Introduction
Albania is not typically on the European tourist route. Several decades of floundering economic growth and isolation under a communist dictator will do that. Now with one of the lowest per capita GDP's in all of Europe, the former communist country has struggled to find its footing in the post-Soviet era.
Albania suffers from awful infrastructure, which has deterred foreign investment. Albania is rich in oil reserves, but has been unable to fully capitalize on them for quite some time. Large companies like Occidental Petroleum (NYSE: OXY), Royal Dutch Shell (RDS.A), and Chevron (NYSE: CVX) rushed into Albania after it swung its doors open when the Soviet Union collapsed. But violence, political instability, and the high levels of investment needed to kick start Albania's nascent oil industry scared many of the largest oil companies away. Especially at a time when oil prices were low - the late 1990's and early 2000's - Albania didn't seem to be worth the risk.
Much has changed since then. The Albanian government is seeking to build an attractive investment climate, with a competitive tax regime and laws ensuring the safety of capital in country. Infrastructure has improved in recent years, and political stability is better than at any time since the transition to democracy.
Having been left behind the rest of Europe, and tucked away in the continent's southeast, Albania offers a resource-rich country that is incredibly underexplored. Very…
Introduction
Albania is not typically on the European tourist route. Several decades of floundering economic growth and isolation under a communist dictator will do that. Now with one of the lowest per capita GDP's in all of Europe, the former communist country has struggled to find its footing in the post-Soviet era.
Albania suffers from awful infrastructure, which has deterred foreign investment. Albania is rich in oil reserves, but has been unable to fully capitalize on them for quite some time. Large companies like Occidental Petroleum (NYSE: OXY), Royal Dutch Shell (RDS.A), and Chevron (NYSE: CVX) rushed into Albania after it swung its doors open when the Soviet Union collapsed. But violence, political instability, and the high levels of investment needed to kick start Albania's nascent oil industry scared many of the largest oil companies away. Especially at a time when oil prices were low - the late 1990's and early 2000's - Albania didn't seem to be worth the risk.
Much has changed since then. The Albanian government is seeking to build an attractive investment climate, with a competitive tax regime and laws ensuring the safety of capital in country. Infrastructure has improved in recent years, and political stability is better than at any time since the transition to democracy.
Having been left behind the rest of Europe, and tucked away in the continent's southeast, Albania offers a resource-rich country that is incredibly underexplored. Very few people know that Albania has Europe's largest oil field, and several more fields that are yet to be tapped.
Privatization
The Albanian government is moving to privatize its state-owned oil company this year, which will open up new assets for development. Such a move has been considered before, but sales were cancelled in 2013 when the previous government opted against privatization. Albania is sitting on more than 3.3 billion barrels of oil, about 300 million of which can easily be developed, the government says.
Albania's Prime Minister Edi Rama said on March 17 that the government will auction off 13 blocks for development, both onshore and offshore. The first three will be put up for sale in the near future. The government is trying to sweeten the pot: oil companies will be exempt from Albania's value added tax, and will be given more flexible timeframes for development, such as a production period extended out to 30 years.
When privatization occurs, it will open up the doors to more players and more investment.
Small Players Only Game in Town Right Now
Up until now, Albania has only been explored by relatively small players. Bankers Petroleum (TSE: BNK), a Calgary-based oil company, is trying to resuscitate the Patos-Marinza oil field, which is the largest oil field in Europe. It was once one of the most productive as well - a predecessor to BP (NYSE: BP), Anglo Persian Oil Company, brought it online in the 1930's. But the Patos-Marinza went into disrepair after the communist leader Enver Hoxha pulled Albania into several decades of isolation and poverty. Now, Bankers Petroleum has a 100% working interest in the field, which holds an estimated 191 million barrels of oil. A little farther east is the Kucova field, also controlled by a 100% working interest by Bankers. The field holds around 12 million barrels and Bankers drilled its first horizontal well there in 2014.
Bankers Petroleum is Albania's largest oil producer and largest foreign investor. It has ramped up its production portfolio to over 20,600 barrels of oil per day, having posted a 17.5% growth rate over a two-year period between 2013 and 2014. The Achilles heel of economic development in Albania has been poor infrastructure. That remains an obstacle for oil producers in the country. Bankers has plans to build a pipeline that would tie in its two big oil fields and pipe oil to the port of Vlore on the coast. It also is considering investing in a port expansion there to handle more crude.
The downturn in oil prices has likely scared away some prospective companies. But Bankers' operations have good economics - the company says it can profitably produce oil in Albania even when Brent prices are at $50 per barrel. Its drilling program for 2015 is fully funded with cash on hand.
All told, Bankers hopes to boost production to 50,000 barrels per day by 2020.
Petromanas Energy Inc. (CVE: PMI), a much smaller oil company (also based in Calgary), is active in Albania as well. Former Supreme Allied Commander of Europe, U.S. General Wesley Clark, is on the Board of Directors at Petromanas. After "saving 1.5 million Albanians from ethnic cleansing," General Clark has returned to the Balkans in order to build up Albania's oil industry.
Petromanas has a stake in two promising blocks onshore, and has demonstrated positive results from some of its test wells. At its Shpirag-2 block, Petromanas achieved flow rates of about 800 to 1,300 barrels per day of light oil and 2 to 5 million cubic feet of natural gas. Petromanas' projects are backed by $200 million investment from Royal Dutch Shell (NYSE: RDS.A), validating the company's potential and asset base.
Petromanas estimates it is holding acreage that could produce 140 million barrels of oil equivalent, with much of it in the form of light oil. The company plans on using the pipeline that Bankers Petroleum is looking to build, connecting them to the Vlore port. Petromanas is confident about its acreage, whose geological features resemble those of productive areas in Southern Italy just across the Adriatic Sea. The Val d'Agri oil field (pictured below), run by Italian oil giant Eni (NYSE: ENI) and backed by Shell, produces around 85,000 barrels per day. That provides some level of confidence that Albania can grow to be just as productive. Petromanas plans on spudding its Shpirag-3 field in 2015.
TAP
Another thing to consider is the construction of the Trans Adriatic (TAP) pipeline, a major international natural gas pipeline that will run from the Caspian Sea to Italy. Albania is an afterthought for this project, which aims to help Europe find alternative sources of natural gas, reducing its dependence on Russia. But the pipeline will be constructed across Albania in order to reach Italy, with its path set to run near much of Albania's most prospective oil and gas fields. Albania may be able to tie in its gas to TAP, providing an outlet for exports. The TAP pipeline is slated for completion in 2018.
Conclusion
The fall in oil prices have no doubt dimmed the appetite for investors and oil companies to develop new frontiers. Albania certainly had higher interest a year ago when prices were over $100 per barrel. Nevertheless, Albania is massively underexplored and its resources base is wholly underdeveloped. That offers the few private companies an enormous upside if they can deliver. The pending privatization also works in their favor. New prospective assets that have not been drilled will be opened up. Long having been a backwater, Albania could finally realize its potential as a significant oil-producer, allowing it to join the ranks of other developed European countries.