“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.”
Peter McKenzie-Brown
Language Instinct
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