Zeta Petroleum: Never Say Dry
What may have been “dry holes” to state-controlled oil and gas companies during the reign of Romania’s communist regime are, today, anything but.
At least that’s what Zeta Petroleum is banking on. The company has amassed a choice of concessions in Romania which they believe can produce significant quantities of oil and gas.
The company’s Managing Director Stephen West told Natural Gas Europe that Zeta Petroleum’s most significant asset is the Bobocu gas field in Romania which the company was currently drilling upon. Zeta just made the announcement that it had spudded a well there on 24 July.
Other significant assets for Zeta include the Jimbolia oil field and the Padureni gas field in the Transylvanian Basin.
Mr. West explained that there had been a mad rush by other companies to try and get into the country, so Zeta Petroleum was quite lucky picking up a selection of assets before that. It’s quite hard to get assets of that quality these days.
“We’ve spent the last few years working these assets up, trying to collect all the data on them as there’s lots and lots of data available on these fields. We’ve gotten to a stage where we’ve shot our own seismic at the Bobocu as well, all of which we did before we decided to list on the stock exchange in Australia (ASX) in May of this year, raising funds to kick off our drilling campaign, essentially.”
He offered the company’s approach to dealing with historic hydrocarbons sites that had been lying fallow. The company’s Bobocu field provided a good case study for explaining that approach.
“This is an old field which had produced about 33 BCF of gas previously. It was owned by a state company and they drilled about 30 wells on this field, drilling without really understanding the geological model of the field, essentially. All they had over it was two regional 2D seismic lines, and they were basically following these lines in drilling their wells,” he recalled.
“Secondly, they were drilling these wells back in communist times and they didn’t have access to all the modern day equipment that we have access to these days. A number of the wells were not completed correctly, so they collapsed in or sanded up prematurely. I suppose it comes down to not understanding the field correctly and also not using modern day drilling techniques – you put those two together and we saw the potential for remaining reserves there.”
Zeta Petroleum had made use of the mass of well data from the 30 wells, added West.
“We also had the 2D seismic lines, which were available and we got hold of those. Off the back of that, we built a geological model – we still had gaps in the model, so we decided to invest in a 3D seismic campaign, which we shot over the whole field, to fill in those gaps. We incorporated the 3D seismic into our geological model and it pretty much changed our understanding of the field: we can see a lot of gas which the previous operator had missed and we can also see potential for gas at deeper and shallower levels from where they were originally targeting.
“We think there’s a lot of low-hanging fruit to go after on this field, but also there’s a lot of exploration potential attached to it as well,” said Mr. West.
Bobocu, he added, was the most material asset that Zeta Petroleum had.
“We’ve tried to hold on to 100% of it, which we’re currently doing, because we see it adding the most value to the company; it’s also the lowest risk asset we have as well. So we’re very keen on the asset and have just started drilling on it and should get a very good idea of the commerciality of it by the end of August.”
Zeta is scheduled to produce natural gas at its Bobocu field next year, according to Mr. West.
“The plan is to get this well down that we’re drilling now, do some test production for the next six months or so and in the meantime we’ll be working towards a development plan to get the full field in production by mid 2013.”
That’s not to say that Zeta’s other assets were not material, he said.
“Jimbolia is an oilfield in the southwest of Romania which is very interesting,” he remarked. “It has tested oil before, so it has quite a nice risk profile and we’re looking at drilling a well on that field later on this year as well. It is material to us and we’re looking to bringing in a company to partner with, so we can focus our efforts more on the Bobocu field.”
Mr. West reported that Zeta Petroleum had also recently acquired a 50% stake in the Suceava field through the acquisition of Regal Romania. “That’s a very interesting asset for us as well, because it’s on the eastern Carpathian side of Romania, which we see as a focus area for us and there’s lots of exploration potential – it’s very shallow – so we’re talking about 800-meter wells, which are quick and cheap to drill.”
He emphasized that the E&P was not using any complicated drilling techniques in Romania.
“We’re essentially drilling vertical wells using modern technology. In Bobocu, we’re targeting gas which is 99.99% methane, so it’s all very clean. We’re close to infrastructure. In terms of drilling, it’s about as easy as it gets – it’s all very conventional drilling that we’re doing here,” he explained. “When we reach the next stage of development, because of the proximity of infrastructure, it’s fairly straightforward because of the composition of the gas as well.”
He said he was thoroughly satisfied with both the fiscal terms and with hydrocarbons regulation in Romania.
“Romania is working towards becoming an unregulated market and that’s essentially driven by the fact that they’re now an EU member country; they’re also under a lot of pressure from the IMF.”
Freeing up the price could prove lucrative for E&Ps in Romania.
“The main item which is outstanding in terms of deregulation for us, as an oil and gas company, is the gas price, which is at present regulated. It’s around about $4.20/MCF, whereas the regional price is about $10-11, so it’s quite a discount to the regional price. They’ve been under a lot of pressure to deregulate that and leave it up to the market forces – I think it was last week when they legislated a deregulation process within Romania, so by the end of next year they should have a deregulated price, which is great for us.”
Romania, he explained, had two state oil and gas companies: “Petrom and Romgaz, which essentially controlled the market, and still do to a certain extent these days in Romania, but because of EU competition laws, they need to go through a privatization process as well. Petrom’s already a long way down the track, being 51% owned by Austria’s OMV; Romgaz is going through a listing on the local stock exchange this year as well, and will open itself up.
“As non-government companies, they’ll be run a lot more efficiently, rationalize their asset bases. They’ve got fields producing thousands and thousands of barrels a day and others producing five barrels a day, so logic says they’ll go through and likely dispose of the smaller fields and concentrate on larger, more material fields,” he opinioned.
“We see that as an opportunity for us, too, going forward,” added West.
Indeed, Zeta Petroleum would be looking to capitalize on smaller oil and gas fields coming onto the market in Romania.
Of fiscal terms there, he said: “They’re nothing short of excellent. We’ve got a flat, 16% corporate tax rate, and then a sliding scale royalty of anywhere up to 13.5% for production.
“If you model that through on fields in Romania, you can make a lot of money off what are traditionally smaller fields in other countries. For instance, our Bobocu field which is 44 BCF of 2C reserves – we can make a lot of money off that based on those fiscal terms.”
Financially, Zeta Petroleum appears to have solid footing.
Mr. West explained: “We’ve recently just listed on the Australian Stock Exchange (ASX), so we’ve raised $8.3 million through that transaction. We’re using some of those funds to drill our first well at Bobocu, using some of those funds to acquire and drill a well at Suceava. As I said, we’re looking to bring in a partner at the Jimbolia field. Financially we’re strong and certainly have enough money to make good on our commitments on our permits, so there’s no fiscal risk there at all.
“What we may end up doing later this year, depending on how quickly our development plan proceeds for Bobocu, we may end up fast-tracking some finance for that later on this year. Apart from that, we’re well funded and also have a little bit of production coming in from Suceava to fund our Romanian overheads,” he said.
But just how exotic was it to produce gas in Romania?
“Romania’s one of the oldest oil provinces in the world,” said Mr. West. “They actually claim to have drilled the first ever oil well, back in the early 1800s. They’ve got hundreds of years of industry there,” he added, emphasizing that Zeta Petroleum was not in Romania to find new hydrocarbon basins.
“All the basins have pretty much been proven in Romania already. We’re going into an area where there’s known hydrocarbons; the reservoir or trap risk is a lot lower than for other countries. So we’re not out there doing rank exploration, we’re essentially getting hold of fields which have been drilled before and have not been exploited to their full potential. We’re using modern technology to extract the remaining hydrocarbons from those fields, so the risk profile’s a lot lower than what you’d get in other countries – certainly not exotic.”
Now that Romania was in the EU, he explained, the perception of sovereign risk around the country had been reduced quite substantially.
While as of late Romania had been experiencing a bit of political instability, Steve West said this had not presented a problem for the oil and gas industry in Romania in terms of risk.
“I know there’s a bit of friction between the President and the Prime Minister – to put it lightly. They are in an election year as well, so I think all this bantering needs to be taken in context. It’s certainly no worse than other EU countries like Italy, where similar situations have occurred.
“We don’t see it as a risk to ourselves as a foreign investor in Romania. At the end of the day, we’re an oil and gas company producing oil and gas and Romania is a massive importer of gas. Logic says that we’re going to be very well supported by the Government to encourage production going forward.”
He offered his sentiments about what it was like doing business in Romania.
“It’s very European and I don’t see any remnants of the communist past at all. I think the important distinction between Romania and its neighbors is that Romania was only communist for one generation, so they got communism out of their system a lot quicker than some of the neighboring countries and by virtue of that it is a very European style country to do business in. We’ve certainly had no problems with the government in our dealings with them and everything seems to work well: the tax system is very transparent and the government agency for natural resources is nothing short of very supportive of foreign companies investing in the country.”
Mr. West also weighed in on opposition to hydrocarbons projects in Romania, like the moratorium on hydraulic fracturing for unconventional explorers.
He offered: “There certainly is a bit of opposition to unconventional gas in Romania, and I think that’s more of a regional issue as well, specifically to do with fraccing. I think it’s more of an education process; there’s fear mongering going on, I think, but if you do look at a map of shale gas potential in the region, you’ll see that Romania is covered in shale gas potential.
“Again, Romania is a net importer of gas. I would be very surprised if they don’t eventually allow shale gas exploration to go ahead. It certainly hasn’t stopped it – I know there was a Government decision probably about a month ago, where they had a vote in the equivalent of the senate and they had a vote in favor of shale gas exploration, so at a government level they’re very supportive. At a public level, there’s a lot of fear and it all comes down to education,” he said. “Fraccing’s not really anything new, but a technology that’s been used in conventional drilling as well.”
An accountant by background, Mr. West said he had worked at some of the larger accounting firms like PriceWaterhouseCoopers. He moved to London from his native Australia about 13 years ago. After a stint in investment banking, he joined a company called Regal Petroleum (whose wholly-owned subsidiary in Romania Zeta Petroleum purchased), and later helped set up Zeta Petroleum in 2005.