Monday, June 18, 2012

Rheinland Revival


A private Canadian company is front and centre in Germany's post-reunification oil rebirth.
This article appears in the July issue of Oilweek 
By Peter McKenzie-Brown
“The guys who founded the company began their exploration program by driving around what had been East Germany looking for Communist-era oil and gas relics.” The speaker was Alicia Groeneweg, a geology major working as a co-op student for Calgary-based Central European Petroleum; we were having dinner with others in a small Thai restaurant. Already unusual, the story got better when she reached the punch line. “They didn’t hit pay dirt until they found a decaying museum glorifying the achievements of socialist oil production.”

Intrigued, I asked her to put me in touch with her CEO, Peter Putnam. As Putnam talked about his company, the narrative became compelling. “As a general rule, petroleum people don’t approach things from historical context,” he said. “But I see this story as a combination of 20th century history and geopolitics and (21st century) regional geological analysis and economic analysis. If you don’t understand what was going on during the Cold War, you actually miss the story.”

Who Knew?
A PhD in geology, Putnam wears many hats. “I’m the chairman and chief executive of Central European Petroleum (CEP), an executive officer of OSUM Oil Sands Corp. and the non-executive chairman of Petrel Robertson Consulting Ltd. I was also a founding shareholder of Laricina.”

The key to these connections is Petrel Robertson, which he describes as a “unique entity in the Canadian consulting firmament. It has created a number of well-known companies. Others include OSUM Oil Sands and the asset base within Laricina Energy. Those two companies (plus CEP) all have one common originating location. Petrel Robertson put together their original theoretical premise, asset base and technical base. In various forms, Petrel Robertson actually created their land positions, conducted negotiations with governments, raised the money and staffed the organization. Then we let them go on as autonomous businesses.”

CEP is the most recent in a long line of companies formed in this way, although that fact is not well known; “we’ve always been very quiet about these things.” Even though CEP is the largest resource landowner in Germany, the company is virtually invisible in Canada. “This is the first media interview we’ve ever had in North America,” according to Putnam. “It’s funny that Alicia, our co-op student, was the one who finally connected us with the media in this country. But we are a big deal in Germany. There have been nearly a thousand reports about us there, in German. (They’ve been) in newspapers and on television and so on. We are big news in that country.”

Germany produces 145,000 barrels of oil per day, but consumes around 2.5 million. The seventh largest oil importer in the world, it is beholden to Russia for supply – especially because of the recent embargoes on Syrian and Iranian imports. Since the federation has only 276 million barrels of proved reserves, anything that inspires hope for a decline in imports is newsworthy. “So what we are doing there is of much interest to the Germans. We’re doing it in the poorest part of Germany. There was oil and gas production in that area under the Communist regime, but no interest in it until we got there. No one has done any development (in former East Germany) since reunification.”

The Prize
“We’re just a small company but we were able to do that because of the way the table was set when we entered Germany,” said Putnam. CEP was able to develop its enormous land position in Eastern Germany “because of the way the rules are set up and because as a private entity we were able to fly under the radar.”

“We have been in Germany since 2006, and we started our drilling campaign last year. We have raised about $134 million and we do have a partnership with Gaz de France, and we would always consider working with other partners. We have an enormous position, more than 3.4 million acres of land, and we’re just a small team so we are going to need partners. We need to optimize what we see as the value here.” What, exactly, does he see? Near term, “a substantial light oil opportunity.”

“The reservoirs we’re chasing are an oil story.” The target is in the Zechstein formation in Europe’s Permian Basin, which stretches from the east coast of England to northern Poland. The Zechstein has yielded much of the North Sea’s oil, and in many places it also serves as the main cap rock for gas fields in the Rotliegend – one of the world’s giant gas-producing formations.

The Rotliegend “is the zone just below our main target. It’s the Zechstein that interests us just now. We think it offers a combination of conventional but also somewhat unconventional (light oil) targets.” Looking at the bigger picture of the company’s holdings, Putnam said its large land position includes “old producing fields, high-risk green-field prospects and land in the Baltic Sea. We have sealed off the entire trend between Denmark and Poland. Try to do something like that in Canada!”

Last year CEP drilled Germany’s first-ever horizontal well, and it showed a little oil – the first new oil production since reunification. “We want to do a fracture stimulation of the well before we release any information on it,” he said. Since then, the company has drilled another, conventional hole. What success did they have? “We are in a blackout period, so I can’t give you well results.”

Those holes represented the beginning of CEP’s exploration push. “This year, next year and the year following are the ones in which we are really going to explore our lands. It is an expensive area to work, but the prize is commensurate with the cost or you just wouldn’t do it.”

Exploration in Europe is expensive because, while drilling and well servicing contractors exist, the services they provide are scarce. There are no issues related to quality in terms of either equipment or skill levels – after all, Germans invented seismic geophysics and they have been doing sophisticated fracture operations since the 1970s – but there are issues with respect to availability. “They have a sophisticated service industry,” Putnam said, “but they aren’t used to drilling more than a handful of wells a year.”

To appreciate the importance of history and geopolitics on CEP’s holdings, consider Guhlen, which Putnam described as the company’s best onshore prospect. Several hundred kilometres square, the property is southeast of Berlin. “That area has been out of bounds (for exploration) since 1914 because it was a military base during World War I and during World War II – that’s where Rommel learned desert warfare,” according to Putnam. “And after the fall of Berlin it became (the Soviet Union’s) biggest onshore military base outside of Russia. Today it is right in the heart of one of our exploration licenses. (During the Communist era,) it was surrounded by productive fields. We actually had to do an unexploded ordnance survey of the property, and we identified 4½ tonnes of unexploded ordnance. Within that area is our biggest onshore opportunity. It sat under everybody’s nose forever because it was a no-go area.”

Azerbaijan, Kazakhstan, Uzbekistan and…East Germany?
The Guhlen prospect is a small-scale example of the opportunities there for the plucking when the Soviet Union collapsed. Think Azerbaijan, Kazakhstan and Uzbekistan, all of which were insignificant producers until they got access to western know-how and capital.

East Germany was only different in that its land-mass was small enough for an entrepreneurial start-up from Canada to pick up all the goodies. According to Putnam, “we targeted East Germany because it was post-communist, and we could see that nobody had looked at it since the regime fell.” To understand the system in Germany, Petrel Robertson hired Germany’s honourary counsel in Alberta, consultant Jaap Baumann, to open the doors to Germany’s bureaucrats. “He’s Dutch by birth, but he lived in Germany most of his adult life. He’s now our country manager in Germany. He opened all the doors for us. It was through him that we met all these government agencies and found out all the rules.”

“Germany is the easiest place in the world to get acreage,” according to Putnam. “Everything is done in secret. There are no size limits, no shape limits. By law, as long as you are working on the land they have to extend your ownership.” What this means in practice is that CEP will have rights to all the oil and gas resources in its license areas, as long as the company wants them. “One of the benefits of being in Germany is that you never have to worry about land expiries. You don’t have to worry about doing rapid development. Under this system you have all the time you need.”

He later learned that the communist government’s oil company – its acronym was EEG – had been the world leader in ultra-deep drilling in the 1960s to 1970s, drilling as deep as 8,500 metres. In its search for oil the workers’ oil company drilled hundreds of wells and, in the 1980s, shot thousands of miles of seismic. “The funny thing is that 99% of the wells they drilled predated the seismic. East Germany went bankrupt in 1987-88, so they were not able to optimize or maximize what they found in those seismic data. Even so, the biggest oil field they found produced over 10 million barrels, and they found it without seismic.”

The reason an outside company could achieve so much success in Germany, according to Putnam, is that its bureaucrats really don’t have a culture of dealing with smaller entrepreneurial companies like CEP. “Being Canadian was a good brand; we were quite welcome when we first showed up. There is a sense in Germany that we are a major hydrocarbon power, that we have global reach. That helped, but the main thing is that we asked the right questions.”

Communist-era Legacies
It seemed like the right time to ask about the oil and gas museum – the odd story that inspired Oilweek’s enquiries into CEP. Clearly, Putnam relished telling the story. “There is no public information about the German oil industry,” he began. “It is a black hole of information. There are very few oil and gas companies in Germany, about ten. They produce about two billion cubic feet of gas and 60,000 barrels of oil a day, so (Germany) is not an inconsequential producer. But you can’t find out about the industry – it’s very difficult.” There are no relinquishment rules on technical information in the country because of the way German mining law developed.

“Nobody finds anything by sitting in their desk,” he continued. “If you want to find something you better get off your butt and go see it.” So Putnam and Alula Damte – Ethiopian by birth, he is a PhD in structural geology, a VP of Petrel Robertson and now president of CEP – went on a week-long trip from the Brenner Pass in the Alps to the Baltic Sea, looking for evidence of oil and gas activity.

During the first three days they found no evidence of old seismic lines or pump jacks, according to Putnam. “Then we saw (a pump jack) through our binoculars. When we drove up, we found that it was strictly decorative. We were in a fossilized petroleum equipment yard from the Communist era. It turned out we were on the grounds of a museum built to the glorification of the oil industry in East Germany. We went inside and – lo and behold! – on the walls was all this information about the history of the oil industry in that part of the world, and thus suggested that there was real opportunity. We captured everything by taking digital photographs of the exhibits and taking notes.”

Between them, Putnam and Damte had to pay three euro for admission. The value of what they learned? Priceless.

As they began securing land – the company acquired seven leases between 2007 and 2011 and is seeking more – Putnam and his team began seeking more legacy data. They learned, for example, about a multi-government, Communist-era consortium named Petro-Baltic. Since government had funded the data, it was there for the asking. No one else had asked.

Gaz de France, a French utility, bought out East German’s EEG in 1994 and now owns its data. After CEP brought them in as a partner in an exploration license, the French firm released data relevant to three of the Canadian company’s exploration licenses. The wells the company is drilling this year are based entirely on that legacy information.

Is there a simple way to sum up this narrative? “It’s a bit like one of those shaggy-dog stories,” said Putnam. “A Canadian, a Dutchman and an Ethiopian go into a bar and come out with Germany’s biggest oil and gas landholdings. It was almost just like that. I love the historical and geopolitical part of it. What we added was technical and economic thinking.”
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