₪ David Pescod's Late Edition August 29, 2006
An Interview with Clifford James
President of TG World Energy
(From August 21, 2006)
We are here with Clifford James and all of a sudden his TG World Energy is attracting a lot of attention, but usually behind every story like this, which looks like it is an overnight success, there has been years of work! Cliff, can you give us a little bit of background information on the Niger play?
Clifford: Yes, it certainly has been years of work. We first acquired the Niger block back in 1997 and it took us quite a while to put a Joint Venture together. From 1997 until about 2002 no one was really interested in early stage international exploration plays mainly because of low oil prices during this period. In the summer of 2003 we assembled a consortium of companies, led by a large American multi-national, which was very interested in working with us. As we were finalizing that deal, our current Joint Venture partner, CNPC tried to do an end run on us and we ended up as a result doing a deal with them. The arrangement with CNPC actually turned out to be better than the initial deal we were negotiating with this other group of companies.
So as far as I am concerned, we ended up with a very good agreement for the shareholders of TG World as our Chinese partner has performed very well under the operating conditions that exist in Niger.
David: All right, it has taken a little longer than expected, but the Rift Basin area of Africa is attracting an awful lot of attention all of a sudden. Can you tell us what is going on?
Clifford: There are a number of arms to the Central African Rift Basin system. The Sudan arm, is the most explored and currently produces a significant amount of oil. The big venture there is the Greater Nile Project, in which ONGC is the operator and in which our partner CNPC has a 40% plus interest. This project has apparently over 3 billion bbls of recoverable oil reserves. Our partner CNPC has a block in this basin in which it has a 100% interest with over a billion bbls of recoverable oil reserves. On top of that I am told that Total also has a block in which they have over a billion barrels of recoverable oil reserves, so for that arm alone there’s in excess of five billion barrels in total.
Next, if you go down to the southern part of Chad to the Doba Basin, in another arm Exxon Mobil and others have another big project. On the strength of roughly a billion barrels of recoverable oil, the consortium built a 200,000 bbl per day pipeline to the coast through Cameroon. I am told that the partners have made a number of additional discoveries, since they constructed the pipeline. Just recently (about two months ago) CNPC announced together with EnCana, that out of the three wells drilled last year in a sub basin just to the north of the Doba Basin in Chad, apparently two of them were successful and the oil in place number is greater than a billion barrels. So, this brings us to the arm that we’re in and what’s interesting is that we are in a continuous trough where seven new pool discoveries have been made in eight attempts by Esso and Petronas. So as you can see, these Rift Basins are very, very petroliferous and certainly very oily and producing a significant amount of oil.
David: The chatter so far is that you think you’ve got about 36 obvious targets to start with.
Clifford: We actually have 39 targets based on seismic shot up to roughly the end of last year and have since then done a lot more seismic which is expected to show additional targets. Last year we were concentrating on the southern part of the trough on our Block in an area to the north of the northern boundary of the Esso block to the south. Since then we have done a lot more seismic within the middle and northern parts of our basin where seismic wasn’t shot before. As a result, we are expecting to see a lot more than 39 structures.
David: Wow! There are some obvious first ones to start with and should you use exploration odds chance of success of 1 in 10 – 1 in 3 or what?
Clifford: We do have two locations picked for the first two wells. The first one is the Saha-1 location and the second one is the W. Fachi-1 location. These were selected based on their close proximity to the northern boundary of the Esso block as we want to be as close as we can to their discoveries. If you look at the map, within our company presentation, of the Esso discoveries you’ll see seven new discoveries all in a line that ends magically at the northern boundary with our block. So that’s where we are drilling the first two. The third will be selected in the near term from the new seismic that was shot since the beginning of the year.
Now as to the chance of success: Our Chinese partners are carrying a success rate of 1 in 2 for both prospects which is interesting because if you look at a chance of success spectrum, this is what you would use for a development type prospect.
In our analysis we are applying a chance of success of 1 in 3, still very low for this type of play prospect. In justifying the chance of success factor used by CNPC, they point to the success they had down in Chad and over in Sudan and they are saying they are experiencing basically a 2 out of 3 COS rate, or a 66% discovery rate. This is the result of the years of experience they have had in these basins. Esso/Petronas will tell you that they had 7 out 8, so these are areas where the discovery rate can be quite high.
David: Okay now, you’ve put a pretty good deal together where much of the first part of the program TG World Energy is carried.
Clifford: Yes. First of all, we are carried for all of the 2 and 3-D seismic up until the end of the second exploratory well. We are also carried for three exploratory wells and for all the testing, side tracking or any deepening that might occur with these wells. In addition we are carried for almost all the entire project related G&A. This deal was put together on the basis that we would get a good shot at three different structures on our block. Based on recent conversations with our partner, we plan on a drilling start up in early October. Given the historical chance of success rate of 1 in 3 within these internal African Rift Basins, and with three exploratory tests, we believe we could end up with at least one success.
David: Okay, great! Now as far as timing, there have been several delays up until now, but it looks like the rigs are on their way and the equipment now is in Africa - how long does it take for these wells to drill and test and how soon do you expect to start?
Clifford: Well, as I mentioned, we expect to start drilling at the beginning of October. The equipment is on its way to the first drilling location as we speak. We expect to spend something in the order of 60 days, given the depth of the wells, to drill each of them. Testing, obviously, will depend on what we see and what type of testing we want to do. It is my understanding from talking with the operator that if we do encounter hydrocarbons, they would want to do some extensive flow tests. All the wells, Dave, will be back to back – the rig is contracted to do the work and the wells will be drilled as quickly as we can drill them.
David: As far as the country Niger, I noticed that the CNN commentator Anderson Cooper has spend a lot of time there and describes the country as one of the poorest in the world.
Clifford: And he is correct. However, our experience and certainly the experience of others operating within Niger has shown that the country is very anxious to find oil and to get something going that will better the lives of its citizens through economic development. They are therefore obviously very keen on our project.
David: We understand that the country is basically 90% desert.
Clifford: Well, I don’t know if it is 90% desert, but it certainly has a lot of desert. It is certainly desert where our operations are occurring. The eastern and southern parts of the country, however, have a lot of vegetation along the Niger River an area which makes up a lot of the country.
David: It’s looking a long way down the road, but there is also not a lot of infrastructure and what to do about pipelines is another question.
Clifford: We have looked at four different pipeline possibilities. The first two options, which I rule out, are building a line and taking it down to the southern part of the Doba Basin in Chad where ExxonMobil has built a line to the coast of Cameroon, or going up north to Libya and tying into the Elephant field line. The reason I rule both of those out is due to the significant discoveries made in both countries, and where I suspect a lot more will be made. As a result I don’t see any spare capacity developing in these lines in the short term.
So the other two real possibilities are, number one, to take the oil up through Algeria, and two, take it down to the Kaduna refinery that is located down in northern Nigeria. The most likely scenario at this point is building a line down to the Kaduna refinery which CNPC announced a couple of months ago that they had purchased. Our Chinese partner had told me in the past that it was their intention to acquire the refinery, which they now have, build a pipeline and then tie into that refinery.
Now, the other route I mentioned up through Algeria is also very real for the simple reason that I spent the better part of a couple of years of my time working with Sonatrach, which is a national oil company in Algeria. We worked with the Minister of Mines and Energy who became very keen on the idea of piping oil to Algeria, so much so that they wanted to become a joint venture partner with us. Unfortunately, they were not able to become part of our joint venture – the Chinese wanted all of it, other than the 20% that we hold, for themselves.
So what the Algerians have done is acquired two blocks of their own in Niger. We understand that they are currently negotiating for several more and have made Niger their prime exploration area outside of Algeria.
Algeria is pouring a lot of resources, money and people into the country and their stated aim at a recent conference, which we attended in Niger, was to quickly find significant oil and build a pipeline up to the north. The first pipeline out of that area will be the key line that everyone will want to go into.
So what’s great from our standpoint is that there will be several possibilities for getting oil out.
David: Okay, now you’ve also made another interesting joint venture just recently and that is in northern Alaska. Some people have used the analogy of the North Sea, where the big guys were there for years, found the big plays and now are off trying to find the big plays elsewhere and there might be little plays left that wouldn’t make a difference to an Exxon, but could make a big difference to a TGE.
Clifford: Yeah absolutely! And these plays are not that
small. We see a definite analogy to the North Sea very clearly, but the difference is that right now what people are doing in the North Sea is going after smaller pools. The difference in Alaska is that the majors went in and they were looking for the giants and super giants and they found those a number of years ago, but they didn’t concentrate on the smaller pools. There has been a recent USGS paper that was put out indicating that they see another 5 to 10 billion barrels of oil to be found in the North Slope, the area where we are playing. What is interesting is when you do what we call a “creaming curve” analysis of the basin we see the potential for discovering a number of fields that will be in the 20 to 500 million barrel range that still remain to be found.
Now this is where the North Sea was about 25 to 30 years ago, Dave. So we’re coming onto the scene in the North Slope of Alaska as if someone was going into the North Sea all those years ago and was able to look at some of these bigger structures that have now been found.
That’s the fundamental reason why we are as excited as we are about Alaska at this stage. That and the exciting potential we see in the land – prospect package we have in our JV.
Our operator and our joint venture partner, Brooks Range Petroleum, started acquiring land and leases up in that area, building plays and prospects, starting in 1999. It has taken them quite a while to put together the portfolio of seven prospect areas that we have in the JV. We will be focusing on a few of them this winter drilling season. We have high hopes for good size discoveries on these prospects. Quite importantly we have an excellent team of people involved in our operator with a lot of experience finding oil in this area.
David: How many holes do you expect to be drilling up there this winter?
Clifford: Well the budget calls for three wells right now with the possibility of a fourth. It really depends on how many we can drill in the season. Right now we’ve got rig 16-E contracted from Nabors Drilling, who is also a joint venture partner with us. They have come into the JV recently and have made things easier for us to get a rig. We want to drill as many wells as we can in the upcoming drilling season in Alaska, which starts anywhere from December 15 to January 15 and ends in May. We’re confident that we can do three, but there is a possibility that we might get a fourth one in depending on how the winter goes.
David: Every different part of the world you are working in has surprises, are there any surprises in Northern Alaska yet?
Clifford: Surprises in what way?
David: Something out of left field.
Clifford: Something I see from an exploration standpoint
that you could say came out of left field I suppose, is a new discovery made here recently by ConocoPhillips called the Qannik discovery. It is in a shallow sand, what we call a topset type of sand unit, and it has been announced as a very good discovery. I guess the surprise there is that no one was really thinking that these shallow sands would have the kind of potential that this find is demonstrating.
The other big surprise too is the heavy oil. The Central North Slope is a relatively small geographic area and what’s amazing is that already there has been 23 billion barrels of conventional oil found there not counting the up to 36 billion barrels of heavy oil which has also been found and is currently starting to be developed.
David: Okay
Clifford: I guess the other surprise too for us is that the State really wants more smaller operators and what they are doing is re-vamping the fiscal regime up there. One important feature which they appear to be ready to go with would be a significant tax holiday which would affect TG World where the first US $60 million in annual income is State tax exempt. Another feature is that companies would receive any where from a 20% to 40% tax credit on exploration expenditures and almost all the exploration expenditures would qualify. What you can do, it appears, is actually incur the expenditure, receive the credit then turn around and sell the tax credit to someone who is already paying tax like the big operators are up there right now. They are paying anywhere (I am told) from $0.90 to $0.95 per $ for these tax credits. So you can substantially reduce your overall exploration expenditures that way.
David: Seeing that we are taking about surprises, what were your surprises in working in Niger?
Clifford: The surprises in Niger, that’s a good question! I guess the only big surprise we’ve had there was the attempt by our partner to back door us. But again, we ended up with a tremendous deal at the end of the day which we believe will serve shareholders well.
David: Okay, I can’t think of any other questions, have you got any you would like to touch base on?
Clifford: Well, I think what’s important to note is the information on the slide within our corporate presentation showing the Expected Monetary Value analysis. The point I want to make about that slide is that when you actually look at the expected net risked EMV –we’re looking at $277 million U.S. - using some very modest oil price assumptions – about $38.50 for Alaska and $48 for Niger - you can see the significant upside exposure TG has in its prospects that will be drilled over the next period. The way I would like to end all this is to say that we are offering investors multiple shots at some very significant targets here with a lot of upside.
David: Okay, thank you very much for your time.
Note: To see the TGE Presentation, go to www.tgworldenergy.com, under Investors, see presentations.</b
Disclosure: Canaccord has recently led a financing for TG World Energy.
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