TransAtlantic Petroleum: Turkish Delight

Want to know how to use unconventional E&P technology and know-how in Europe?

Just ask Chad Potter, Vice President of Financial and Investor Relations at TransAtlantic Petroleum, who told Natural Gas Europe about the secret to the company’s success, thus far in Turkey.

He offered: “Ultimately, it’s about rock and governments: you have to have the right rock and the right government, the right terms to make it work. We think that Europe has some great rock, you just have to be able to get at it.”

Not all shales, however, are great reservoir rock.

“Some of them are great source rock, but you won’t be able to economically produce the oil or gas from it,” said Mr. Potter.

Still, in Turkey, he said that TransAtlantic had found the right combination of the necessary elements: good government, good rock, good fiscal terms.

He recalled that TransAtlantic was a hydrocarbons explorer that had been cultivated by N. Malone Mitchell III, Chairman and CEO. “He previously founded an oil and gas company out of his bedroom in Texas 20-plus years ago that successfully grew by buying overlooked or underdeveloped fields and part of that had to do with a shortcoming of the availability of oilfield services.

“It was called Riata Energy at the time and he grew it into one of the largest private oil and gas companies in the US, both from an E&P perspective as well as from an oilfield services perspective. He started the process of taking that company public in 2006,” explained Potter.

During that process, one of the founders of Chesapeake Energy, Tom Ward, came in and bought a controlling interest before the company went public. “One to two years later, he took the company public and it continues to trade on the NYSE under the name ‘SandRidge Energy.’

Mr. Mitchell, he explained, eventually elected to step out of the company in search of new ideas.

“He had the concept that he should look internationally as he felt a lot of the domestic plays were pretty crowded, so he started evaluating international opportunities and really liked the prospects he saw in Turkey, from the combination of rock, government and business conditions.”

Mr. Mitchell then ran across TransAtlantic Petroleum, which Mr. Potter described as a very small, publicly traded company in which Mitchell took a controlling stake, using it as a vehicle to consolidate acreage in Turkey, Bulgaria and Romania.

Former assets in Morocco had been jettisoned, he explained.

“The centerpiece of the portfolio is Turkey: 99% of our production. It’s where our headquarters is (Istanbul) and where most of our employees are.”

But while the good geology, fiscal terms and fiscal climate were present, the availability and pricing for oilfield services needed was lacking.

Mr. Potter recalled, “So as part of the consolidation, he also brought oilfield services to Turkey, doing an acquisition in 2009 of Longe Energy which was essentially bringing drilling rigs in the US to Turkey. We ultimately built a frac spread and crewed it up, brought that to Turkey and currently have the only sizeable frac crew in the country.”

He said that that has taken several years, leading TransAtlantic to drill and test the prospects that it had.

“Early on we really felt that a lot of the rock was better than what you saw in Texas 20-30 years ago,” he remarked, “but the North American mindset needed to be brought to that. It’s about figuring out the magic formula, so to speak, to stimulate the unconventional rock potential that has not been developed in the past.”

TransAtlantic, he said, had started pursuing that goal in Turkey’s Thrace Basin, the part of Turkey that’s on the European side of the Bosporus.

“It’s about finding the right mix of fluids and force in order to crack the rock and then keep it open so that the natural gas flows out of the formation. We started off re-entering existing wellbores, sometimes deepening them a little bit and then executing the stimulation.”

According to Mr. Potter, this approach had saved the company money, because it wasn’t necessary to build the well pad or drill a new well. Still, then, success was elusive.

“Our first year was mostly unsuccessful,” he reported, “figuring out the right mix of fluids and force. This is typically buried within a big company, so it doesn’t get talked about, but in our case we had to talk about it because that was all we were doing.”

Then, late last year, TransAtlantic figured things out.

“Late November and December we started a stimulation process that’s generating essentially a 95% success rate for completing Thrace basin wells and we’re continuing that to this day.”

He described TransAtlantic’s Thrace basin concept: “First we need to prove the fracability of the rock – that it can be cracked and you can get gas out of it. Then, we needed to identify the opportunity – we know that you can get gas down to say 1,500 meters, but we know that the sands go down to 4,000 meters, so we need to figure out ‘do the sands work all the way down to that level?’”

Consequently, for the past six months TransAtlantic has drilled wells deeper to test deeper sands to get an idea of what worked and how long a rig would be on location, how long the completion crew needed to be there and how much water and sand needed to be trucked in.

“Once you can set that out, then you can plan many many wells ahead, whereas right now you’re drilling a well waiting to see what you find out before you drill the next one. We think that once we’ve got that opportunity defined, over the next few months we’ll be able to set out a nice natural gas growth program in the Thrace basin,” he explained.

Meanwhile, in the southeast TransAtlantic had possession of the Selmo field, which provided base oil production; the company has also made a recent nearby discovery, said Mr. Potter, at Molla – the Goksu well.

“We have some pretty interesting ideas of a development concept there that we’ll be evaluating in the coming months.

“The Goksu well produces a cretaceous formation called the Mardin whose oil is sourced from the Dadas shale, which will also be a drilling target. It’s still early stages, but a Dadas frac was actually our first frac in the country: we did a vertical well took a core and executed a frac and we’ve been evaluating that. Now we just drilled our second well and took another core from that location – that well’s finishing up right now,” he reported.

The conditions in the Dadas shale looked right for a good oil and potentially natural gas shale, according to him. “It’s starting to bring some big interest,” he noted. “You’ve see Shell and Turkey’s state oil company TPAO have got a farm in agreement to target the shale just north of our acreage.”

He said TransAtlantic’s partner in the Thrace basin (Valeura Energy) is also there, to test the Dadas shale and some other zones, as well as Anatolia Energy.

“So it’s good to see we have some other folks working on it, so hopefully the learning curve will be shorter. Ultimately if that shale works, it’s not only a company changer but could have a significant impact on Turkey’s oil supply.”

According to him, Turkey imported approximately 95% of the oil it consumed and approximately 98% of the natural gas it consumed.

Mr. Potter explained, “The size of the shale itself is about the size of the Barnett shale, so if it were to work and produce the level of oil we think it has the potential to, it could definitely make a big impact on Turkey’s domestic oil supply.”

While there has been no public opposition in Turkey to unconventional gas E&P, he said that TransAtlantic had been proactive.

“We’ve worked with the government, brought them to our sites, showed them our microseismic and what we’re doing. We did all that effectively before we even got started: ‘This is what we’re going to do, what we’re planning.’ We do the best we can educating the regulators and officials here to stay ahead of potential opposition.

Regarding the company’s concessions in Romania and Bulgaria, both places with temporary moratoriums on shale gas exploration, Mr. Potter admitted it was difficult to predict the future when it was a matter of a governmental decision.

“Obviously Bulgaria’s original fracing ban was suspended; they had to go back in and just over the past week reversed the clause that they had arguably mistakenly included that prevented conventional oil and gas drilling.

“So we’re waiting on our production license and once we get that, we have numerous conventional targets that we’d like to drill in Bulgaria. Once that production license is in hand we would like to get back to drilling there. The shale obviously will have to wait, because it’s not going to be economic without a frac,” he explained.

“The shale is the source of the gas that’s in the conventional formation, so ultimately we can just drill into a conventional zone above the shale, if it has an effective trap, and produce clean natural gas, there’s just more of it contained in the shale.”

In terms of TransAtlantic’s financials, Mr. Potter said the enterprise had a firm footing, bolstered by the sale earlier this year of its oilfield services company, Viking International, whose cash proceeds totaled $157.5 million.

He commented: “We immediately paid down close to $90 million worth of debt and intend to use some of the remaining proceeds to pay down a large portion of other debt as well. It’s left us almost net debt free (debt outstanding minus cash on hand), so we have a nice balance sheet to work with as we begin to reach the turning point in our resource play evaluations – that sets us up nicely, and hopefully, we’ll get some more meaningful production growth in the months ahead.”

It was a kind of a “win-win” for everyone, he explained.

“One of the problems of having an oilfield services company within an E&P, aside from confusion on the side of investors on how to value a company that’s multidimensional, is the challenge of allocating capital. Do we spend $10 million to go buy a new rig or to drill 10 new wells? With an E&P you’re always fighting a decline curve and so $10 million not spent on drilling wells means you may lose cash flow from declining production.

“So by separating the two entities they’ll each have their own balance sheets to use accordingly,” he said.

Viking, he added, would have a good amount of capital spent within the company within the next year that ultimately TransAtlantic would be the beneficiary of as it was Viking’s biggest customer.

He said that the sale had been conducted as part of a rigorous process, soliciting bids and signing confidentiality agreements with several candidate parties. Mr. Mitchell partnered with a group out of Dubai that was the highest bidder; today, Malone Mitchell owns around 50% of Viking and 40+% of TransAtlantic.

Chad Potter explained: “So he has an interest in seeing both of the companies do well. I think that we can work together in numerous ways. If Viking were to enter a new country that TransAtlantic’s not currently operating in and was facing something interesting from an E&P perspective, when you have the same guy sitting at the top he could say ‘Well, this could work for TransAtlantic.’

“If we want to go somewhere, we know that we have a deep relationship with an oilfield services company so if the services we need aren’t available there, immediately we know that we have a services company that can deliver that to us.”

In terms of getting gas to market, Mr. Potter pointed out that Turkey had numerous trunklines and that most of TransAtlantic’s gas was concentrated in the Thrace basin. 

“A lot of that gas is effectively the first gas ever produced in Turkey by a company called TBNG, which we now own. They were instrumental in effectively developing natural gas supplies in Turkey, realizing that natural gas was in the water wells near a city called Tekirdag and they went and got investment money to get a rig that could drill very shallow wells and started drilling little 200m wells and getting gas.

“It’s actually the opposite of what people fear,” he explained, referring to the “flaming taps” from the movie Gasland. “They were de gasifying wells. When they realized they had the critical mass of having enough gas they approached local industries, like a local brick plant that was paying to bring in coal to bake its bricks. They said, ‘We’re producing natural gas right up the street. Why don’t you use our natural gas?’”

Thus TransAtlantic’s produced gas is tied in to several end users as well as Turkey’s national grid, which brings in imported gas from abroad.

In terms of milestones for the year, he offered what TransAtlantic was looking forward to in Turkey: “We are coming to a head in the next few months of knowing the right depth to drill our Thrace basin wells. And I think as we define our opportunity set over the next two months or so we’ll have a good idea of how to set up a more repeatable development program, scaling our activity and, hopefully,  production,” said TransAtlantic’s Chad Potter.