Otto Energy

Ahead of the pack

Oil and gas company Otto Energy is using revenue from its producing oil asset in the Philippines to undertake a high-impact exploration programme in East Africa.
Headquartered in West Perth, Australia, Otto Energy Ltd (ASX: OEL) has been listed on the ASX for 10 years but it was really in November 2011, with the arrival of Chief Executive Gregor McNab, when the company set upon its current strategy. McNab brought with him 28 years of oil and gas industry experience, gained working for major corporations including BHP Billiton and Shell across Australia and the US. He was actively looking for a career change when the opportunity to lead Otto Energy arose.

“My whole career had been with big international companies; I thoroughly enjoyed it, saw a lot of the world and learnt a lot about the oil and gas business,” he says.

“But fundamentally I was looking for a change of pace by moving into the smaller end of the industry, which is perhaps more fleet of foot and entrepreneurial in its culture.

What that leads to for a CEO is having a very immediate sense of accountability, and therefore an immediate sense of achievement when you actually deliver results.”

Although a small company, Otto’s ownership of a producing asset in the Galoc oil field in addition to its several exploration assets immediately sets it apart from other juniors. This source of regular revenue is a huge advantage, says McNab, especially in the current climate where markets are uncertain and raising funds is difficult.

“There are many junior players purely focused on exploration, but for us it’s good to know that we have a reliable revenue stream and a strong balance sheet to support our exploration activities,” he comments.

“Another strength of ours is that we are a very focused company. I think some juniors struggle to find the right balance between focus and diversity. You see many companies with just one piece of acreage, whereas I like to have a focus balanced across two regions. Equally, a number of juniors can overstretch and you’ll see them in places such as the Middle East, Asia and Canada. They lack synergy, and this can often stretch balance sheets to breaking point.

“I think it is that combination, of having a strong asset to underpin our balance sheet and a balanced focus, that has allowed us to deliver a project like Galoc and gain entry into places like Tanzania.”

The Philippines

Otto is the operator of the Galoc field in the Philippines, with a 33% working interest. It successfully delivered Phase II of the project in 2013, increasing production by three times to more than 4,000 barrels per day (net Otto) and extending the field’s life up to until approximately 2020. Production was almost constant throughout 2013, excepting a planned shutdown for the initiation of Phase II and a disruption of a few days caused by Typhoon Haiyan. All in all, it was a very successful year for the asset.

“Typhoon Haiyan caused widespread devastation throughout the Philippines and it effectively came right over the top of the Galoc well,” McNab recalls.

“However, due to the integrity of the asset, it caused only minimal damage and we came back on stream within a couple of days of the typhoon passing. I think that is testament to the quality of our operation and the people who run it.”

In addition to the Galoc field, Otto has very high-impact exploration acreage in Service Contract 55 (SC55) with potential to deliver both oil and gas discoveries. This asset suffered a knock last year when major partner BHP Billiton decided to withdraw from the project.

“BHP was strategically withdrawing from a number of countries and unfortunately we were part of that decision – leaving us with a 93.18% working interest in that asset,” McNab explains.

“We are actively seeking partners to come and join us in that asset, but in parallel to that we’re maturing all the drilling preparation necessary to build another well on a key exploration prospect called Hawkeye, which could have a Best Estimate of apx. 90MMstb Net Prospective Oil Resource. Adjacent to Hawkeye is another target called Cinco, which has potential for Best Estimate2.4 Tscf of Net Prospective Gas Resource. So these are very high value targets, and certainly we want to see that well drilled as quickly as we can manage.”

The drilling programme is funded by US$27.5 million provided by BHP, as specified in a Letter of Intent (LOI) signed by the two companies last year as part of BHP’s withdrawal from the project. McNab adds that while he was sad to see BHP go, he was pleased that the major’s parting commitments would fund further drilling. Otto began receiving unsolicited approaches for partnerships the moment news of BHP’s withdrawal broke, but at this point it is still reviewing the market and holding various discussions to ensure it secures the best deal.

Further to Hawkeye and Cinco in SC55, Otto has further Philippines exploration prospects in SC51 and SC73. The Duhat prospect in SC51 delivered what McNab deems “interesting results” in 2013, which Otto will be “digesting” this year to decide the best work programme for it. SC73 was acquired only last year and Otto is only just beginning basic geological groundwork there.

East Africa

Keeping the oil flowing from Galoc has been McNab’s main priority over the last couple of years, but over the next couple he intends to dedicate much more time to building Otto’s exploration portfolio in East Africa. He describes this region as “one of the most exciting oil and gas provinces to emerge over the past 10 years,” and tells how he spearheaded Otto’s move there after becoming CEO.

“Myself and our Exploration Manager had a lot of discussions about the emerging exploration success we were seeing in East Africa, and very quickly moved to take up two large exploration positions there: the Pangani and Kilosa-Kilombero blocks,” he explains.

“We were looking for similar plays to those in Kenya’s Lokichar Basin, where African Oil has had phenomenal success. They recently announced their seventh exploration well with their seventh discovery. Seven out of seven successful exploration wells is almost unprecedented, so that gives you an indication of the excitement of the geology in that region.”

Otto invested in building detailed technical pictures of the Pangani and Kilosa-Kilombero acreages, and at the end of 2013 announced the results of the initial seismic survey.

The southern area of the Kilosa-Kilombero block, in particular, appeared analogous to the Lokichar Basin and therefore cause for excitement.

“We’re working through our detailed plans right now, but I’d like to think we can find a way forward that allows us to commence drilling, particularly in the Kilosa-Kilombero block, by the end of calendar year 2014,” McNab comments.

“We love these two East African blocks and they’re starting to show some really valuable insight.”

He adds that Otto’s exploration efforts in this and the following year are likely to be centred more on East Africa than the Philippines. Further to its existing acreage in the Pangani and Kilosa-Kilombero blocks, the company is looking to acquire onshore East African assets: possibly in Tanzania, Mozambique, Kenya or Uganda.

“Our main goals for 2014 will be to drill a well at the Kito prospect in Kilosa-Kilombero and make progress towards drilling a deep-water well on SC55 in the Philippines,” remarks McNab. “We believe those are real, tangible targets for 2014.”

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