The International Resource Journal: Central Petroleum

Central Petroleum
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admin on 24 February, 2010 10:59:00
 
Our story begins back in central Australia, 1998. Oil is trading at around US$12
per barrel and the market has certainly seen better days. Analysts blame this
price on the lifting of commercial restrictions on Iraq oil exports and the
surplus supply in international markets, and investment in the industry is
subdued.
Scouting potential amidst this bleak period was John Heugh, Managing Director at
Central Petroleum Limited (ASX:CTP). Heugh, an oil and gas explorer from Perth,
Western Australia, decided to do something a little unusual. IRJ spoke with
Heugh about the founding, the growing, and the quest to reach production of
Central Petroleum today.
Creating Central Petroleum
Heugh, a geologist by training, had just finished attempting to float a gold
company which, along with the gold market, was ruined when the World Bank moved
to liquidate their gold reserves.
“I was determined to build something,” Heugh says. “The only
thing I could really do at the time (without working for somebody else which
didn’t appeal to me), was to pool my resources with a couple of mates and
go after some acreage that was vacant.” His decision to explore oil and
gas was more than some people could comprehend.
“There was no competition for it, because at the time, everybody said
nought but a madman would be seeking opportunities in the oil exploration
area,” Heugh says. “Most of my associates had thought I’d gone
a bit crazy to try to form a new oil company when oil was trading at such a low
price. It wasn’t until 2004 that the oil price saw a sustained level of
above US$30 per barrel—which is pretty close to break-even for oil
exploration in central Australia.”
It was then that the tide began to turn with Central Petroleum ready to take the
helm. The oil price moved up and allowed the company to raise more pre-float
capital. In 2006, the company listed on the Australian Stock Exchange.
“Once you’re listed you can generally raise money for a new
programme. There are enough speculative investors out there that are willing to
back an exploration-only company such as we are,” Heugh says.
“We control the biggest exploration spread in Australia. We cover about
270,000 square kilometres which is round about 60 or 70 million acres. As far as
junior explorers in the petroleum field are concerned, we’re probably one
of the biggest exploration-only companies at this stage; in terms of the land
acreage certainly we’re the biggest.”
Today, Central Petroleum stands out from other petroleum onshore explorers in
Australia with a market capitalization of approximately US$60 million and US$30
million in the bank. The company continues its search for oil and gas and also
helium, for which the company has some promising subsalt projects.
Post GFC: valuing Central Petroleum
Heugh says that Central Petroleum emerged from the global financial crisis in
June, 2009, with approximately US$36 million in the bank after commencing
drilling its first few wells in the Pedirka Basin in 2008.
“One of our junior farm-in partners, Petroleum Exploration Australia
(ASX:PXA), ran out of money and they sold themselves to a company called QGC,
the Queensland Gas Company (ASX:QGC) (one of Australia’s major calcine gas
explorers and producers) for about $20 million,” Heugh recalls.
This immediately signalled a benchmark price on just what Central Petroleum must
be worth—for QGC to spend this sum on the farm-in and earn the 20 per cent
interest in the acreage.
“In June 2009, stockbrokers in Australia saw this benchmark valuation and
decided that we were dramatically undervalued, which we were, and put their
shoulders to the wheel and raised a lot of money for us,” Heugh says.
“We couldn’t predict that QGC was going to buy out PXA but it
certainly solved a lot of problems for us: having this amount of capital inflow
into the company, at a time where other companies couldn’t raise a
cracker.”
In ten years, Central Petroleum had emerged from a unique idea in a troubled
time for the oil market, as a lucrative investment with a promising future.
Staying entrepreneurial, tackling hostile environments
Heugh explains that over a 20-year stretch Australia awarded very few
exploration licenses because of native title issues.
“The traditional owners out there are by and large governed by a group
called the Central Land Council, and much bigger companies with applications in
the area had failed to negotiate an agreement with the traditional owners via
the CLC,” he says.
“We ended up getting nine permits granted over the space of time between
2004 and 2006, which is something that far bigger companies failed to do.”
Central Petroleum’s secret to exploration license-success comes down to
the flexible and entrepreneurial nature of the company. Heugh says that the
company was open to paying the traditional landowners a little more in royalties
in order to allow for rapid granting of permits because Central Petroleum could
see the great potential. Unlike conglomerate companies who had corporate
policies against paying that extra percentage, Central Petroleum took a
different approach.
“We were a little bit more pragmatic and said, well, if we have to pay a
couple per cent more in terms of royalty, it’s not going to be a deal
breaker,” Heugh says.
With the necessary licenses in place, Central Petroleum faced another challenge;
the unforgiving environment and hostile desert terrain.
“A lot of our acreage sits in the Simpson Desert and that’s the
world’s largest parallel sand dune desert (176,500 square miles).
It’s not as big as the Sahara, but crossing the dunes out there can cost a
lot of time and expense,” Heugh says.
“It’s also a very hot area; we’re recording temperatures in
the shade on a routine basis at 40 degrees centigrade and up to 50 degrees
centigrade while we’re drilling out there.”
Heugh says that the company’s exploration activities are continually faced
with the great lack of fresh water, remote conditions and sandstorms. When
monsoon season breaks, the company’s work is also subject to outside
cyclonic depressions which drift down into this desert region and, can result in
unrelenting rainstorms which make roads tricky to traverse and cause floods.
However, Central Petroleum’s work continues and true to form, the company
tackles these adverse conditions with the same entrepreneurial spirit and drive
that it applies to every challenge.
A company culture of performance
Heugh says that he is trying to maintain the performance-focused culture in the
company as it grows and develops, while also maintaining excellent standards of
health and safety.
“We’re more concerned with performance and outcomes and less
concerned with politics and procedures. With my staff, I continually push the
line that we must run a safe operation,” he says.
“Safety is paramount, but we’re (still) driven by performance. We
don’t want to get tangled up in internal bureaucratic red tape. The
company is of a size where we can make rapid decisions, and as the company grows
I want to maintain that culture...not prevaricate about something and run it
through 16 different committees before a decision is made and action
happens.”
Central Petroleum has two major milestones in its sights for the coming year,
both of which are aimed at getting into production for cash flow.
“We think that we can probably do that, firstly by discovery and
monetization. Secondly, by helium discovery and monetization,” Heugh says.
One of Central Petroleum’s helium subsalt prospects has undergone previous
drilling which flowed helium to the surface at six per cent. Heugh points out
that with helium in such short supply throughout the world and the rising demand
and prices today, these prospects are probably worth more than potential natural
gas and condensate prospects at this point in time.
In just over ten years, Central Petroleum has come an incredibly long way. The
company’s clear vision, entrepreneurial culture and continued flexibility
have already proved their worth—their 2010 milestones are just around the
corner.
www.centralpetroleum.com.au