that has to be discovered and put on stream.
Dick: We are drilling a bunch of new prospects, Dave, that have high productivity potential and we have reason to believe they should work and if they do, we would expect to get 1002, 1003, 1012 or 1013 types of wells. On top of that, we are going to have a rapid, massive and continuous drilling program on Rinconada, which we believe is very consequential with productivity and reserve potential that is considerable. Wells like 1027 which recently tested 2,400 bbl/d have opened up a whole new number of additional follow-up locations in the northern part of Puesto Morales. We are not saying anything at this stage about the 1028 well on the northeastern edge of the Puesto Morales Block, but we will see where that leads us. This is a very prolific, well-endowed region (if you will) in terms of reserve potential and productivity potential and we are going to keep banging them down. Based on our risked assessment of what we see evolving, we are staying with 18,500 a day for oil for year end (December exit rate that is) and 2,500 boe’s a day, the oil equivalent of about 15 million cubic feet of natural gas a day being on-stream by the end of the year.
Dave: Would you not at least admit that is a very aggressive target?
Dick: That was our stated target, Dave, back in October of last year. You called it aggressive back then and we’ll just have to see how the drilling unfolds. We’ve got four rigs working down there drilling the new wells and we have two service rigs for completion. Once we get our water flood installed and it’s up and running, as well as the full bore treatment plant, then we’ll be able to do that much more in terms of enhancing productivity.
We had virgin or flush production in some of these wells at the outset – we didn’t overproduce them, we produced them carefully – in fact some wells were flowing oil wells which were tubing constrained, with the tubing acting as an effective choke. As you produce out of a reservoir, you are going to have pressure decline and you have to deal with it over time. Most of these wells still are not on pump, either, Dave and that also doesn’t mean that when some of the wells go on pump they couldn’t actually produce more than they are presently contributing as flowing oil wells. We will not put a pump on a well until it stops flowing.
Dave: Back to Petrolifera Petroleum. It amazes me what some people are starting to say over a glass of beer or two about the potential for Petrolifera in Peru.
Dick: Are you saying they have to be alcohol induced?
Dave: You know how analysts are….there are so many constraints on analysts these days…what they can say and what they can’t, but boy there sure are some aggressive statements being made.
Dick: How often do you get exposure to prospects that could be a billion barrel-type prospects? In the case of potential oil on Ucayali or where you have a number of prospects where there is potential for 50 or 150 million barrels per prospect on Maranon where there are a number of prospects? Where else can you get Camisea-type prospects of 10 TCF plus with possibilities of 500 million barrels of associated liquids? You just don’t get many shots at things like that and that’s why we got the blocks and that’s why we’ve always felt very optimistic and positive about them. Gary Wine (*) is “Mr. Peru” when it comes to geology. He is the person who picked the blocks, he is the person who picked the outlines of the blocks, he had done the basic geology and we continue to do new geology, field work, etc., which has given us reason to be optimistic that Petrolifera’s Ucayali Block could not only be prospective for big gas, but could also be prospective for big oil.
Dave: I don’t think a lot of North Americans understand what’s going on in the oil and gas in Latin America, at least outside of Venezuela. For example, Argentina has to shut down the McCain French Fry factory, the biggest in South America.
Dick: If you saw the Agrium announcement today, they also said they are curtailing some of their fertilizer production, I believe.
Dave: There is just a shortage of oil and gas in Argentina, and Chile is desperate as well.
Dick: That’s correct. I think price controls may serve their purpose in the short run, but in the long run, everybody is going to have to eventually capitulate to market driven forces. The shortages in Argentina are a reflection of price controls and lack of investment that follows price controls as a general rule.
That being said, we are an exception to the rule in Petrolifera because our capital budget has been tripled this year compared to what we did last year. We’re doing our part in terms of planned and new drilling and new pipelines and new gas coming on stream, etc. Argentina is also at the bubble point where it is actually no longer self-sufficient in gas…its importing gas from Bolivia at $5.00 and exporting it to Chile to meet their commitments at $3.50 and that’s bad business which can’t go on too long. So it can only mean prices have to start moving up and eventually the economy is going to have to bite the bullet.
Chile has its own problems as well and they have historically been reliant on Argentina and other sources for natural gas. I think it positions Peru very, very favorably as a potential new hub for natural gas in South America as well. Because of Camisea Peru is gasifying Lima, they are building a big LNG plant for export, there’s new exploration activity that’s going to take place in Peru accelerating over the next three to five years and I think it can be a potential source of new gas volumes going into the Southern Cone. So reverse the pipeline into Chile from Argentina and move Peruvian gas back into Argentina and possibly back up to Brazil as well, in addition to exporting to Chile, and you have a very buoyant framework within which to explore and develop on success. I think there are a lot of dynamics that can happen down there.
You have to pick your country, you have to pick your regime, and you have to pick your concession terms or contract terms. The top two in South America are Peru and Columbia (not necessarily in that order) and the third one that’s attractive because of a lower royalty regime, established procedures and underdevelopment, even with short-term price controls, is Argentina.
Dave: I guess on August 10th, when the Great Divide has its opening ceremony, you’re probably not going to have to have dancing girls to attract a crowd, are you?
Dick: I don’t know Dave – it’s the middle of summer, people are busy. This is a formality and a celebration.
This is occurring to note the completion of the plant which will go hot after the ceremony. We will complete testing of the component parts of the facilities with the vendors and make sure everything is workable and then we’ll go hot (as they say) and start generating steam and then our intention is to inject steam for three full months before we start to produce.
That’s being done on the advice of all our experts - heat up the reservoir properly so you get proper performance from your wells. That will happen as soon as possible after the ribbon cutting ceremony. I believe we invited quite a few people who have had a long standing interest in the affairs of Connacher which started out about five or so years ago as a $1 million company (now over $1 billion in enterprise value) as well as the press, certain political leaders, suppliers and service providers and others that we will be pleased to see attend. It should be a nice little event.
We are going to have a BBQ and probably a few speeches (inevitably) and unfortunately we can’t invite the whole world. We had a number of shareholders who got wind of it (in part because of your newsletter) and of course we just can’t accommodate everybody for security and safety reasons.
There still will be work going on there and of course when visiting (as you know from your trip up in February) everybody gets a safety briefing and helmet and goggles before we start touring around. We are investigating if we can webcast the speeches, etc. at a minimum, or possibly even a videocast, and at a minimum we will have material posted in due course on our website. We just put up some new pictures and we post our investor presentations as they are updated so we do our best to keep everyone informed in a level and fair manner.
Dave: On SAGD, there’s almost a dozen SAGD plants up and running, one or two have had a little bit of trouble, but in the main there are still some people that felt this might not work for some reason.
Dick: There’s “Doubting Thomas’s” everywhere. SAGD is 20 years old. We started it with Tanglefields in Sceptre days in 1987 - which was a more conventional heavy oil if you will, than the oil sands, which are unable to flow of their own accord as a general rule, to distinguish them from cold oil flow with heavy oil. At Tangleflags we increased a McDaniel-assigned recovery factor from a ½ of 1% to about 100% and it is still producing for CNQ, who bought Sceptre This was the first use of continuous steam and horizontal wells and we worked with now-deceased Dr. Roger Butler, Paul Jespersen and Tim O’Rourke of Deer Creek fame, and kicked off a huge surge in horizontal applications by independents in Saskatchewan first and then later in Alberta. I call that working. I was at a conference a year ago that Encana spoke at and they said that they had (on pilot projects) recovery factors of 70%, which is pretty good.
Our analysis based on 2P reserves as assessed by GLJ, our evaluator, gets it up into the 50-odd percent range/. I think we will do better than that over the long run and there’s no reason why it shouldn’t work – not that there won’t be a few problems or a renegade well or something like that. It is not rocket science but it is also not a slam dunk. We at Connacher also mitigated risk by hedging our own gas needs on the upstream side. We mitigate the differential risk and capture the differential with our refining of the downstream side and as we indicated, our long term plan is to move up towards 50,000 to 55,000 barrels of bitumen a day in the next five or so years and then equally extend the refining capacity one way or another to about 50,000 to 55,000 barrels a day as well. So we have a long term plan to continue to sequentially develop these accumulations, increase our productivity, and hopefully start to provide significant capital appreciation and a cash return to our shareholders as we become self reliant and start to also reduce our indebtedness incurred to meet our capital needs, with minimal dilution!
Dave: You have been (once in a while) successful at actually picking a stock. Rally Energy is now probably close to a triple for you. Have you got any more of those?
Dick: On the other side, I had a disappointment with Diamond Tree Energy (DT). It got caught up in the junior gas syndrome. I guess I could always pick it again at $2.80…it can’t go any lower..it’s got to go higher Dave! Just because of the psychology of gas. I think smaller gas producers are going to have to go through some consolidation and I think various companies are all casting around to see if they can get bigger, faster to weather the storm that seems to be evolving around summer gas prices. I just haven’t had time to really look at anything new, Dave. When you have two gems like Connacher and Petrolifera, why would I want to diversify?
Dave: Many thanks, Mr. Gusella.
(*) Gary Wine has been the President of Petrolifera since March 2005, has extensive experience in South America and was the group leader for Basin Analysis Group with Perupetro (00-04) and was exploration manager for Norcen in Buenos Ares (93-96). He is a geologist by training and has not drilled a dry hole in Argentina since Petrolifera started its drilling in late 2005! |
