A strategy of sustainability and growth

What was Ophir’s position when global oil prices began falling and how did that affect the company’s business strategy?
We were very busy integrating the Salamander Energy business through 2015. We were focused on the Fortuna project in EG and still had a relatively large and fairly frontier exploration portfolio. Because we had a lot of business to manage, we did not go into a quick downsizing as many of our competitors did. We were late to that in many respects and we hoped we wouldn’t have to downsize significantly, but given the industry situation, we reduced our cost base materially.
Having integrated the Salamander production assets in Asia, we have pared back our exploration to high-graded projects that make sound economic sense in lower commodity price scenarios. This was a natural point for us to become a sustainable E&P company, with our capital expenditure rescaled to our revenue and without relying on capital markets to fund new investment. Through this effort, we have become a sustainable business in a world of USD 50-60 barrels and preserved solid upside in a scenario where prices stay higher.
Ophir’s history is that we were very much an explorer that raised money from the market to fund frontier exploration, opening up new plays and taking relatively high risks. With the downturn, that once successful model was not particularly valid anymore, because the capital markets were essentially closed for this high-risk, high-reward approach.
We still retain a key exploration skillset and portfolio, but one that is self-funded through the business and high-graded based on value. The last period has been about right-sizing the business for its income stream while preserving access to material value.

How will Ophir approach investments in the future?
Once we reach an FID [final investment decision] on the Fortuna project and once our revenue rises with that incremental production, that will allow more room for the business to grow and for us to invest further, but it is really about being a disciplined company that does not need to regularly go back to the market for capital because that is not a sustainable investment thesis.
The industry has reset itself to think like businesses outside the sector, which means it is not okay to constantly spend money and tell investors that tomorrow they will get their money back, with tomorrow often never arriving. There was a habit in the industry of doing that, particularly in exploration.
It’s important to run the business in a way that generates enough cashflow to fund your capital investments. You have to look at it in a much more cost-conscious way. You have to do that in a way in which most other sectors operate.
That has been a key mindset change for Ophir – unit costs for production, opex, day-to-day tight management of costs and insulating against low commodity prices. If you know you can run the business in a USD 40-per-barrel world and make money, fine. If it is USD 60 or 70 per barrel, that is even better, but you cannot rely on that in the long term.

How is the Fortuna FLNG project advancing?
Fortuna has been a long and interesting story. When you look at the status of the project, everything is in place to take the FID, in terms of the field development plan, the umbrella agreement and the host government agreement with the state of EG, which we signed in May 2017. The JV between Ophir and OneLNG has been in place for more than a year now, and the gas buyers are also identified.
The time delay has been around closing out the project financing. There is debt financing coming from China, and those conversations continue to mature. We have set a number of deadlines for the FID, believing that was the date the financing would get closed, but we are not in control of that timeline in reality. When you miss those deadlines, it creates negativity around the project, and that is unfair, because the project is incredibly valuable. We have been guilty of being optimistic that deadlines in control of other people would be met.
We expect an FID in 2018, as soon as possible, but rather than say it will come in one or two months’ time, we are just saying we need some space in 2018 to close that financing conversation.
The important thing is that the value of the project is there. It is an incredibly low-cost development, and that is what everybody from the Ophir, OneLNG, the EG state and funding sides see. That gives us confidence the project will get funded, but we cannot control the timing of it, partly because there are a large number of stakeholders involved.
Compared to a typical oilfield development, we have a larger number of parties at the table – gas offtakers, debt finance banks, shipyards and different parts of the state of EG. As we make steps forward, communicating that goes through about 12 key stakeholders, and you have to talk to each one and they have to talk to each other, and that can be a naturally slow process. We move quickly as Ophir, so we assume everything moves this quickly, but it does not, particularly when you are dealing with very large and complex institutions. We remain confident that it is going to move forward, though.

What challenges have you encountered when negotiating with financiers for projects such as Fortuna FLNG?
When you are seeking project finance and you say you have a certain investment with a certain return, that gets attention. When you say there is something new about it – FLNG, in this case – that can bring some reluctance and a requirement to digest the various value-chain components. When you say it is gas, which carries some commodity risk as well, that can also slow things down.
The key aspect is the perception of risk around FLNG rather than the reality. When you look at what FLNG is, particularly the solution we are proposing here, you are taking existing LNG technology, which is proven, and putting it on an offshore vessel. That is new, but the components themselves – the whole LNG process – is not new. This brings caution because you cannot show there are 10 FLNG vessels in production with significant production history.
About 20 years ago, some people said FPSOs wouldn’t work, but that concept moved quickly to the mainstream. There are different flavours of FLNG and there is something new about it, which means people see risk and they need time to understand it more in depth. When investors and financiers do that, we generally see a positive response and a recognition of the huge growth potential in the sector.
If you look forward five to 10 years, there are likely to be multiple FLNG projects, and financing a project such as Fortuna would represent an easier financing proposition. As an early mover, you are going to get that penalty. The early mover position is not for everybody, particularly not in a debt-financing world.
From our perspective, we are taking proven oil and gasfield topside equipment and putting it on a boat. That brings some challenges in terms of the deck space layout and engineering issues, but they are not problems. From a company perspective, the facility is not something we consider a big risk.

How can smaller-scale FLNG projects compete with large gas producers?
The question is, can that gas compete with piped gas from Russia, or US shale gas exported as LNG? The Fortuna FLNG project is a great example of the low unit cost of FLNG in the right environment, and one that is cost competitive with these suppliers. In that respect, FLNG has the potential to unlock a lot of African gas, and particularly some of the smaller resource scale discoveries.
The other critical aspect is that the LNG market is fragmenting. FLNG has smaller production. Fortuna is 2.2 million tonnes per year [tpy] and traditionally, people were selling 10 million-15 million tpy to Asia under 15-20 year contracts, but the smaller tonnage and spot markets are becoming important. Smaller packages such as 2.2 million tpy are nicely sized to give security of supply for significant gas volumes, but without the traditionally huge volumes seen in other long-term LNG contracts.
The spot market is not dominant, but it is getting stronger every year. At the same time, people on fixed contracts want some flexibility as well, because they know if the price goes down, they do not want to be locked into the contract for their gas; they want to play the spot market as well.
With respect to pricing, from our perspective, we approach gas in the same way as oil. You do not want to be producing a hydrocarbon that requires a higher gas or oil price, because you are becoming a marginal supplier at that point. We see it as an opportunity for Fortuna because it is one of the lowest-cost projects out there. Unit cost is the key focus and we know we can compete in the top quartile of LNG production costs.

What are your plans for the EG-24 block?
EG-24 is a PSC that we have done a lot of technical work on, but it was licensed to another company for a long period. It became available through the last licensing round and we negotiated with the Ministry of Mines and Hydrocarbons to sign a two-year PSC in early 2017.
While deepwater exploration can be tough, it makes a lot of sense for the right fiscal terms and the right subsurface. If the exploration risk plays out in our favour, there is potentially a very high volume of oil resource there. Kosmos Energy has farmed in for a 40% stake and will acquire 3,000 square kilometres of 3D seismic. The seismic will take around nine to 12 months to acquire and process. We will make a drill-or-drop decision before the end of the licence period in early 2020.
The block is downdip from the Ceiba and Okume fields and we are testing an extension of that petroleum system downdip, so it is very exciting in that regard. Depending on any discovery size, there is potential to tie it back to that existing infrastructure. From Ophir’s perspective and the ministry’s perspective, this whole area of EG is now a zone of exploration excitement.

Which of Ophir’s other global assets will remain important going forward?
There has been a lot of focus on Fortuna from an Ophir perspective, and that is right because it is so valuable.
One thing that has had significant news flow is how much value there is in our other producing assets. In Thailand and Indonesia, we have very valuable assets with low-cost barrels and gas molecules.
In Indonesia there is a lot of gas in the ground and electricity demand is growing rapidly, especially in Kalimantan, which is where the Kerendan production asset is. There are some key hurdles to jump over, but you can see a clear line of sight to that asset becoming much more material.
In Thailand, the Bualuang asset produces about 8,000-9,000 bopd, but we are reinvesting in another phase of development there, which is considerable. It is a strong focus on investing to maximise recovery in existing assets and to ensure sufficient generation of cashflow to fund capital requirements.

What are Ophir’s key objectives for 2018?
The Fortuna FID is a top priority for us in EG, as well as continuing to grow our Asia business. We are in several countries there and we have very good operating teams and good knowledge, so growing that business and potentially expanding our production base is key.
In Africa and Mexico, it is about selectively managing the exploration portfolio. We have built a portfolio counter-cyclically through the downturn very carefully, with Mexico in particular, and we continue to look to add to that portfolio where appropriate.
You will see Ophir exiting some positions in Africa and adding some other positions. That is about being very selective in that we are only going to drill things that work in the industry environment we are in. With regards to EG and Tanzania, our two African focal points, from a development perspective, we aim to mature those two resource pools as quickly as we can because they have a combined net resource of 6 tcf [170 bcm] for Ophir, which is a large amount of gas. From a growth perspective, it is oil-focused and mixing not just deepwater, but also shallow water, and potentially onshore.
In Mexico, we are in a phase where we want to mature the blocks we have, and if there are selective growth opportunities, then we want to pursue those.
We have production targets for existing assets. We are not setting an acquisition or growth target, simply because we want to send a message that we are led by value and not by bopd. Demonstrating to the investment community that we can deliver a self-sufficient, profitable and still exciting portfolio are critical targets for us.

For more information on Ophir Energy’s planned Fortuna FLNG project, see our business intelligence platform,TOGYiN.
TOGYiN features profiles on companies and institutions active in Equatorial Guinea’s oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.

Business intelligence and networking for executives: TOGYiN