Harvest Natural Resources striving to diversify, realize its full potential
EDITOR'S NOTE: Perhaps best known for its operations in Venezuela, Houston–based Harvest Natural Resources operates in proven hydrocarbon basins worldwide. The company is diversifying its operations to complete its production, appraisal, and development assets in Venezuela. As a result, Harvest is pursuing domestic plays in the US as well as new international projects in Gabon, Indonesia, and Oman. The exploration portfolio consists of a series of high–impact projects, and Harvest expects to spud new exploration wells in Indonesia and Gabon this year as well as potentially expand drilling in the Monument Butte field extension project in Utah. Company executives recently discussed their plans with a correspondent for OGFJ. |
To a casual observer, Harvest Natural Resources may look like a far–flung enterprise for a small exploration and production company. Harvest has prospects in the United States in the Uintah Basin, Indonesia, Gabon, Oman, China and an equity interest in a producing company with the state oil company in Venezuela. But according to CEO James Edmiston, "All of our prospects fit the common theme of being located in areas with known and active petroleum systems, are focused primarily on oil reserves, and present an extremely attractive risk and reward profile."
Explaining Harvest's rationale for diversifying far and wide, Edmiston said, "In the midst of the disruption in converting to a mixed company structure in Venezuela, it became clear to us that although the new structure offered the substantial opportunity to grow well beyond what the prior agreement afforded, the uncertainty of the process would weigh heavily on the stock. It became obvious that we needed to adjust our concentration of risk in a way that provided the opportunity to build a portfolio where Venezuela, though a large and important asset, was only a part of the story. The acquisition market, given our finances, couldn't provide the scale required to accomplish that goal, so we focused on exploration as the means to diversify."
United States — onshore oil and natural gas
Harvest has two promising projects in Utah's Uintah Basin. Harvest's Antelope land position in the basin contains 65,000 gross acres (39,000 net) sandwiched between two established oil fields — Altamont Bluebell to the north and Monument Butte to the south. Harvest is evaluating two prospects — Mesaverde deep gas and Green River–Wasatch oil in the north and Monument Butte shallow oil in the south.
In late 2009 and early 2010, Harvest participated in an eight–well appraisal and development drilling program with Newfield Exploration in the southern portion of the company's Antelope land position. The program was designed to test the oil potential from the Green River formation, as an extension of Newfield's existing Monument Butte oil field. Harvest holds a 43% working interest in the project. As of March 10, six wells were on production at a combined average gross rate of over 2,000 barrels of oil per day and 2 million cubic feet of natural gas.
"This project extends the known limits of the field, which is exciting, as it could hold the potential for future visible growth," Edmiston noted. "The eight wells were drilled at an average gross drilling and completion cost of about $800,000. We expect the remaining two wells to be placed on production soon. The results have exceeded our initial expectations, and we are working to evaluate the shallow oil potential of our Antelope position."
Harvest has additional acreage to the west and north of the acreage pledged to the "Area of Mutual Interest" with Newfield.
During 2009, Harvest drilled its first exploratory well in its Antelope project, the Bar F, which was drilled to a depth of 17,566 feet. Since then, the well has been put through an extensive testing program to evaluate the natural gas potential of the Mesaverde tight gas reservoir and the Green River–Wasatch oil bearing formations. Though testing is still underway, Harvest drilling and testing to date have determined that a large gas resource exists within the Mesaverde and producible oil and gas exists within the Green River–Wasatch interval on its acreage. Harvest looks to appraise the potential for commercial oil and natural gas production with its ongoing Bar F test program.
Venezuela
Harvest has been in Venezuela since 1992, through a net 32% interest in the Venezuelan subsidiary, Petrodelta, in which PDVSA (the Venezuelan national oil company) holds a 60% ownership. In a country believed to have the fifth–largest oil reserve base in the world, Venezuela's restructuring of its contracts with its foreign partners in 2005 drove some US companies to abandon the significant reserve potential. While the dust settled, Harvest Natural Resources strategically organized its operational goals to develop and grow its presence, reserve base, and production in Venezuela.
Today, through its equity affiliate, Petrodelta, the company operates six fields that produced 7.8 million barrels in 2009, a 42.3% increase from 2008. Harvest has a 32% net interest in Petrodelta, as the result of holding an 80% interest in Harvest Vinccler, which in turn owns 40% of Petrodelta.
Harvest originally entered Venezuela in 1992 by acquiring the operating services contract for the South Monagas Unit (SMU), which includes the Uracoa, Bombal, and Tucupita fields. When Harvest acquired the contract, the fields had produced 73 million barrels of oil and had remaining proved reserves of 18 million barrels.
Beginning in 1992, Harvest drilled 181 wells, constructed facilities, and produced 113 million barrels of oil and 64 bcf of natural gas through April 1, 2006. At that time, the SMU fields had remaining proved reserves of 105 million barrels of oil and 133 bcf of natural gas. Through Harvest's efforts since then, the SMU has witnessed an improvement in ultimate recovery of 220%, or 200 million barrels of oil.
Harvest essentially "doubled down" on Venezuela during the conversion process to a mixed company structure by acquiring three new fields. The new fields, including the Isleno, Temblador, and El Salto fields have not disappointed. With average–IP rates of 3,000 BOPD and well costs near $2 million, Harvest's conventional wells in Venezuela have production rates rivaling or exceeding some of the best wells in the Bakken oil shale play in North Dakota at one–third to one–fourth of the cost.
The ELS–30 appraisal well drilled at El Salto had net pay of 368 feet, 40% greater than expected. The ELS–31 well, also drilled at El Salto, has 255 feet of net pay and began producing at an average rate of 3,000 barrels of oil per day. The well is currently producing 2,000 barrels of oil per day, restricted due to the availability of trucks and production facilities. Since December 2009, the ELS–31 has produced 372,000 barrels of oil and shows no sign of significant decline. And, the production is profitable. At a $70 WTI oil price, Petrodelta's cash margins are about $28.05 per barrel.
These impressive well results from the new fields continue to drive the company's optimism for achieving a target production rate of 30,000 BOPD in 2010, up from an average of approximately 21,000 BOPD in 2009 by running two rigs. An aggressive $205 million, self–funded drilling program has been inked for El Salto, Isleno, and Temblador in 2010. With combined 3P reserve numbers net to Harvest of 224.3 million barrels of oil equivalent, up from 132.4 MMBOE at December 31, 2008, the company's target production numbers appear very attainable.
Edmiston says, "We realize that the perceived political risk of Venezuelan assets is high, but we have always viewed our assets in the country as a strategic opportunity. Since Petrodelta's capital budget is self–funded, our financial risk is limited. Also, because Venezuela generally receives 90% of the operating proceeds through royalties and taxes, given PDVSA's majority ownership of Petrodelta, we believe there is little incentive to further nationalize the business. Based on the strong results of last year's appraisal drilling program, our fields present decades of visible growth in oil reserves and production with compelling economics."
International play potential: Indonesia, Gabon, and Oman
A near–term exploration catalyst includes Harvest's Indonesian oil prospect. Harvest has a 47% interest in the 1.4 million acre Budong–Budong Production Sharing Contract (PSC) located onshore West Sulawesi in Indonesia. Heavy forests and thick vegetation made exploration, drilling, and production costs uneconomic — the primary reason BP left. However, recently planted palm oil plantations have been developed in the area, clearing huge areas and creating open space for drilling locations.
Oil seeps have been identified near Harvest's operations, indicating the presence of an active petroleum system. Harvest plans to test that potential with the first of two exploration wells to be spud in the first half of 2010. Harvest plans to spend a total of $28 million in net expenditures for Budong–Budong in 2010, including contingent appraisal wells in the second half of the year.
Harvest holds a 66.67% operated interest in the 680,000–acre Dussafu Production Sharing Contract (PSC) located offshore Gabon. Harvest plans to drill its first exploration well in the Dussafu PSC in 2010 to test pre–salt targets in the Gamba and Syn–Rift plays, which are productive in the nearby Etame, Lucina, and M'Baya fields.
In 2009, Harvest brought in new 3–D seismic modeling technology to paint a clearer picture of the pre–salt formations previously tested with 2–D seismic technology. The first test well is planned to target the Gamba sandstone reservoir having a porosity of 20% with an expected gross interval of 65 to 100 feet, which could hold 30 million barrels of original oil in place.
In most cases, budgeting $15 million for a test well with those estimations is not viable. However, a find of only 10 million barrels makes the play more than economic to Harvest.
Staying true to its exploration niche, Harvest signed an agreement with the Middle East country of Oman in 2009 to explore for natural gas in fields adjacent to established, multi–TCF producing fields. If successful, the Oman field has the potential to be a true game–changer for Harvest. The Block 64 EPSA was created specifically for the exploration and production of natural gas and Harvest plans to complete the reprocessing of a 3–D seismic evaluation to identify and target high–grade drilling areas.
In 2008, the US Department of Energy reported Oman had approximately 1,100 miles of pipelines servicing its LNG terminals and power plants. With Oman's infrastructure already in place, Harvest has a ready market for the gas produced from a commercial discovery.
The ‘right stuff'
Harvest is run by a small, tight–knit team of seasoned oil and gas veterans. "Each of our operating officers has major E&P company experience and significant international experience," explains Edmiston. "In fact, we have no operations in any country or region where at least one of our officers and senior management team hasn't had direct, on the ground, operating experience."
In terms of getting things done, he continued, "This expertise enables us to operate successfully in places where others have struggled."
Financial resources for growth
In February 2010, Harvest raised $32 million of new capital from the sale of convertible notes for funding the company's growth plan and maturing the prospects in its exploration portfolio.
Steve Haynes, CFO commented, "We were very pleased at the market's response to the offering, which was oversubscribed. The offering also helped bring in new, large investors who wanted to take a scalable position in the company in one transaction."
For most energy companies, 2009 was a year of transition. For Harvest it was one of advancing the company's diversification plan with new initiatives and preparations to drill on high–potential exploration prospects. Now, Harvest appears poised to make 2010 a year of growth and realized potential.
Edmiston concluded, "Last year, we successfully navigated one of the most challenging business environments in recent memory. In 2010, we have several near–term catalysts in Indonesia, the US, and Gabon that could change the complexion of the company. Now is a good time for investors to be watching our progress."
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