It was just 8 years ago that Canada's Bankers Petroleum (BNK-TSX) began developing one of Europe's biggest oil fields – in Albania.
The main reason for that – Albpetrol, Albania's national oil company, lacked the resources necessary to develop the country's huge oil resource.
And in those 8 years, Bankers' stock has enjoyed two big runs.
So what will happen now that Albpetrol has been sold to the highest bidder—an Albanian tycoon with deep ties to the government and the regional energy elite.
The answer is a cocktail of optimism and uncertainty, with a heavy dose of geopolitics. The sale of Albpetrol has three clear winners:
1. The Albanian economy
2. Western gas pipeline ambitions
3. A controversial Albanian tycoon
But the outcome is less clear for Canadian energy companies that have been the backbone of Albanian oil. Other Canadian juniors operating in Albania include Stream Oil and Gas (SKO-TSXv) and Petromanas (PMI-TSXv).
On October 3, Albanian Prime Minister Sali Berisha announced that a private, US-based consortium Vetro Energy had won the tender for Albpetrol.
The price: €850 million—but the actual assets were only valued at one-third of that price shortly before the tender process opened on 7 September.
What will Vetro Energy actually get for nearly $1.2 billion? Quite a lot, under the surface.
While Albpetrol maintains only 5% of the country’s oil field shares and operates only one oilfield, Amonica, the government took steps right before the tender was opened to sweeten the deal.
Legislation governing Albpetrol was amended, granting the new owner licenses to build a refinery and to transport and distribute natural gas. This addition to the Albpetrol dossier is worth an estimated €20 million in revenues annually.
In total, Albpetrol’s above-ground assets, including oil and gas fields, are worth about €322 million, and Vetro Energy has won the right to explore and exploit these assets for 25 years.
Calgary-based Bankers Petroleum was one of the six bidders for Albpetrol, but its €304 million offer was turned down. Stream Oil and Gas did not participate in the tender.
Was Bankers Petroleum disappointed? Yes, but there is a silver lining. According to Mark Hodgson, Vice-President of Business Development for Bankers, the high price tag placed on Albpetrol raises the estimated value of Bankers’ own assets.
"If you look at the assets of Albpetrol, a good portion of that value is future royalty payments [from Bankers Petroleum]," Hodgson told OilandGas-Investments.com in an October 9th interview, suggesting that the value attributed to Albpetrol's assets with the nearly $1.2 billion bid immediately raises the estimated value of Bankers' own assets.
Albpetrol was on a downward spiral during the post-independence transition period of the 1990s and was in dire straits by the time Bankers Petroleum entered the market in 2004, acquiring the lion’s share of Albpetrol’s key oilfield holdings.
Since then, Bankers Petroleum has been responsible for a massive increase in Albanian oil production—from 600bpd in 2004 to 13,000bpd in 2011. Average third-quarter 2012 production from the Patos-Marinza oilfield was 15,616 bpd.
The company’s $450 million in investment in the Patos-Marinza field alone between 2007 and 2011 has increased proven and probable reserves, making it one of the biggest onshore fields in Europe. Probable (2P) reserves are now estimated at 227 billion barrels, compared with 100 million in 2006.
In 2011, Bankers Petroleum acquired Albpetrol’s remaining shares in the Patos-Marinza field. That same year, it began re-development in the Kucova field, with production targets of 2,250 bpd for 2015. Exploration in Block F, next to Patos-Marinza, represents an additional $215 million investment and is scheduled to begin in the first quarter of 2013.
Acquiring Albpetrol would have been ideal, giving Bankers control over the extraction, processing and distribution of oil and gas. It was, however, up against the formidable force of Albanian oil tycoon Rezart Taci and his US partners.
The Chicago-based Vetro Energy consortium consists of Singapore-registered YPO Holdings, owned by Taci, and Vetro Silk Road Equity. The deal saw YPO gain a 51% share in Albpetrol, with a 49% share for Silk Road. On October 5, two days after it was announced that Vetro Energy won the bid, the consortium stepped out publicly with Taci, introducing him as the man behind the deal.
Taci, whose main business empire hinges on the Taci Group and Taci Oil, also owns the country’s only refineries, the largest chain of gas stations and a key TV station which boasts more than 10 million viewers. He is a personal friend of Silvio Berlusconi and a member of Berisha’s inner circle.
In 2009, Taci managed to acquire Albania’s state-owned refineries (ARMO) for €128.7 million by having a previously unknown Swiss company close the deal. Shortly afterwards, he re-registered ARMO under the Taci Group.
So where does all of this leave companies like Bankers Petroleum and Stream Oil and Gas, who have developed Albania’s oil production capacity.
Bankers Petroleum is “not overly concerned,” said Hodgson, noting that “as a state-run entity, Albpetrol was often bureaucratic and slow, and its decisions were often politically rather than financially motivated.”
"We're excited to be working with a new party with similar motivations, to expand Albanian oil production and increase revenues," he said.
On the subject of Taci, there was more reservation. Hodgson said that Bankers Petroleum had a “long history” with the Albanian tycoon, and that history was not without its problems, particularly concerning the timing of payments for crude deliveries.
ARMO has had difficulties keeping current on their payments to Bankers, according to Hodgson. “We’ve had payment delays in the past and we’ve worked hard to resolve them with [Taci].”
Albpetrol’s newfound power, however, should not be underestimated. After all, Taci is part of the prime minister’s inner circle and he has worked to secure his hold on Albania’s energy industry at an even pace.
The acquisition of ARMO, to complement his chain of gas stations was a logical step. Another logical step would be to win back some of Albpetrol’s lost oilfields, particularly since they have now been successfully developed. While this latter ambition would be legally out of Taci’s reach as Vetro Energy will be bound to honor Albpetrol’s previous agreements, the Albanian tycoon could make things very difficult for his foreign competitors if he chose.
Essentially, he will have the power of Albpetrol, Berisha and a key link in the future of the Trans-Adriatic pipeline behind him. And when Taci makes an acquisition, no one sees it coming. This is his modus operandi. His involvement is only revealed after the deal is done.??
What if relations with Taci went sour
One concern for both Bankers Petroleum and Stream Oil and Gas could be how a mounting battle over non-payment of corporate income taxes plays out. Presently, the opposition Socialists are attacking the two Canadian companies for allegedly taking unfair advantage of a 1994 law that exempts them from paying corporate income tax as long as investments outpace profits.
Bankers insists that it continues to reinvest revenues in development. Certainly that has been the case, most recently in the Kucova fields. Despite Socialist claims, audits are conducted frequently to this end. And Taci is not going to help the Socialists.
Regardless, it remains an issue of contention that could be easily manipulated through the media. Bankers is also dogged by recent allegations that its drilling caused a series of earthquakes in June which resulted in structural damage to (illegally built) homes in the rural area of Zharres, followed by protests and an attack on Bankers facilities. This issue could also gain momentum, particularly through the media, in which Taci owns significant stakes.
For now, these are hypothetical situations and Bankers Petroleum does not view Taci as a threat to their future operations. As Hodgson reminds us, “[Taci’s] business is very much dependent on our own business.”
And indeed, business is good. Bankers’ third-quarter output has risen 18% and sales agreements have been signed for most of its 2013 production. Shares were up 3% at C$3.18 on October 4 on the Toronto Stock Exchange, boosted, rather than shaken, by reports of the sale of Albpetrol.
From a geo-political perspective, the acquisition of Albpetrol by Vetro Energy resounds all the way from Albania and Azerbaijan, to Western power corridors, eyeing an opportunity to further the plans of the Trans-Adriatic Pipeline (TAP).
TAP will carry Azerbaijani gas across Greece and Albania to Italy. It is a key strategic element of Europe’s plans to reduce its dependence on Russian gas and the stranglehold Gazprom has on Europe’s supplies and distribution network.
Vetro Energy will guarantee the West additional gas supplies for the TAP along with a convenient place to store those supplies to boost European energy security.
From the perspective of the TAP, Albpetrol’s value far exceeds the estimated value of its tangible assets. There is another deal sweetener, too: The new owner of Albpetrol will also be granted the use of the country’s vast salt mines for natural gas storage. The largest of these salt domes, at Drumea, can hold up 2 billion cubic meters of natural gas, or 70.6 billion cubic feet (bcf).
Essentially, the privatization of Albpetrol will render Albania a warehouse for TAP gas supplies, strengthen ties between Albania and the US, and help Albania—and the Balkans—keep a safer distance from Russian dependence.
Gazprom did bid on Albpetrol, but it has fallen on hard times in the face of the US shale gas boom, and offered up a paltry $52 million.
Even before the tender results were announced, on September 27 officials from Albania, Azerbaijan, Greece and Italy signed an intergovernmental MOU in New York on the TAP pipeline.
By Charles Kennedy for the Oil & Gas Investments Bulletin