Eleven years ago, Dragon Oil inherited an under-developed oil concession in the Caspian and never looked back. In 2000, the company acquired a 100% working interest in the Cheleken Contract Area (CCA) off the coast of Turkmenistan. The concession comprises the Dzheitune and Dzhygalybeg fields, near the town of Hazar.
Dragon Oil which is headquartered with and majority-owned by the government of Dubai via state energy firm ENOC, recorded oil strike after strike to increase production at the CCA tenfold from 7,000 barrels per day (bpd) in 2000 to 60,000-plus bpd in 2011.
In the process, the company has invested heavily in Turkmenistan, succeeding in obtaining an excellent working relationship with the government and sourcing over 90% of its staff locally.
The company has also been forward-thinking on digital oil field technologies and methods, utilizing 3D-seismic and reservoir modeling technology.
In the process, the company became one of the London Stock Exchange’s best kept secrets. Even today, with a market capitalization of $4.6 billion, the company is still regarded by analysts as trading at a discount compared to its UK E&P peers.
Scott Darling, a Dubai-based analyst at finance company Nomura, believes Dragon Oil can break 20% production growth in 2011, saying to investors “our recent management roadshow reinforces our positive view on Dragon Oil”. Nomura’s target price for their investors is approximately 30% higher than its current value.
In 2009, minority shareholders saw off a bid by ENOC to purchase the 48 percent in the company they did not already own, on the basis that the offer came up short. Their tenacity has paid off, as shares in the company are currently trading 33% above their level when the offer was rejected.
The company declared its first dividend this year, and is showing no sign of shaking off its appetite for growth.
Dr Abdul Jaleel Al Khalifa, CEO of Dragon Oil, reveals to Oil & Gas Middle East that the company is far from resting on its Caspian laurels, and is primed to become a major international multi-asset independent in the Middle East and beyond.
But first, to the CCA, where Dragon Oil continues to increase the pace of development.
“In the past we used to drill eight, then ten, then eleven wells per year. In the future we will be drilling 15 or more wells on an annual basis. And we hope that with additional rig fleet, we can go up to 20 wells in the near future,” Al Khalifa says.
The Group is awaiting delivery later this year of a Yantai Raffles jack-up rig and is in the process of tendering another 3,000 hp rig now which the company expects to be ready for production for 2012.
“Our plan is to have at least two jack-ups, plus the Iran Khasar, then we will continue to use a land-drilling rig. In general we are talking about 3-4 rigs working for the company”.
While nobody doubts Turkmenistan’s potential as an oil & gas producer, there are logistical issues in operating offshore, hiring staff and transporting hydrocarbons to export markets. Developing relationships down the contractual chain is also important. “It’s no secret that we have streamlined our commercial and contracting activities,” says Al Khalifa. “We have instilled trust and transparency in our procurement processes, and have people on our fleet now who were not there before. We’ve had big names bidding on contracts and we go for cost-competitive bidding”.
“We need more contractors to come to the [Caspian] region, but this takes time. I’m pleased to say that over the last few years we have seen new contractors coming in, and hope we are going to get more in the future”.
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Al Khalifa describes Turkmens as “sincere”. “They deliver on commitments; they don’t change terms and conditions. They are reliable partners and have excellent relations with the government of the UAE,” he explains.
Last year Dragon Oil inaugurated a centre of excellence in the country to help train and promote more local people into the field.
“More than 90% of our workforce in Turkmenistan are Turkmen nationals , and we’re happy with them. Two of our country managers – senior employees – are local Turkmen,” says Al Khalifa.
So what stands out about Dragon Oil, and what makes them likely to succeed beyond the Caspian? “We are good at taking a field that is producing at a low rate and putting the technology and investment into it to make the production five or ten times higher,” explains Al Khalifa. “For several years we grew production at a 20% level. Now we’re putting a guideline out there to say our production levels will rise by 10-15% for the coming three years”.
Al Khalifa’s prediction to Oil & Gas Middle East may yet be proved modest: Nomura predicts growth may break 20%, a figure borne out by recent drilling results - Dragon Oil added two new development wells 28/156 and B/155 yielding 3,038 bpd and 783 bpd respectively. On 21 July the firm announced that production in the first half of 2011 grew by 25% to the end of June to 58,000 bpd. Seven new development wells have been completed this year and the company’s drilling programme has been updated to complete 12 wells, a sidetrack and a workover versus 11 wells previously targeted.
Al Khalifa has since said the company is targeting growth of “up to 20 percent,” and has spelled out Dragon Oil’s commitment to ongoing production growth, saying in a company statement that “with significant budget allocated for infrastructure development in 2011-13, we will be tendering out contracts for the construction of at least three new platforms with associated pipelines in the next 18 months alongside a number of other projects”.
Al Khalifa is clear on why Dragon Oil has been successful: “We have a laser focus on Cheleken, because it is such a fantastic asset, and we have been happy to work closely with the government of Turkmenistan to ensure both sides are happy.”
Over the past ten years Dragon Oil has invested around $2 billion in Cheleken, and has been rewarded with a tenfold production increase. “In the coming ten years we will continue to invest and grow production. Our estimated course of investment at this field on infrastructure is anywhere between $200 to $300 million annually, with the same again on drilling,” Al Khalifa says. “To maintain this kind of investment to ensure there is enough platforms, enough wells, enough pipeline, it takes a lot of focus, a lot of effort,” he adds, “but it is very rewarding”.
Monetising Dragon Oil’s 3 trillion cubic feet (cu/ft) of associated gas resources is a big priority for Al Khalifa. The company has completed a pipeline to shore with storage and terminal facilities last year. Al Khalifa says negotiations with the Turkmen government - that have been running for some time - remain ongoing.
“We are now certified to convert at least 1.6 trillion cubic feet (tcf) of gas into reserves and the remaining 1.4 tcf to be kept as contingent resources,” he explains.
“Our gas right now can’t be separated onshore. We await completion of a compressor station and connection with the Turkmen network to be ready, and then within a few months our gas will make it to the Turkmen system”.
Al Khalifa says Dragon Oil has a two-pronged strategy for monetising associated gas: one short-term, the other long-term. “We appreciate that today the global gas market, and especially in Europe, is not as positive as a few years ago,” says Al Khalifa, “so the demand for Turkmen gas to Russia and Europe is not as strong as it was. However, there are new outlets towards China, talks of new pipelines, including the Nabucco pipeline. So in the long term things seem to be positive for gas”.
“We need for Dragon Oil to be rewarded for bringing gas onshore and making it available in their system. The government has been very receptive to this, and we are currently talking about what kind of reward we will receive,” Al Khalifa says. This arrangement will last for around 1-2 years. “Hopefully after that we are talking about a long-term marketing strategy,” he adds.
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Al Khalifa is clear that he is not going to rest on his Caspian-earned laurels: Dragon Oil is going multinational. “We really think that Dragon Oil can grow into an international independent company that has many assets globally,” he says. “This has been our focus, especially in the past year, where we had a dedicated team looking into a new venture. They have looked at many assets globally, including Africa, Central Asia, and South East Asia and in the Middle East”.
“Dragon Oil is very much positioned to work in the Middle East. We’re happy to have this asset in Central Asia, and have proven that we can work there, managing complexities with regard to marketing and so on,” Al Khalifa says. “This gives us the readiness and a sense of ease with working in the Middle East. We share the culture, the language, the interests, and we’re based here. This is the opportunity for growth that maybe our competitors do not have”.
“We are proud to be UK/Irish-listed, Middle-Eastern based and international in our workforce – we have over 20 nationalities at Dragon Oil,” says Al Khalifa, “so we have all the ingredients to make an international global independent company”.
Al Khalifa confirms that developed proposals for specific expansion targets have been taken to board level. “We have also been in competitive bidding stages with some of them. We haven’t completed any transactions yet, but the process is ongoing, the systematic due diligence we have is working, we are following a very prudent process,” Al Khalifa says. “We go through financial, technical and legal due diligence. Once an asset crosses those hurdles we go into a bidding stage”.
“We are looking at multiple assets now,” confirms Al Khalifa. “I cannot tell for sure whether things will happen this year or next year, but it is definitely the focus and intent of the board and management to grow this company to comprise many assets”.
Al Khalifa says that more specifically, Iraq - the biggest exploration and production prize in the Middle East - is part of Dragon Oil’s plans along with other areas that the company is seeking to diversify into. “We are in the process of pre-qualifying for Iraq. If successful we plan to participate in the fourth [exploration & production contract]round,” Al Khalifa says.
The next round of contracts has been provisionally timetabled for January 2012, but may come to depend on the progress of a suite of hyrdocarbon laws through Iraq’s parliament.
“I think that Iraq is a magnet,” says Al Khalifa. “Iraq is the centre of oil gravity in the coming ten years. There is going to be huge activity there by multiple IOCs and independents. I can tell you that this wave of activity will not stop: it’s already started, the train has started moving, and there’s a long way to go”.
Al Khalifa says that Dragon Oil is very interested in working in Iraq, including but not limited to pre-qualifying for the fourth round, as well as sponsoring exploration workshop focused on Iraq. Dragon Oil will also look for farm-in opportunities in Iraq should they become available.
Shares and dividends
Turning to ENOC’s controlling stake in the company, Al Khalifa is clear the Dubai state company is an asset to the business, but refuses to say if ENOC intends to make another approach.
“We’re really happy to have ENOC as a majority shareholder. They have been very supportive and we have a relationship that allows independent operations. We have full autonomy in running this business on behalf of all shareholders, majority or minority.”
The company has introduced a sustainable dividends policy from this year. “We have a policy, but the level of dividends will depend on circumstances at the time and will be decided by the board.”
When asked if paying a regular dividend will act as a break on investment, Al Khalifa is clear: “The dividend policy is there to stay, we are happy to have reached this level of maturity, to be able to sustain dividend distribution alongside our growth strategy.”
What is the one thing Al Khalifa wants everyone to know about Dragon Oil? “The company is valued at a discount compared to its British E&P peers. There is a great deal of upside in our share value on account of our growth potential,” he enthuses.
“The value of Dragon Oil P2 (proven and at least 50% probable) reserves is equivalent to only $3-4 a barrel. In the market, for peer companies, it’s somewhere between $5 to 15 a barrel for P2. We are very much discounted and there is a great deal of room for growth in our share value because of that”.
If the last eleven years tell us anything, it’s not to underestimate Dragon Oil’s growth in the years ahead.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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