Mediterranean Oil & Gas: From Transformation to Excitement
Bill Higgs, CEO of Mediterranean Oil & Gas, characterizes 2011 as a transformational year for the company, but 2012 he calls “exciting,” considering the company’s potential this year to de risk its Ombrina Mare oil and natural gas development.
Recently, Mediterranean received some very good news about its offshore Italy concession there.
Of the Italian government’s decision to loosen up on its offshore drilling moratorium, Mr. Higgs explained, “We had felt for a number of weeks that there would be some modification to the decree that introduced the offshore drilling ban in Italy in 2010, post the Macondo incident. Our uncertainty had been whether that modification to the decree would enable us to move ahead with our Ombrina Mare offshore oil and gas development or not, and so obviously we’re very pleased that restrictions under decree DLGS 128/2010 will no longer apply to applications for production concessions that were under review prior to the 2010 ban and any titles, including exploration licenses that had already been issued prior to DLGS 128/2010 coming into force.”
Now, Higgs explained, Mediterranean was able to move ahead, re seeking its application for a production concession on Ombrina Mare and move forward the development following two years of considerable uncertainty.
Mediterranean was beginning to see the next step in its transformation, he said, starting in May of last year when it was re capitalized, introducing GBP 20 million into the company.
He commented, “We’ve used part of the proceeds to pay off our debt and the main component to pay for our Guendalina field offshore in the Northern Adriatic. Guendalina came on production last October, so that’s increased our cash flow significantly and actually gives us some free cash above our base operating expense to undertake capital programs, which enables us to re invest in our portfolio.”
Of Mediterranean’s financial standing, Higgs reported: “We entered 2012 with no debt and around EUR 3.7 million of cash on the balance sheet and we’ve continued to be in a position where we’re steadily building our cash position whilst re investing in capital programs, so we’re able to easily cover our group operating costs with the cash flow from both our onshore gas fields and offshore at Guendalina. We’re using free cash flow to grow and re-invest in our onshore gas assets with the goal of trying to double our onshore production by 2015.
“It also leaves us with excess cash to look for small, inorganic opportunities: farm in’s for single well options, or seismic acquisition.”
Still, Mr. Higgs described what Italy’s offshore drilling ban had meant for Mediterranean.
“From the company’s perspective, it’s had a big impact,” he explains of the offshore drilling ban. “We were expecting to move forward with the development. We were very close to getting final approvals in place in 2010, when the ban came in and so it had a big impact on the share price as well as on the ability of the company to do other things.”
Prior to Italy’s offshore drilling ban, Mediterranean had completed two appraisal wells in 2008: a vertical well and a deviated well, which had been suspended as a producer.
“Our plan forward would be to drill another pilot appraisal well once we have a production concession awarded, and that would test the southern extent of the field and would also enable us, we believe, to move more of the P2 reserves into P1 reserves, which will strengthen the economic case for the development of the asset,” he explained.
Now that Ombrina Mare was starting to show signs of life again, it would be a big step forward for Mediterranean Oil & Gas.
“It’s a great asset,” he explained. “We currently have 40 million barrels of 2P certified reserves, which is unusual for a company of our size and 100% working interest.”
He recalled that Mediterranean had been working extensively with agencies and authorities in Italy to try and get the modification to the decree in place.
“There’s been a lot of support, particularly from the technical government in Italy and also from the Assomineraria (the Italian industry body) that have seen the need to move ahead, so that’s been good. Like most things, this is a big decision for the country and it takes a while for these types of decisions to come into place.
“Unfortunately, it’s been a two-year waiting game for Mediterranean Oil & Gas.”
Had the precarious state of the Italian economy influenced how things had played out?
“This decree is all about trying to energize growth within the Italian economy, and the industry has a great contribution to play,” Mr. Higgs explained. “As an example, we expect that Ombrina Mare will make a material contribution through taxes and royalties as we move into production and these types of assets cannot be left idle. So we’re pleased that we’re seeing progress, particularly in a way that obviously recognizes that we need to be good stewards of the environment. We have to develop our assets in an environmentally friendly way and so we’ll be looking to make sure that we have in place the best, most up-to-date environmental standards as possible.”
E&P at Ombrina Mare is set to take place about four miles from the Italian coast.
“We actually have a fixed platform that’s four miles offshore and that will form part of the first phase of the development: probably 5-9 wells centered at that location. There’s actually a tripod there right now – we’ve already invested EUR 23 million in the development, and we have a well and a wellhead on the tripod.
“It’s very different from say Macondo,” he continued. “We have oil that’s 17-19 API. While it flows naturally to the surface, it does so at a low rate, so there are very manageable well control conditions.”
Mr. Higgs reported that despite some public opposition to the project there was actually a lot of support for Ombrina Mare from the local community.
“The local area is suffering in the economic downturn and projects like Ombrina Mare can help,” he commented.
Meanwhile, as part of the modification to DLGS 128/2010, the Italian government has increased the royalty percentage it earns from hydrocarbons production.
“Revenues generated by the 3% increase in royalty for offshore oil and gas is going to be split 50/50 between the Ministry of Economic Development and the Ministry of Environment, which is focused on environmental protection and ensuring the highest safety standards in the offshore operation. We support both those objectives,” he said of Mediterranean.
“Guendalina is offshore now and it will obviously be impacted by the increase in the royalty, but it is still a very viable development.”
But how much does Italy need domestic oil and gas production?
“If you look at the balance in Italy both for oil and gas, it’s producing about 10% of its consumption needs and therefore it is subject to import parity pricing and European index pricing for gas. So any opportunity Italy has to develop oil and gas fields domestically has to help the balance of payments and development in local industry – it’s a good place to invest from the point of view of construction and development of assets.”
Meanwhile, Mr. Higgs mentioned Mediterranean’s frontier exploration acreage in offshore Malta: over 5,000 square kilometers for which new 3D seismic data was acquired in 2011 and is currently being interpreted. Now, he said, the company was looking for a farm-in partner that would hopefully be in place by the end of the year.
“We hope to have plenty more excitement to contend with as the year progresses,” he said.
For his part, Mr. Higgs has been with Mediterranean for the last five months or so, following a 23 year career around the world with Chevron.
“I felt that Mediterranean had a great portfolio of assets that are very interesting prospects and I wanted the opportunity to develop a small company,” he explained.
“For a company like Mediterranean Oil and Gas, we see that there’s plenty of opportunity to explore in the greater Mediterranean area, including southern Europe and North Africa, where there are development opportunities that fit the current size of the company.
“We see an environment where there’s continuing regulation, but that’s to be expected and we have to manage that, but these are very good markets to develop oil and gas - close to Europe, which we expect to still have strong consumption.”