Is There Still Room For Small Companies In Oil And Gas Exploration?
In pondering the future of the oil and gas industry, I wonder whether it will include junior (small) companies, which have been the crucibles of many new ideas, concepts and plays over the years.
Small companies — the very first drillers — gave birth to the industry in the 1850’s. A few years later, John D. Rockefeller put big money on the table to establish Standard Oil, which, as Daniel Yergin tells us in The Prize, “developed into one of the world’s first and biggest multinational corporations”. While many stories of the evolution of the industry through the 20th century revolve around the big multinationals, junior start-ups continued to play important roles, especially in North America.
In Alberta, Imperial Oil is often credited with kick-starting the modern oil era with the drilling of Leduc #1 after spending millions on a long string of dry holes. But smaller companies had already been drilling for decades, finding small fields and larger ones (like Turner Valley) that encouraged further exploration.
After Leduc, companies big and small piled into the oilpatch, and many important early discoveries were made by smaller players. In a golden era of exploration that lasted well into the 1970s, small companies with great exploration ideas were able to make the deals to get key discovery wells drilled.
As the Western Canada Sedimentary Basin matured in the late 80’s and into the 90’s, many multinationals started to look elsewhere for bigger prizes, and sold off their declining assets. A new generation of juniors jumped on this opportunity, adding substantial value to supposedly exhausted fields by infilling and drilling the margins much more cheaply than the majors could. They also discovered new pools on old properties with intensive, multidisciplinary exploration work. Investors and entrepreneurs reaped huge rewards from modest initial investments (and some lost a bunch of money too).
New juniors also identified heavy oil and oilsands prospects in northeastern Alberta, accessed using emerging production technologies such as CHOPS and SAGD, while the majors were focused on bigger prizes.
During the WCSB exploration heyday, several “management teams” — usually including a geologist, engineer and a landperson — had repeated success in raising money, making and developing a discovery, then selling it off or spinning out an “exploreco” to start again.
More recently, tough economic times have stressed the oil industry profoundly. Moreover, the fundamental structural shift to unconventional reservoirs has made starting a new company hugely daunting. Big land positions are the key to support factory-style drilling for unconventionals. Once industry understood the scope of unconventionals, lands in the big unconventional plays (Montney, Duvernay, and Horn River) were posted as massive township-sized blocks that sold for tens of millions of dollars. Even blocks on the fringes of smaller plays like the Viking and Cardium were hugely expensive, well beyond the reach of the financing available to most startups.
A few small companies found their legs in the face of this trend — Vesta in the Duvernay East Shale Basin and Leucrotta on the flank of the Montney fairway come to mind. But even for them, making new discoveries in today’s oilpatch has not translated into immediate business success, at least not like “the good old days.”
Surely there must still be niches for bright, nimble small explorers? There are certainly ideas —exploration for lithium and helium, or development of geothermal and water disposal capacity. But even for projects with great economic potential, it’s hard to find investors in today’s market. Investment for resource start-ups is out of favour, whether petroleum- or mining-related. It’s an uphill battle to attract money away from the current trends like cannabis, AI, and biotech. There is reason to believe that junior oils are a casualty, at least in Canada, of the misplaced societal outrage against our resource industries.
Can Canadians take their abilities (and money) international? There are certainly great prospects in under-explored basins of the world, like there were in Western Canada in the 1970s. But few basins offer up their opportunities readily. Some countries restrict oil and gas activity to a few organizations with substantial state ownership, and / or carry substantial political risk in the form of inadequate business and regulatory structures. Land acquisition is often challenging: bid rounds are highly competitive and demand large work commitments, as we’ve seen in Mexico and India recently. Where small, less-attractive acreage blocks are made available specifically to entice small companies, as happened in India in 2017, some of the new players had no industry experience, and so no idea what to do when they won parcels. Many blocks quickly reverted.
There are other situations: Kenya has emerging petroleum prospects and is keen to be in the game, but is still designing its bid and evaluation logistics. New Zealand and Australia have small but active junior sectors, but have experienced environmental-based pushback in recent years — although Australia’s Northern Territory recently decided to look at allowing hydraulic fracturing.
And it all has gone wrong for Canadian-based junior CamCan Energy — they hold a huge exploration permit in Laos, with access to data and the co-operation of government — but cannot find an investor willing to undertake the “greenfield” exploration required. Maybe because they were trying to get people excited about oil and gas just as prices were plummeting in 2014/2015?
All that said, there are still small company successes. In Germany and Poland, Central European Petroleum has tied up large acreage positions with limited expenditures, based on a lot of foresight and leg work up front. Gran Tierra has grown to a substantial company in only a few years with a savvy combination of acquisition and exploration focused in Colombia. The jury is still out on Helium One —they’ve raised money and identified helium prospectivity in Tanzania, but have yet to make a discovery.
A new company with great ideas, great skills, and the right backers can still succeed — but the challenges are huge and the odds are long.