Ascent Resources

Source: Energy Digital

Date :10/23/2007 8:32:07 AM

Exploration closer to home

Managing Director Jeremy Eng tells James Hurley why Ascent Resources is focusing on lucrative, previously overlooked onshore European oil and gas projects

Written by James Hurley & Produced by Alex Smith

Since commencing operations in 2005, AIM listed European oil and gas exploration and production firm Ascent Resources (AST) has built a portfolio of some twenty oil and gas projects across Europe - in Hungary, Switzerland, Spain, Italy, Slovenia and the Netherlands. With the exception of the Netherlands, all of the company’s projects are onshore, where operating costs are substantially less than they are offshore. Ascent Resources aims to build value through an active exploration, drilling and development programme and by bringing some of these projects through to production.

Jeremy Eng joined Ascent at the end of 2004, and became Managing Director in March 2005. “When I was introduced to the company, it had only one property – the Gabon onshore minority interest which used to belong to Hardman Resources. I was invited in to take part in a big opportunity - onshore oil and gas in Europe.”

This strategy was informed by the widespread availability of prospects and attractive exploration and development costs. “There were a lot of things that had been overlooked onshore in Europe,” Eng explains. “The board was quite happy to move in that direction so we sold the Gabon asset, keeping a net profit interest so that we didn’t have any further cash exposure in that project, and used the proceeds along with a small placing to acquire a substantial portfolio of projects throughout Europe.”

As Ascent was looking to expand its portfolio, it was fortunate enough to encounter a quiet market onshore. “Nobody was looking; we put together a substantial part of the portfolio in 2005 when there was very little competition. In Hungary for example, a significant proportion of the prospective acreage was unlicensed. Now there is basically none left, the prospective and even some of the non-prospective areas are all taken. That gives a good idea of how competitiveness has changed onshore,” he says.

Eng, who has 23 years’ worth of experience in the oil and gas sector, says that he finds it extraordinary that so many high quality onshore prospects had been overlooked in Europe. “While the scale of it is quite small - you’re not going to get a massive find - the profitability is very good.”

Ascent found that working onshore gives the company the opportunity to enjoy the kind of margins offshore operators can only dream of. “The transportation and the operating costs are much cheaper because most of Europe has both oil and gas pipelines already going through it, or in any case every territory has access to a local refinery.”

The same principle applies to operating costs, as Eng explains. “We’re drilling in Italy paying €10,000 a day for the rig whereas the guys who are working offshore are paying at least €200,000 a day - but it’s the same oil and gas we are chasing. Plus, we don’t have to charter a helicopter to get to the rig; we can just jump in a hire car and not even a four wheel drive at that.”

Royalties and Taxation Issues

While a number of growing AIM listed exploration and production companies have set off looking for offshore oil and gas finds in Africa and South America, working closer to home also has advantages when it comes to the tax regime and political climate that the company experiences. “We’re subject to government royalty which averages about 12 percent of the total take. Everything else is essentially corporation tax, so the tax regime is not a production sharing agreement, which a lot of the African and Far Eastern regimes are.”

Eng cites the example of the vastly different tax regimes in Italy and Tunisia, which share a common sea border. “In Italy the net revenue interest for the company is 93 percent. On one side of the median line there’s 7 percent offshore royalty, but on the Tunisian side the net revenue interest is about 48 percent because it’s a production sharing contract. Yet the costs are the same so in Italy it’s a much more favourable regime. Everything we do, apart from Switzerland and Hungary, is in the Euro zone, so we don’t have any currency and minimal political risk. The laws are pretty stable.”

Working in Europe clearly brings Ascent a number of key strategic advantages, yet it also brings a significant challenge for a growing company of Ascent’s stature. “One of the downsides of Europe is that it takes longer to get to production because of environmental regulations. However, proving reserves is what will give us the initial value and then production will come afterwards,” says Eng.

Ascent expects to be producing next year in Hungary both from on its Nyirseg PEN-104 gas discovery drilled last year and from the Bajcsa gasfield redevelopment in partnership with MOL, the Hungarian oil and gas company. For the PEN-104 complex, that would represent an impressive turnaround time of less than two years from discovery to production.

Acquisitions & joint ventures

The increase in European exploration activity over the past two years has led to a shortage of drilling contractors, especially in Italy. Ascent recently tackled this by acquiring a 22.5 percent interest in Italian drilling contractor Perazzoli Drilling. The acquisition provides Ascent with access to Perazzoli’s rigs enabling it to more efficiently schedule the Company's exploration and appraisal drilling programmes on its European gas and oil portfolio, as well as providing additional revenue.

"We have over 20 projects in our portfolio and the seven wells drilled to date have been on only four of these projects. These first wells were the easier shallow wells. The next wells are generally deeper and target more prospective and substantially larger targets. Market conditions in Italy at the moment make taking a strategic interest in an Italian drilling company very advantageous to Ascent. Not only does it allow us to drill at a time convenient to us but it will also contribute to revenues," Eng says.

While Ascent only operates in areas where there is proven oil and gas, the twenty projects that Eng mentions are distributed throughout a number of territories. “We very much have a spread of projects so not all the value is in one place. We’re spread through six countries at the moment. On a country by country basis we now have to decide if we operate our own production or whether we leave it to the local production companies and keep a minority share for cashflow,” Eng explains. Currently, Ascent retains operator status in the majority of its projects, allowing it to optimise work programmes.

However, in Hungary, Ascent Resources has a joint development and joint operating agreement with Hungarian company MOL, for the redevelopment of the Bajcsa Gasfield. The redevelopment project is designed to recover additional gas reserves through the horizontal re-completion of existing wells. The JV has already completed extensive reservoir and horizontal well studies and will jointly plan and implement the drilling of the new wells, which will use Rotary rigs already under contract to MOL. Incremental production will be shared between MOL and PetroHungaria.

“Working in an existing producing field provides additional proven reserves to the Group, and this JV has the ability to immediately sell produced gas without having to wait on new development approval,” says Eng. Similar opportunities in the surrounding area leave the company well placed to add further projects to its portfolio.