Small fish, big pond

With major exploration players outsourcing to small companies, Robert Lambert discusses what the future holds for GB Petroleum.

“When you're with a major multinational, once your budgets are set the money is guaranteed, whereas with a small company that's just not the case”
-Robert Lambert

The discipline of oil and gas exploration is innately driven by money; entry costs into countries need to be paid; resources, equipment and employees need to be taken care of; and of course there are profit margins that need to be hit. But perhaps the most surprising context money currently takes in the realm of exploration is in the relationships held between small and larger companies. As Managing Director of GB Petroleum, Robert Lambert not only appreciates this dynamic, he understands it.

Formed in the second half of 2005, GB Petroleum functions as a relatively small exploration-oriented company with the help of Lambert and a number of his former Conoco colleagues. Having raised the necessary funds, the group started acquiring expiration licenses with a view at one time of seeking a market listing or merger with a larger company once they had established themselves. However, things turned out to be much more difficult than they had originally planned.

“The credit crunch hit our long-term planning quite hard because our business model depends on regular injections of investment in equity capital, which effectively disappeared for the two years. Fortunately, we managed to do a deal with a small private fund who acquired us in October of last year and we’ve been recapitalising and restructuring the company since that time with a view to getting back on track and growing as much as we can and making some acquisitions again. We’re emerging from the financial crisis that’s afflicted every small company and we have more confidence now in the future.”

Lambert’s main task is to balance GB Petroleum’s portfolio, which is extremely orientated towards exploration. Currently, they hold nothing close to production, although Lambert is quick to highlight an interesting gas prospect with hopes for drilling later this year that could be on stream within 18 months. “That’s not on a short enough time horizon for us,” asserts Lambert. “We would like to have something a bit more immediate. We’re evaluating a number of production opportunities in our focus area, which happen to be Africa and Europe. Our current assets are in North Africa – where we operate both in Tunisia and Morocco – and non-operated interests in Poland and the UK.

“We have a little bit of a geographic spread. That was done deliberately for portfolio diversification – to spread our technical, commercial and political risk – but only from an exploration point of view. Having established what we would call a ‘footprint’ in each of these countries, it would be beneficial if we could build within each country and add some more interests. That’s where we’re primarily focusing our acquisition targets.

“Central and Eastern Europe and North Africa would be our first choice; we’re looking elsewhere in Africa too. My own personal experience has been effective all over the world, perhaps with the exception of South America. There’s nothing stopping us looking anywhere, but the commercial or technical reality is that if we’re London based, there is a certain amount of work that a small team can do, so we tend to look close to home if we can.”

Having previously worked for major multinational upstream, downstream companies, Lambert’s experiences have certainly moved him to opposing ends of the spectrum now that he’s with GB Petroleum. However, despite the change of scenery, Lambert maintains that there are still interesting similarities between the two conflicting environments.

“Most of my career was spent internationally with Conoco in various parts of the world: Indonesia, Egypt, Baku Lagos; each branch operates almost like a stand-alone business. You get used to levels of responsibility and managing your assets in remote environments, almost independent of the head office. The major difference, of course, is that when you’re with a major multinational, once you’re budgets are set the money is guaranteed, whereas with a small company that’s just not the case. You have to fund all your activities fully each year and you can’t afford cost or resource overruns; you have to manage with the resources you have. That’s quite a challenge, but managing the foreign operations in remote areas is very similar to running a small company.

“A major multinational is composed of perhaps 20, 30, 40 different small businesses aggregating into a multinational. Part of that sets you up quite nicely experience wise – and of course you get to travel the world and experience different cultures and business environments – so you learn a lot about the business that way.”

Yet from Lambert’s statements, and given the continuing economic crisis, the question still remains: Why North Africa? Surely, with the various levels of instability that come with the territory – not to mention the heightened levels of risk for smaller companies – taking the safe option would be a priority? Well, as it turns out, it’s completely the opposite.

“We’re based in London; we’re a very small team so to avoid what we would call resource stretch we focused on opportunities within a short flying time of London. We also wanted to focus on areas that we had prior experience in – that was very important. In addition to that, areas where you can access exploration acreage at low cost, because being a small company you can’t pay large bonuses to governments, you can’t pay high entry costs. You have to negotiate you way into some licenses.

“Low entry costs and barriers are important considerations, but proven geological producing areas was also a key. Hence, looking at the UK, Poland and Tunisia. We built a portfolio that had a balance of oil and gas, onshore and offshore, and we realised we probably needed a little bit more romance in our portfolio with a higher potential – although that comes with a higher risk – hence we went to Morocco.”

Indeed, while Morocco doesn’t have a lot of oil and gas proven to date, the potential is definitely there. Its technical parallels with the rest of West Africa, the other side of the Atlantic and offshore Canada have all proved geologically similar, forcing the conclusion that Morocco could provide some very good petroleum potential. The risk is, of course, far higher – but so too are the rewards. For all the countries mentioned by Lambert, the fiscal terms certainly shine; low costs, solid potential and a good proximity to London work wonders for GB Petroleum when combined with the relationships that have already been established throughout years of working in the industry. Yet, given all these factors, the continuing international focus on climate change has undoubtedly had an effect on strategy.

“Being a small team,” continues Lambert, “we tend to operate from the head office as much as we can. Not necessarily as a result of environmental concern, but cost concern if nothing else, we limit travel and make use of teleconferencing wherever we can. But, it has had a spin-off benefit for minimising our own impact. I’ve had very good training through my career with Conoco in being very environmentally aware and looking at sustainability too, so that is factored into everything we do anyway. But being a very early exploration company, we’re fairly prudent in what we do.

“In operational terms, we do insist that our contractors pay proper regard to those issues. I don’t think anyone could ignore it these days as climate change is demonstrably happening. One could argue what the causes are, but there’s no doubt that things are changing and it’s only prudent to take appropriate action.

“Traditionally, supply has always met its demand; it’s just a question of economics. However, oil and gas is a fossil fuel and there is a physical limit. Every time we think we’ve reached it something happens to make us change that view. We’re accessing oil and gas reserves in areas that we never dreamt of even 10 years ago. New plays are emerging everywhere. Deep gas is clearly a fuel for the future. It’s a question of economics.”

Unfortunately, gas could play a larger part in the world than it does even today, but with producer prices for gas being quite low in comparison to oil, the focus should still remain on the oil front. Lambert goes one further to say that we should be more careful about how we produce oil because it has certain uses that cannot be replaced by other means. Conversely, gas is abundant and can be easily substituted into oil burning economies if the financial incentive is there.

“Sadly, that has not proven to be the case in many parts of the world,” admits Lambert. “I think the developed part of the world is catching on very quickly with the emergence of LNG and the energy hungry countries. I’m more concerned about the countries that produce oil and gas and seem not to develop their own internal energy markets to the fullest extent. Again, it all boils down to economics at the end of the day. No oil company or contractor is going to work at a loss. Some of these resources are enormously expensive to develop.
“When government takes are very high and oil prices are lingering in the US$50 to US$80 range, you can see very quickly that it’s not the oil companies that are making a lot of money; there is an enormous leakage of value in the energy chain. But sooner or later that will catch up. Whenever supply gets out of balance with demand, then economics steps in to restore it – although it does lead to short-term imbalances. Long term, of course, it has to be a better solution, but technology will definitely come to the rescue of the energy crisis as and when it happens.”

On the topic of long-term planning, Lambert has bright hopes for building a successful and independent oil and gas producing company, although it remains unclear whether or not it will eventually be listed on a major stock market or traded into a larger venture. However, in order for this to become a reality, Lambert is all too aware of the need to acquire some producing assets and generate an early cash flow for the company so they can break the dependence on external financing; he also hopes to use a fistful of luck through their exploration programme in order to grow organically as well as by acquisition.

“It’s not a unique story by any means. A lot of small companies go that route and some are successful, some are not. You only have to look at the general examples of Tullow and Kern to see the successful ones. What’s less known are the unsuccessful ones. For every successful story there are hundreds of failures. Then there’s the middle ground where you’re partially successful and you’re absorbed into a bigger entity; I see that as probably a more likely future for the oil industry. Consolidation always happens when the majors run out of reserves and they buy their reserves elsewhere – the independents usually provide that target. This then spins off more new startups that start up the whole process again.

“It’s a continuous cycle of business renewal, but it’s always been that way. When you look back over history it’s always happened; not just in the oil industry but in any industrial sector. I don’t see the current environment being any different. We like to think it’s because we like to think we’re creating our own future, but I think if you step back and just look at what’s happened, there’s a clear path that does emerge, and it’s all driven by economics. Economics will drive the technology.”

In recent times, the joke seems to be that the outsourcing of services in any industry is becoming the norm. Well, this isn’t too far off the truth when it comes to looking at the way major companies seem to be ‘outsourcing’ their exploration to the smaller man – such as GB Petroleum – as they take risks in areas that the majors just won’t. It’s only when those resources are found that the majors will step back in. The bottom line: without the smaller companies, the sort of reserves that we continue to find would most probably still be hidden away.

Robert Lambert is Managing Director of GB Petroleum, as well as one of the company’s founders. He holds a BSc and a MBA, both from Aberdeen University. Lambert has worked for nearly 40 years in the international petroleum E&P industry, primarily with ConocoPhillips, from which he retired in 2003.GB Petroleum was established in 2005 by a group of former ConocoPhillips executives. Since then, the company has grown steadily and it was recently acquired and recapitalised by Nimbus Oil and Gas Group Ltd.