Otto Energy is a fully integrated business dedicated to the exploration, development and production of oil resources in Southeast Asia and East Africa

With a market cap of AU$102 million, Otto Energy (ASX: OEL) isn’t the largest oil company, but its chief executive Gregor McNab brings to the table nearly 30 years of experience in the industry and a well-wrought plan to bring the company success through exploration and reinvestment. It also doesn’t hurt to have a healthy pipeline full of promising projects.

Galoc

Among these projects is the Galoc oil field off the Philippines, a development that has been in production since 2008, yielding 5,600 barrels a day. According to McNab, the field has produced to date over nine million barrels of oil. “For a company of our size, it’s a very nice milestone to achieve.”

However, as the driving force behind Otto Energy, McNab isn’t content with looking back at milestones. “I think the most interesting part of Galoc Is what lies ahead,” he says. Original projections for the existing wells had them slated to finish by 2013, but, given the current output, it looks like these expectations will be far surpassed and the lives of the wells will extend far beyond what was initially forecast.

The outstanding performance of these two initial wells has been very encouraging for Otto Energy, and the company has worked throughout 2012 on both sub-surface elements and the development of facilities.

In terms of sub-surface work, Otto Energy has completed a 3D seismic overview of the field alongside full reservoir and geological models. The success of these surveys has given the executive team enough confidence to make a commitment to drill two more development wells during 2013. These additional wells will effectively double the production rates of this field. The company also plans to drill an exploration well in the Northern part of the Galoc field, following the completion of these development wells.

Critical services

Otto Energy has been very busy during the past 12 months securing critical services. According to McNab, it has become exceedingly important in the industry to focus on establishing key service contracts, especially drilling services, contracts that enable the company to invest with confidence in further development and exploration.

The company has negotiated and secured a binding contract with Diamond Offshore for the Ocean Patriot, a semi-submersible drilling rig. Otto Energy has also worked with Dof Subsea to complete offshore construction and installation. Another important contract that has been secured is for subsea trees and wellheads, which has been negotiated through Dril-Quip.

“Doing all the subsurface work, doing all the subsea design work, getting key service contracts lined up; that’s what really what gave us the confidence to do the final investment division back in August,” says McNab. The project has now been substantially de-risked and the drilling operations will commence in the second quarter of 2013. The plan is to first drill the two development wells, and immediately after to use the Ocean Patriot under contract to drill the exploration well in the North of Galoc.

Tanzania

Otto Energy has also expanded its focus from Southeast Asia to East Africa, acquiring two pieces of acreage each, sized at around 17,000km2 in Tanzania and holding a 50 per cent working interest in these parcels of land.

The plan for developing the project in Tanzania is focused on the process of completing surveys of each parcel of land to build an increasing understanding of the prospectivity. Otto Energy and its partner Swala have already met their commitment to the Tanzanian government this year by acquiring an airborne survey over the blocks.

McNab is excited to see this project progress as these would be onshore wells – much easier and faster to monetise than their offshore equivalent.

Palawan and Duhat

In addition to the projects in Galoc and exploration in Tanzania, Otto Energy also has two projects that are possible game-changers for the company.

The first project, Service Constrat 55 offshore Palawan, has Otto Energy going in partnership with BHP Billiton (McNab’s previous employer) to explore offshore Palawan, southwest of the Galoc field. The block has a potential of 19 trillion cubic feet (Tcf) recoverable reserves. Initial surveys have shown prospects analogous to the Malampaya field, which has been a key source of gas supply to the Philippines, meaning the Palawan project could be extremely profitable for Otto Energy.

BHP Billiton holds the major stake in the project and is the operator of the field, while Otto Energy has a working interest of 33 per cent. “That could be an order of magnitude change for our market cap,” says McNab. The only challenge is that the well would have to be drilled in 1,500m of water. To this end, Otto is working with BHP Billiton to secure a high-quality rig.

The other exciting project for Otto Energy is the drilling of the Duhat prospect on the Philippine island of Leyte. “We plan to drill that in 2013, and we are the operator on the Leyte service contract 51. We hold an 80 per cent working interest,” says McNab. This exploration well is easily within the Otto Energy budget, as it is an onshore operation as in Tanzania with the same benefits of easy and fast monetisation.

Future

Otto Energy approaches future growth with realistic expectations. McNab is very clear about the fact that the company is not large, especially compared to the giants with which it shares the industry. However, he believes that by staying realistic the company will be able to maintain steady growth.

This steady growth is achieved by a constant process of earning revenue through production and development assets and reinvesting this revenue into the company’s exploration portfolio. “Part of our strategy is to build an integrated oil and gas company,” says McNab. “I want us to be involved in exploration wells each year. I want us to continually execute new development opportunities. I do want us to ensure that we maintain our revenue stream from production operations.”

Otto Energy builds its success around the key philosophy of being realistic with its aspirations and building success out of the resources that it has. McNab wants the company to be aware of its abilities and focus on being the best at those. “If you go beyond that you lose synergy, you lose focus.”

www.ottoenergy.com