Pioneering Enegi Oil has the technology to transform marginal fields

Big oil survives not because of its scale. Big oil survives because it is diversified.

The risk is spread geographically and between upstream and downstream operations.

The producing assets provide the cashflow that allows the likes of BP and Shell to plumb the frozen depths of the Russian Steppes or the unexplored waters off the coast of Guyana.

Those producing assets also throw off enough money to ensure investors get a payback in the form of a very plump dividend - unless of course you hit problems in the Gulf of Mexico.

However, it is a difficult model for the smaller operators to recreate. Though one, EnegiOil (LON:ENEG), is looking to follow the blue print copyrighted by the majors.

Last Thursday it unveiled a plan to acquire AB Technology - a company set up by Enegi’s chief executive Alan Minty.

That’s not, on the face of it, a move that would be designed to emulate the success of an Exxon or Total.

For ABT is essentially a technology company. It has a way of making marginal fields profitable by using unmanned buoys that can radically reduce the capital expenditure and operating expenses associated with production.

In theory it is a very simple concept that replicates the oil and gas processes found on conventional offshore installations to remove the gas and water from the fluid stream. 

The gas is subsequently used as fuel to power onboard electrical generators with any excess typically being flared, although monetising gas value through export is being reviewed.

The separated oil is then held in a seabed storage tank that is emptied periodically by a shuttle tanker.  

Under the earn-out deal Enegi can take control of ABT with the option being triggered when the latter lands its first deal.

Details of any future tie-ups to commercialise these marginal fields are necessarily sketchy at this stage. 

However, if the company achieves what it has set out to then ABT and, in turn Enegi, will start generating cash – and very quickly. 

And that’s the point: having its own source of cash allows Enegi fund its exploration plans without having to dilute existing investors out of sight. So that’s what it now has in common with its larger, more diversified brethren in the oil and gas sector. 

Also, there are no geological or political risks to plumbing a buoy into an already producing field – although granted there are bound to be some technical issues.

That said, these buoys have been around for a number of years, so there is nothing new or cutting edged about them - other than their deployment as unmanned oil platforms.

Crucially, the seal of approval for this technology comes from Wood Group, which was unveiled as ABT’s partner last week.

To say the FTSE 100 oilfield support has done its due diligence on ABT would be an understatement.

“We have been speaking to them for 18 months,” reveals Minty. “They see this as a great way to generate business themselves in the future.

“We realised from the outset a partner like Wood Group was absolute key. 

“Verification was a necessarily very long process, because Wood Group is naturally very protective of its reputation.”A

ABT, meanwhile, has an option to acquire a power buoy from Forth Ports for £750,000. 

According to press reports as much £45 million has been spent on the Sea Commander, which was originally built to provide electrical power for submersible pumps in the Lyell Field, about 150 kilometres northeast of Shetland. 

Proof of concept will be achieved by successfully using the buoy in a first project. Then it is a case of rolling out it out worldwide, according to Minty.

“There are hundreds of marginal fields around the world,” he says with an almost evangelistic zeal. “The point to bear in mind here too is this is not novel technology, so the risk is minimal.”

According to the Enegi boss, negotiations over the first project are well advanced – it is likely to be in the North Sea.

The company currently has a trans-Atlantic spread of assets that includes two off-shore exploration licences and one onshore petroleum lease in Newfoundland and an onshore licence in the Clare Basin in the Irish Republic.

However its struggles to date since its AIM debut back in March 2008 demonstrate the difficulties facing the small explorer where the outcome of any drilling campaign is usually binary.

And even with success, some of the market’s tiddlers still struggle to raise financing on the right terms to fully exploit the opportunities in front of them. 

It is why Minty decided to take a different tack using his background of risk management in the oil and gas sector to come up with the idea of tapping these marginal oil fields.

“You can tap these marginal fields that have low G&G risk yet still have very large potential economic upside,” Minty explains.

“We can build a portfolio that might consist of farm in opportunities, which increase production. 

“Those production revenues mean we will have an in-house source of capital that then allows us to develop the higher-end exploration projects without having to dilute the co every time it has a project.

“We are trying to put forward an unusual portfolio for a small market-cap company in this space.

“In a way we are trying to emulate the way the oil majors do business, just on a much smaller scale."