"Trinidad is like the UK North Sea 25 year ago," Joel 'Monty' Pemberton tells Investors Chronicle. "It's an extraordinary hydrocarbon province - and a real cash cow for the half dozen major oil companies that dominate production there - but it needs independents to come in and work with the existing players to monetise assets that don't meet their development criteria in terms of size."
Of course, the Trinidadian chief executive of Trinity Exploration & Production (TRIN) has a vested interest here. His company is one of a handful of companies listed on London's Aim busily snapping up licences and drilling oil wells in the area.
Just seven miles off the northeast coast of oil-rich Venezuela, the islands of Trinidad and Tobago have a long and prolific history of oil and gas production dating back nearly a century. But the winds of change are blowing across its sandy shores and, after decades of production, gas reserves are rapidly diminishing and oil production has declined to a level where the state refiner is operating at barely half its capacity.
With the oil and gas industry accounting for 44 per cent of the country's GDP and 83 per cent of its exports, the government is justifiably eager to increase exploration and develop new projects.
Drill, baby, drill
For now, deep-pocketed multinational oil companies are leading the charge. Six offshore drill rigs are currently operating in Trinidad, a stark contrast to mid-2010 when there was just one. Five of the rigs are contracted by the majors such as BP (BP), BG Group (BG.), Centrica (CNA), Repsol (Madrid: REP) and US heavyweight EOG Resources (NYSE: EOG), as well as Trinidad's state-owned operator Petrotrin. But one of the rigs in the shallow-water Galeota block off Trinidad's southeast coast is drilling for Mr Pemberton's Trinity Exploration.
And Galeota could be the start of a new type of oil and gas industry in Trinidad. While the 65:35 joint venture between Trinity and Petrotrin is unsuitable for the majors, the licence offers small-scale production growth with follow-on exploration potential that is ideal for small- and mid-sized exploration and production (E&P) companies. Trinity is conducting an aggressive work program there to revitalise existing production and has ambitious plans to drill five wells close by the field in 2013 and 2014, targeting new resources that would be straightforward and cost-effective to develop.
"Longer term, we also want to help the majors monetise their smaller assets here", says Mr Pemberton. "There are dozens of discovered fields which would likely be profitable to develop, and the industry is ready for the requisite changes to ensure that production is optimised for the benefit of the citizens of the country."
X marks the spot
Most of Trinidad's undeveloped oil and gas fields lie in the prolific Columbus Basin, off the island's southeast coast, past Galeota. The area benefits from excellent infrastructure, but almost all of the licences there are controlled by the majors. It's largely the same story at the North Coast Marine Area (NCMA), 40 kilometres to the north of Trinidad, made up of six large gas fields controlled by a consortium involving BG, Petrotin, Petro-Canada and Italy's Eni (Milan: ENI).
Two other areas have started to open up to small players, however. They are the Gulf of Paria, a shallow-water area immediately off the west coast, and onshore Trinidad. And it's onshore where most of the new action is. Besides Trinity, two Aim juniors, Leni Gas & Oil (LGO) and Range Resources (RRL), have operations there and both are rapidly ramping up production.
Range is the bigger of the two in terms of production and market capitalisation. The company is almost two years into an ambitious exploration and development program that it says could lift production from around 800 barrels of oil per day (bopd) currently to 8,000 bopd by 2015. That sounds impressive, but we're not getting overexcited. When Range bought the assets two years ago, production was around 700 bopd. Nevertheless, the company plans to drill up to 40 new wells per year on its licences with its in-house fleet of 10 used drill rigs. Part of the problem up to now has been finding enough spare parts for the old rigs. A sharp drop off in flow rates has also been an issue.
Still, Leni is having better luck growing production. Output from its main Goudron field was just 30 bopd in October, but that has since increased to over 300 bopd. Rather than drilling new wells, it is increasing production by conducting well workovers and re-completions on roughly 90 underperforming wells drilled by a previous operator. In a very positive show of faith in its licences, Leni secured $50m (£32m) in debt funding last month to ramp up the program.
Caribbean life is taxing
It's not all sunshine and pump jacks in Trinidad, however. The fiscal regime is onerous to say the least and is a major deterrent for new companies setting up shop there. The headline corporate tax rate for energy companies is a steep 55 per cent and state royalties generally stack up to about 12.5 per cent of revenues. There's also a sliding scale supplementary petroleum tax of up to 33 per cent of revenues for offshore projects and 18 per cent for onshore, albeit with an allowance for state royalties.
Recently, however, the government has indicated it could be flexible with those rates in order to encourage more activity. Remember, activity levels in the North Sea took off when George Osborne introduced tax breaks last year. Each of the operators that Investors Chronicle spoke with said they were in talks with the government and Petrotrin regarding something similar, especially for mature offshore fields and smaller project developments. The Ministry of Energy has promised to review the competitiveness of Trinidad's fiscal regime and has established a committee to report ahead of the October 2013 budget. And the government, which follows the Westminster model and upholds the traditions of parliamentary democracy inherited from Britain, is usually true to its word.
IC VIEW:
Trinidad may not turn out to be the next North Sea given its relative maturity, but there are serious opportunities for growth there, especially for smaller explorers. And the region is nowhere near as risky as other emerging hotspots such as Kurdistan, Morocco, French Guiana, and some parts of Central Asia and East Africa, yet is just as prolific in terms of hydrocarbon accumulations. Overhauling the current punishing fiscal regime would be a huge boon, too, and positive changes could start to filter through shortly.
| FAVOURITES: |
| Trinity is the leading junior independent operating primarily in Trinidad and we see it as offering the best exposure to production growth potential and high-impact exploration. It currently produces just under 4,000 bopd from a diversified mix of assets in the Gulf of Paria, the Galeota block and onshore Trinidad, and expects this to rise to 5,000 bopd by the end of the year. Moreover, there should be plenty of catalysts for share price appreciation over the coming months, as the company plans to drill two exciting offshore wells beginning in October. Leni Gas is a palatable second choice. A recently announced joint venture with a local company to target the deep exploration potential of their shared licences looks promising, but is subject to a further farm-out to a company that will actually pay for the drilling. |
| OUTSIDERS: |
| At first glance, Range seemingly offers the most potential given its ambitious production targets and heavy drilling schedule. But recent operational and geologic problems have put these in doubt. Furthermore, we think the company is simply spread too thin. Besides its Trinidad operations, Range also has projects in Georgia, Colombia, Texas, Somalia, Guatemala, and in Russia where it has just agreed a major, dilutive acquisition that will chew up a lot of time and money |
