Opportunities beyond the U.S. shale plays

Denis McKee

With low oil prices creating a very competitive and challenging environment in the United States, many companies are looking to expand their operations globally in an attempt to find new markets. Today we speak to United Oilfield Services CEO, Denis McKee, about developing an oilfield service company outside of the U.S. and some of the challenges faced.

Monica Thomas (Shale Gas International): The first question I just have to ask: What made a prosperous Texan forsake the U.S. with all its rampant shale drilling and relocate to Poland, of all places to start a shale oilfield services business?

Denis McKee (United Oilfield Services): It all boils down to five years ago, I came to a resolution for my investment company to come and look for some oversees opportunities to establish what we were doing in North America shale and do it internationally. The U.S. market seemed flooded and there wasn’t really anybody doing anything seriously internationally. I prepared a long list of many potential countries where shale plays were developing and Poland was the first stop in a list of about 23 countries.

I basically found out that my very first two objectives were to ascertain that: One, we had a stable regime and the country was politically stable, and two, I was looking for an educated and motivated workforce. Poland fit that bill very, very nicely.

I then spent the next year vetting the deal and drawing up the business plan and as of July 1st 2011 we were fully registered as a company.

MT: UOS is the only company in Europe which has invested about 250 million dollars in shale industry. You certainly must have great faith that this business will take off. How do you see this industry developing in the coming years?

DM: Our initial investment was 165 million dollars; obviously we’ve been terribly underutilised. Europe isn’t the biggest market in the world, but the political situation here changed about two and half to three years ago.

Particularly due to the passage of unfavourable tax rates we started seeing investors exit the business fairly rapidly with all the things that were coming through the pipeline – politically. I call it “the Dark Ages of Poland”!

This basically meant that even if you were successful in exploration, there was no way that you would make a commercial endeavour out of it. Then we saw all the majors pull out one after the other. This dried up a lot of the investment pool and then the independents having a huge problem funding major projects here because there is a delay in permitting and all this stuff takes extremely long, and then you’ve got the oil price collapse, which also collapsed the gas prices in Europe.

It was just a perfect storm for another big slowdown and a lack of investment.

MT: Do you think that this is likely to improve? I understand that in Poland the state-owned companies are still continuing the exploration. In the UK, before the election, all major parties supported shale exploration. However, it seems that the Conservative Party is the only one still supporting shale now; obviously they are in power for the next five years. But what do you think will happen to shale exploration in Europe within the next five years?

DM: Well, we’ve been heavily invested in travel-time and talking to all the major players in the UK for the last two and a half to three years. Or maybe even more. Of course at first it was Cuadrilla that drilled the first original well and fracked it.

And having seen some of the rock-data, UK has definitely gone for commercial gas. Then it is just attributable to the politics and of course the elections – everything was postponed on the 14th licensing round because of the elections and then of course it has been delayed even further now due to the legislations which need to be passed.

It’s very disappointing from the industry point of view, because investors only have a limited amount of interest in sitting back and doing nothing with the investment that they’ve made. The concern now is that the UK drags this issue out for another year or two and doesn’t get off the peg and start going, all of the investment that there is in the UK will dry out very quickly.

And that’s not a good scenario for the UOS in UK and Europe in general.

MT: Part of the problem is that while in Poland there was a lot of support for shale gas, this is not the case in Britain and certainly in Western Europe. I watched your company’s presentation at Shale World in Birmingham in April where the presenter gave examples of how the company engaged with local communities in Poland. Do you have any advice to offer when it comes to managing the social perceptions of shale so that there is more support for it among ordinary people?

DM: For sure, we have made one or two trips a month to England and Scotland and we’re strategizing; we’re in contact with all the current and the future players that are participating in the 14th licensing round. I have had some meetings with a couple of PR firms that are representing some of the E&Ps there and we were giving our input about the way it’s been handled here, in Poland. Conoco-Phillips has done probably the best job I’ve seen with regard to handling community affairs. They didn’t try to hide anything and they definitely involved the locals and had them participate in what they were doing at all phases and it was an encouraging thing to hear the locals actually say: “Well, this isn’t “Gasland”. Where’s the noise, where’re all the trucks, and pollution?”

I predict the same thing will happen in the UK if we ever get to the point of getting past the obstacles we’re facing in the UK at the moment. Like I say, the fear is that thing gets kicked down the road another year in the UK. Of course the Greens are being very well-funded, but they know that if it ever goes forward and gets the first few wells drilled and they’re commercial, they won’t be able to stop this situation.

MT: There is a lot of debate about regulation at the moment in the UK. Recently there was a report published by Taskforce on Shale Gas. So I’d like to ask about how you would compare regulations, or best practices, in the U.S., in Poland, and in the UK?

DM: Well, the U.S. is obviously light-years ahead because they have privately-held mineral rights. The industry over there gets things done quickly. The permit-to-well in the U.S. takes a week or two at the most. The permit-to-well in Poland is about a year; six months to a year, and the permit-to-well in the UK right now – as is the case with Cuadrilla – it’s been going well over a year. And with the local council kicking the can down the road – which personally I don’t blame them – if I’m a 65-year-old retired non-paid government council member, I won’t be willing to take death-threats and all the stuff that was being thrown at them, and make the decision. I’m going to kick the can down the road, knowing that sometime in the future – six months, a year, a year and a half – the UK national government will step in and take that decision-making from the local level. This is because the local people don’t need the headache.

So the UK still has a long way to go as far as legislation is concerned. The industry as a whole is trying to push the UK government forward, explaining that now that they have a majority government, they really need to take advantage of this and pass the legislation instead of waiting two years and then: “Oh, heck, we’ve got another election in three years, so there is nothing we can do.”