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Emperor Oil-A Rags-to-Riches Oil Story Unlike Any Other

By Keith Schaefer | Wed, 19 December 2012 19:02 | 0

It took five years for Africa Oil (AOI-TSX) to be an overnight success.  The stock ran from $2-$11 in the spring of 2012 when they made a big oil discovery in Kenya, East Africa.  But that exciting chart spent five years bouncing between 50 cents and $3 and tested the patience of every investor.

It makes what Emperor Oil [EM-TSX.V] is doing seem remarkable—going from a standing start at 10 cents/share earlier this year, to being in production in just over one year in Africa—and potentially thousands of barrels a day within Year 2. 

And initial production will be onstream at a cost less than $1 million per well—in the middle of high-cost Africa, where wells can be $60 million and take over two years to complete seismic and drilling.

Emperor director John McLeod was able to leverage his knowledge, success and contacts to secure a large land package in Africa that had already been successfully drilled by big National Oil Companies (NOC)—who later left the area during time of conflict.  With peace now in place, Emperor has the ability to leap frog production and cash flow quickly.

Emperor management quickly raised $12 million and is now convinced they’ll be producing several hundred barrels a day at a very low cost—by the end of February 2013.  That’s next quarter.

Oil development doesn’t normally work that fast in Africa.  But Emperor’s McLeod had the right connections to gain partial ownership in a land block with historical production—greatly reducing risk.

In fact, their first three wells will be “work-overs”, where they re-enter existing wells—this costs a fraction of drilling a new well.  They expect each re-entry to cost only $750,000 each.  These wells are already bona-fide discoveries.

Management expects to tackle re-entry within 3-4 weeks of the exchange’s approval of the latest 51-101 report that gave a healthy but conservative estimate of almost 95 million barrels of oil equivalent (MMboe)—on only a small, 20 km2 area of the 10,000 km2 property.

It’s going to be one of the cheapest, fastest rags to riches stories the industry has ever seen in Africa.

Past data on these original three wells showed potential for several thousand barrels a day each—there are nearly 200 producing wells nearby in the basin.  So infrastructure is good.

The geology is also very good, says McLeod: “It’s like drilling a snowbank.”

Production will initially be trucked, keeping all three wells to 2,000-4,000 barrels a day until a pipeline is completed to them in.  Emperor has 42.5% working interest.

Once the pipeline is installed, that production could ramp up to a potential10,000 barrels a day, per well. The latest estimate given by management is that this pipeline will be constructed and flowing by Q3 2013. That means that the limitations of trucking the oil will be around for only six months or so.

Emperor Oil's Block 7 Oil field in Sudan

A fourth well is also scheduled, which management estimates will cost less than $3 million to drill and complete. This is a lot cheaper than other African plays due to:

-the shallower depth of the reservoir,
-easy terrain,
-access to water and other infrastructure while they bring in the equipment.

And unlike other African plays, this project gets into production quickly. Cash flow is coming early in the company’s story. This oil is expected to fetch close to full Brent prices, despite only being 20-21 API—this mid-grade crude is good blend stock for more sour crudes, and management expects it to  sell for only $5-$10 less than Brent.

In total, Emperor holds 42.5% of a 10,000-km2 property known as Block 7 located in Sudan. Once the initial four wells are completed, the company has already identified 6 more prospective oil fields that have yet to be drilled, all of which are geologically similar to the three previously discovered wells on the block. In addition to this parcel, the company has an option to participate in a second block (Block 11)

Going forward, Emperor will be partnered with SUDAPET, which is the state-owned oil company of Sudan, which holds 50%. This is standard practice in this country, as instead of a royalty agreement, SUDAPET just becomes a 50/50 partner on each project.

Technical management, and politically connected management is key for African oil producers. Inside Emperor’s board room is a stacked deck of Directors and Management with international experience. Among this lineup, most notably is Director, John McLeod, who also serves as Director of Heritage Oil (HOC-TSX), which went from $1 to $12 also on African success. McLeod’s resume has plenty of history in Sudan as well, where he actually trained many of the current Ministry of Energy personnel.  

McLeod’s involvement in the country goes back to 1991, and has seen many successes through his involvement there. Among McLeod’s Sudanese successes was building production up to almost 300,000 barrels of oil per day for another junior, before later selling its interest to Talisman Energy. After having been involved with projects in Georgia, Chad, and Egypt, McLeod still says Sudan is one of the best places to do business.

“Khartoum (the capital of Sudan) is one of the safest cities I’ve ever been to,” says McLeod. “For a fundamentalist Islamic society, Sudan is quite modern. In the 1990s, we trained plenty of skilled workers, so there is a lot of talent still there that we had a hand in developing.”

“SUDAPET is a good partner. We know that the government needs to oil to thrive, and the map has changed since I was there before. They’re great to deal with.”

BLOCK 7

Previous operators, Malaysia’s National Oil Company, Petronas, and China’s CNPC, spent $120 million on Block 7 on work that includes 165,000-km2 of 3D seismic data, as well as a very expensive 2D data set. There have been three “hits” into two different reservoirs. Through this work, they identified a 10km long structure with two discovery wells on it.

Petronas and CNPC drilled the initial three shut-in wells that Emperor plans to re-enter. Two of the wells were drilled in 2007 and the other in 2005. Equivalent wells of this nature that fall on the Southern end of the Block (within South Sudan), typically test between 10,000-15,000 barrels a day, and easily flow between 6,000-8,000 barrels a day, says Andrew McCarthy, CEO of Emperor.

Even in North America, nobody gets 6,000 bopd on a $3 million well.  If the well meets anything close to projections, it will pay out in just over two weeks.

On Emperor’s Block 7, Chapman Petroleum Engineering was retained to do a reserve report. The report calculated the Rawat Basin Oil Field’s reserve base to hold 94,709,000 gross barrels of oil. Also of note in the report was the identification of the 6 undrilled prospective oil fields, which estimates an additional total of 567,000,000 barrels of Petroleum Initially In Place (PIIP).

Once the three initial wells are flowing, the next big task is physically connecting them to the/ main artery pipeline 60km away. The project will be large-scale, but worth it, despite the fact that they literally have to drill beneath the Nile to connect it up. Production is expected to flow through this tie-in by Q3 2013.

SUDAPET wants to recoup the production that it lost when South Sudan seceded—peacefully. Sudan shares a port for oil exports with its newly separated neighbour in South Sudan. When united, both countries were producing 460,000 barrels a day. After the split, nearly 76% of the total production went with the South. Policy makers in Khartoum obviously want to make up the loss.

It’s worth noting—though the two countries get along now, there have been tensions in the past that have hindered production.  As recent as this past Spring there was a skirmish between the North and South over the amounts of oil allocated to each side, the costs involved, and the usage of the pipeline. But, that has since been resolved.

“It was very quickly settled,” says Andrew McCarthy, President and CEO of Emperor Oil. “In many ways, I think it’s indicative of a lot of the changes that we’re seeing in the Middle East and throughout Africa.”

The disagreement lasted 6 weeks, and saw revenues halt, along with a stoppage in domestic energy supplies. As a country that uses a lot of energy, Sudan and its new southern neighbour needed to resolve things quickly. With no revenue, and no energy, both sides were able to see eye-to-eye a little speedier than normal.

This is what oil production and cash flow can do. It brings the promise of future funds, while causing former enemies to work together for a common good.

“We’re seeing a lot of the bigger companies of the world starting to enter into these countries, and begin to help them to develop their resources,” says McCarthy. “In our case, it’s very different for a junior company to become involved than one that is as large as Talisman was when they first came here. I believe that makes us less susceptible to bad PR, and as a result of that, I think that whatever we create as a result of this venture will be reflected as beneficial.”

THE ROAD TO PRODUCTION

The two things a company must assess before going into Africa are: Who is going to run the project on a day-to-day basis; and Who has a pipeline to the political heads that can get problems solved instantly?

There’s a surprising amount of people in Calgary with African experience to draw upon. McLeod would be at the top of that list, as he’s been intensely involved in this region before, and knows what it takes to see things through. Also joining McLeod on the technical side is George Fulford, who had worked with McLeod in Sudan before in the past and has quite the record to show for it. Over Fulford’s career, he has been responsible for developing and spotting approximately 90 successful oil well locations in Sudan.

Operating in Sudan or North Africa can be tricky, and requires foresight. If you need something to help your operation, you need to have thought about it 6 months prior, and have it stored and ready to go when needed. This is very different than say Alberta, where if you forget something you can get it right away.

McLeod’s legacy is highly respected in Sudan, having often times been labeled as the best operation the country has ever seen, according to SUDAPET. McLeod himself mentored many of the people now in higher-up positions in government. This is an integral political pipeline that can boost Emperor’s chances down the line.

Now that the 51-101 report is completed, the joint venture won’t be wasting any time to get started. It’s not that far fetched to believe that the drilling rigs will be moving into place to start 2013.

The turnaround time is significantly shorter than what African Oil had to go through, and is far more production ready than Statesman Resources [SRR:CA] that is also dealing in Sudan right now on Block 14.

What The Street will probably want to see is, “HOW can Emperor deliver wells in Sudan with only a $2-3 million price tag?” The Emperor team feels that it can prove this quite easily, because they aren’t drilling in the middle of nowhere.

These will be shallower holes, which should go smoothly due to the terrain that McLeod compares to “drilling a snowbank.” Compared to his past projects in Sudan, this will be a smaller basin that won’t get your 250,000 barrels a day, but instead will provide quick production on built-up reserves.

Planning for the trucking operation has already commenced. If Emperor can quickly get even 2,000 barrels of production onto the trucks to start, then production and company coffers could build quickly.

Once that major pipeline is complete, they’re hoping to open up the spout a lot wider, ramping quickly up to a possible gross 16,000-40,000 barrels a day. After that, they’ll have plenty of room and cash flow to work with to grow production from the drill bit.

Going from zero barrels to a few thousand barrels of production within a few months is nearly unheard of—even in North America. The fact that this is happening in North Africa is remarkable . It’s like the AOI story, with the fast-forward button firmly pressed. They’ve got the land, they’ve got three proven wells, and they’ve got the team with enough Sudanese experience and connections to get this done right.

By. Keith Schaefer

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