Pescod interviews SterlingAN INTERVIEW WITH GEORGE KESTEVEN
MANAGER, CORPORATE & INVESTOR RELATIONS
STERLING RESOURCES
(As of January 4, 2011)
We are here with George Kesteven who does public relations and investor relations
for what we think is going to be one of the most intriguing oil and gas
exploration stories of the coming year and that is Sterling Resources.
David Pescod: I guess we have to start with a look/see at the Cladhan play. If
you could give us some background and just how big do people think it
could be?
George Kesteven: Cladhan was originally discovered with
an exploration well back in late 2008 and at that time people
may recall the markets were not particularly healthy. We
didn’t have a sizeable amount of cash on our balance sheet,
so we made the discovery and we capped the well and indicated
we would have to come back later. We managed to
come back in August of 2010 and we drilled two side-tracks
off that original vertical bore, both of which were very successful
and far exceeded our internal expectations. I can
certainly say that we were very pleased with what we found.
The challenge at this point is that we really don’t know how
big Cladhan is because of two factors. One, we have no oil/
water contact yet and two, there is about an 1800 psi ambient
pressure which is a bit of a mystery to us technically.
We are not entirely sure where that pressure is coming from.
So, what we did do was to have RPS Energy, our reservoir
engineers, conduct an analysis for us and update the Prospective
and Contingent resource numbers, just for the
Cladhan prospect back in October. We published those figures
and depending upon how you interpret those numbers,
the indication is probably somewhere between 150 and 250
million barrels of original oil in place (OIP) – based on what
their assessment says. And that is an extremely attractive
number obviously, but again, it only covers what we have
drilled up to this point of Cladhan.
Looking forward, we are planning to drill four wells at
Cladhan in the first half of 2011. The program will likely
start in February or March, depending upon weather and
regulatory approvals. We want to drill two vertical wells
and we want to drill two side-tracks off the first of the two
verticals to try and delineate how big Cladhan truly is.
So it’s an exciting discovery for us. It’s oil – it’s relatively
light oil, we have a good base of partners there and we
have now raised the money to move forward with the offering
that closed back in December. So I think this is an
exciting discovery for us which we operate and hold a
40% interest.
DP: Now the talk is – you mention 150, maybe 250 million
barrels, but people are using only 93 million barrels.
GK: You have to be very careful with Contingent and
Prospective resource numbers because those resource
numbers are highly risked. I reiterate you have to be very
careful. For instance one of the mistakes that people often
make is to take the Contingent and Prospective resource
numbers and add them together which is not the
correct approach because the stochastic probabilities (in
other words, risk) of the two categories are sizably different.
So that’s why I’m giving you such a broad range.
There are people out there who have come out with estimates
that are twice that and we can’t comment on that
because obviously we want to rely specifically on what
RPS says. The 93 million barrel figure that you refer to is
the RPS Prospective Resources (P50) number for the
channels only – RPS’s analysis in October attributed a
further 74 million barrels of Prospective Resources (P50)
to the fan formation at Cladhan. We want an independent
view, not just an internal view. Until we do some more
drilling, we really don’t know how big Cladhan is. That’s
a really important point to get across.
DP: As well as Sterling’s conservative assets like Breagh
in the North Sea, you have another big, high risk potentially
high reward play and that’s in the Black Sea, which
has been delayed for some time. Once again, when do
you hope to get at it and how big might it be?
GK: The two wells we want to drill in the Romanian Black
Sea this year are located at Eugenia and Ioana and I
should note here that all of the offshore fields there are
named after Romanian women-they are all Romanian female
names. The first of the wells is Eugenia. Eugenia is
an oil target and it’s up in the Pelican Block which is the
northern of the two blocks that we hold.
We hold the Pelican Block which is the northern block and we believe oil prone, and the Midia Block which is the
southern block and gas prone. This is the first well we will drill in the Pelican Block because as some people may recall, a portion of it was at one point, involved in a border dispute between the Ukraine and Romania. Well that has
now been resolved, so we know it’s entirely in Romanian waters, so we feel more confident going in.
We hope to drill the Eugenia well – the oil well target some time in the second quarter and we hope to drill the Ioana
well which is the gas target immediately to the east of the Ana and Doina discoveries which we’ve already drilled up. We hope to drill the Ioana well during the third quarter. So those are our plans for the Romanian offshore going forward. We did announce a change back on November 1st, 2010 We had signed an agreement with a UK based company Melrose Resources back in late 2008 to farm out half of our interest , which would have taken our interest from 65% to 32½%. We chose not to renew the farm out agreement with Melrose simply on the basis of the fact that Melrose couldn’t get the administrative approval for the license transfer from the Romanian government. Our decision on November 1st seems to have broken the log jam a little bit and we will see how things move forward. Our other two partners there which hold collectively 35% between the two of them – Petroventures and Gas Plus, which is an Italian publicly traded company –are very eager to get going and get Eugenia and Ioana drilled up in 2011. So we are thinking we are now full speed ahead in Romania. We have applied for permits and plans are underway to drill Eugenia in the second quarter – and Ioana in the third quarter
DP: Now the interesting thing is that some of this area already has production on the Ukrainian side and the suggestion again is that this is a sizable target.
GK: These are very sizable targets. The Eugenia well is a four-zone targeted well and if our seismic is even partially
correct, we are pretty excited about that. Directly to the east of the Eugenia target is a field called Olimpiskiyi which
was in Ukrainian waters and has been producing for some time and then there’s also an oil field to the southwest of our block that’s called Lebada. This is in Romanian waters and it’s a producing oil field. . It’s been operating for
some time as well, so there is oil production on both sides of our block, so we feel pretty confident that with production in close proximity to the Pelican Block and the four zone nature of the Eugenia well, this looks like it holds tremendous potential.
DP: If that’s not enough, you also have interest in another play that is getting an awful lot of attention for Torreador
Resources and that’s the Paris Basin.
GK: Torreador/Hess will be commencing a three-well program there shortly and we want to see the success that they
have before we consider drilling a well in our blocks. We are in a joint venture with Torreador/Hess and Petroventures on three of the blocks and then the other 6 ½ blocks that we have are 50% with Petroventures. The 6 ½ blocks are on the North side of the major Torreador/Hess block and the remaining three blocks are on the south side of the major Toreador/Hess block. In particular, there is one well of the three that we are really interested in, as it will be drilled on the southern edge of the Torreador/Hess block directly adjacent to one of the blocks we hold. We will see how successful they are in terms of this particular play. This is an oil shale play by the way – this is unconventional and for people familiar with the Bakken geology in Canada and in the US Williston Basin, this is analogous to that kind of geology.
DP: They are using some pretty highfalutin numbers like 90 billion barrel potential target…is this dreaming or does
this have a dose of reality?
GK: With unconventional oil fields, you have to be very careful because until they actually drill it up and do the delineation work in terms of what’s there, it’s really hard to come up with a number. So we wouldn’t subscribe to that type of number yet. I’m not saying it’s not possible, but we wouldn’t want to go out on a limb with that kind of number. That’s a fairly aggressive number. We will see the success of their drilling program and then we’ll decide going forward what kind of program we want to launch on our blocks.
DP: With all that exploration, obviously you’ve got one heck of a year to look forward to. We are curious about your
guesstimate for the price of oil down the road and other than your own stock, what would be your recommendation?
GK: Depending upon which commentary you read and the fundamentals, oil could be as low as $80 and as high as
$120 during 2011. I guess the point I would make is even at the low end of that range, the economics of what we are proposing to drill are still very good. So it’s really not an issue for us at these kinds of prices. In the unlikely event oil drops below $50, we will probably have some questions, but based on what I am reading and what the current commentaries are saying, the bearish level seems to be about $80 and the bull level seems to be $120. So I think that is probably a fair range.
DP: I guess we might as well get an update on the Netherlands because it’s new to most people and the assumption is that it’s fairly small.
GK: It is fairly small. What it is for us is a niche play which we’ve entered at a minimal cost. It’s in an area that is gas
prone, but the oil is in a shallower reservoir and what we have determined as we look at this particular prospect is that the oil is fairly compartmentalized and there may be a substantial amount of oil there. However, it is in compartmentalized reservoirs and what we would really like to do is probably drill a well there some time late in 2011 and turn it into an oil-producing area as well.. So it’s a bit of an interesting play from our perspective as there are already oil discoveries on four of the five blocks. So it’s really a matter of managing the logistics of delivery of that oil. And I think that is something internally we certainly have the expertise to do.
DP: Thank you for the update George!