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Russian risk and reward: interview with Peter Hind, CEO of Matra Petroleum plc

30 October 2009

With drilling operations finally underway on Matra Petroleum’s latest well in Russia, Peter Hind, the company’s chief executive, is confident about its likely success.

Indeed, while drilling 4km into the ground in search of oil is exceptionally tricky business for any exploration company, Hind has the advantage of knowing that after inadvertently drilling a well in the wrong place two years ago, this one is much more likely to be on target.

Peter Hind.jpg

“Well-13 looks very promising,” he said. “Our exploration director, Neil Hodgson, explains this by saying that we have done this the wrong way around – we drilled the appraisal well before the discovery well, we drilled the edge of the structure rather than the centre of the structure.”

The structure in question is believed to contain some 65 million barrels of oil, although Hind reckons the final figure could be much higher. In particular, there are strong signs that additional, uncalculated sections of the new well harbour significant upside potential.

In addition, the company has a working theory that the Sokolovskoe discovery, which its new well is targeting, actually extends much further than previously thought – or mapped. It’s a theory that led the company to quietly extend its acreage holding last July and one that could also form the basis of Matra’s plans far beyond Well-13.

The new well itself is situated on Matra’s Arkhangelovskoe exploration license, which lies approximately 1,200km south-east of Moscow near the city of Orenburg. Its drilling marks the culmination of four years on London’s AIM market during which time the company has endured mixed luck in (and later exited) Hungary, secured acreage in Russia and scrutinised mountains of seismic data before kicking off work with the drill bit.

On the way, Hind and his team have been forced to pick their way through the notoriously challenging Russian business and regulatory frameworks – as well as an economic downturn – in order to secure their position. Occasionally, that has meant frustrating their shareholders with protracted lead times on actually identifying and drilling its wells.

In turn, the altogether fearsome prospect of operating as an oil junior in Russia has not been without the inevitable hardball business tactics either. Last summer the company was forced to field a legal challenge from the original sellers of its assets, who argued (shortly after Matra began making serious progress) that the deal should be cancelled. Matra won the case.

Russia focus

Matra’s decided to focus its attention on Russia in early 2008 after a couple of uncommercial discoveries in Hungary inspired a rethink. Hind and Hodgson had previously worked together at London-listed oil group Premier Oil – Hind as the dealmaker and Hodgson as the explorer – and Hind had wide experience of finding deals in Russia.

“The deals and possibilities we saw were amazing,” he said. “Russia had been considered a difficult place to do business but we found that it was getting easier and more small companies were going in and getting licences. There was a fiscal regime and legal set up that, while not entirely straight forward, was making it an easier place to do business.”

Despite a 13 year absence and virtually no contacts, Hind managed to return from a two-week trip with a list of 20 possible targets after knocking on doors of government departments and institutes in cities across the country.

The deal they eventually opted for called for a structure that had not been done in Russia before and involved swapping 55 million Matra shares for the 171.6 sq km Arkhangelovskoe exploration licence with two Russian businessmen.

At the same time, the company raised £6.0 million to fund the exploration and drilling work by selling 30% of its shares to Israeli conglomerate Delek International Energy, which still holds its stake in the business.

On paper, its new licence area looked promising – situated close to producing fields and infrastructure. Indeed, its previous owners had developed an adjacent licence and even shot seismic data over the acreage but had encountered unresolved technical challenges that meant that they were reluctant to invest in further drilling. Nevertheless, Hodgson managed to identify the technical glitches, which were thought to have been caused by the presence of a thick salt section causing havoc with the seismic surveying.

“Neil was confident about what he was seeing so we said we would spend the money,” Hind said. “That’s how we came to get it and that’s where I think the opportunity is in Russia – there is still the same number of these deals around. People have got the assets and got the licences but they don’t really know what to do with them and they don’t want to spend money on them. So for those three years we have learnt a lot about doing business in Russia.

“It is a tough place to do deals, it can be incredibly frustrating and you just have to be patient, but therein lies the opportunity. The other reason why there is an opportunity in Russia is the fact that there is a huge amount of oil.”

Risk and reward

While larger oil companies have adapted to the Russian business culture in order to play the huge strategic reserves, the market for smaller companies is altogether different. According to Hind, prospects of between 30-60 million barrels are considered too small by larger operators, whilst smaller companies may find the challenge of doing business in Russia intimidating.

He says this leaves a niche in the market where a smaller player can assemble a portfolio of assets below the radar at a reasonable price. This can then attract interest from larger Chinese, Indian or western companies looking for ways to get into the country.

“We were very careful when we acquired the company to do the due diligence and made sure it was acquired in the right way,” Hind said. “But there is no secret about why there are more and better deals available in Russia – it is because the perception of doing business there is that it is harder than it really is and more risky than it really is.”

But while Hind may be comfortable with the risk, there is no doubt that drilling a well can be a slow process. While the country boasts much of the infrastructure to make it simple for incoming players to set up operations, it can still take two months to move and rebuild a Russian rig. It also takes longer to drill a well – Matra’s Well-13 is scheduled to take 120 days.

“It takes longer to drill with their rigs, but it is cheaper,” Hind said. “At this stage we would prefer to drill it cheaper by using a Russian rig but applying western technology.”

The technology he refers too – such as the well logging and analysis techniques – were critical in understanding why Well-12 had been drilled in the wrong place. After acquiring the Arkhangelovskoe licence in March 2007, Matra finished drilling Well-12 in November the same year. It initially turned out to be a success, producing nearly 1,000 barrels of oil per day, before it filled with water and had to be shut-in 12 months later, pending work to fix the problems.

Hind is relaxed on the problems at Well-12 because it was clear that the company had effectively drilled the edge of its target structure. “We ran some new seismic and reprocessed some old data to make it fit with what we know now,” Hind said. “We found that there was a reason why we had got it wrong but also that the structure moved to the east and, luckily, got bigger at the same time. We also realised the structure extended north, so we applied for the acreage and got it.”

The new well is located 50m higher up the structure from the first well, with additional geological modelling showing that it could encounter a thicker and higher quality reservoir.

“We’re fairly sure the structure is there and if you have got a structure in this area and you have got some kind of reservoir rock, you will have oil in it – always,” Hind said. “It is really a question now of how well this reef has developed in this area and what the productivity is going to be.

“On the downside, we’ll have a smaller field which we could develop anyway and make money out of, but it could be an awful lot bigger than 65m barrels too. The data on the area is not quite good enough yet, but there could be potential for the structure to be much, much larger.”

Future opportunities

Looking further into the future, Matra is currently in the process of applying for a 25 year production licence in anticipation of success at Well-13. It would also drill a further three appraisal wells on the licence as part of a move towards full production as well as returning to Well-12 in order to restore production.

“We have looked at lots of other things in Russia and there is a lot of opportunity in Orenburg and there are some fairly obvious things to do fairly close to where we are and we are looking into those as well,” Hind said.

“Delek doesn’t want us to be a £50m company, it wants us to be a £500m company but what we need to do is get this next well down and get some value back into the share price for the original investors. On the back of that we can go out and raise more substantial amounts of money and do more things.

“We are not in this simply for the next six months, to drill a well and find some oil. The opportunity is significant in a place like Russia and we know how to take it.”

Ben Hobson, SmallCapNews.co.uk