Sveinung Svarte, CEO of Athabasca Oil, makes his mark
He ditched the sands and embraced tight oil. Athabasca, he thinks, could be the next CNRL
Every Norwegian kid knows that of all the berries, cloudberries are the best. They are small and delicate, like diminutive orange raspberries whose taste, which some compare to sweet wine, is coveted. They are rare, growing wild on mountain meadows and marshes, and they are beautiful, facing the heavens like a flower. Unsurprisingly, that has made them valuable. To some, they are “highland gold.”
To Sveinung Svarte, they were an early taste of what could happen when he applied a little smarts to a precious commodity. His parents picked them for their own use. He hired a couple of local kids to do the picking, and pocketed the proceeds. “They’re really expensive, and as a kid you make a fortune out of that,” says Svarte, who has long since been transplanted from Norway’s slopes to Calgary’s downtown towers. But distance and time haven’t changed that one trait: he is still looking for ways to mine profit from something everyone wants.
Svarte is the CEO of Athabasca Oil Corp., a company that, in its opening days in 2006, convinced investors to put down $100 million for assets the company would not then reveal. All they could say was that they were chasing the closest thing Alberta has to the cloudberry: the oil sands.
Those who took that initial bet were rewarded. Since its formation, Athabasca has been among the most aggressive companies in Alberta.
It has found oil by the billions of barrels, and then pulled in $1.35 billion from an IPO that landed at a market peak. It sold 60 per cent of two projects to PetroChina for $1.9 billion, then the remainder of one of those projects for another $680 million. What’s left of the second project, which it’s broadly expected to sell, could yield another $1.3 billion, plus the company has not been shy about saying it’s working up another big deal that could land any day.
All the while, it has scoured the province for land it could snap up before anyone else saw its value, amassing a huge position– some 3.5 million net acres – after a buying binge that made it, chairman Bill Gallacher believes, the most active land buyer at public auctions “in Alberta for four or five years.”
Oh, and along the way it did an about-face. In May, Athabasca Oil Sands Corp., as it was initially called, became Athabasca Oil Corp., after the company that built a quick fortune around Fort McMurray completed a transition into a company whose ambitions now span Alberta. The Fort McMurray berry patch, it turned out, wasn’t big enough for Svarte. Nearly 60 per cent of Athabasca’s land now sits outside the oil sands, on the other side of the province in the so-called “deep basin” where instead of heavy bitumen, extra-light oil surges to the surface with natural gas. The company has boasted that in the span of just eight years, it will be pumping somewhere between 200,000 and 260,000 barrels per day.
Today, it pumps 7,000 (although that amount is still waiting to be tied into a pipeline). It recently signed a lease for several floors in a not-yet-built tower, where it will have space for some 650 employees. Its current roster stands just over 300. It talks about a huge trove of oil, some 10.4 billion potentially recoverable barrels. But its proven reserves stand at 8.4 million barrels.
There is, in other words, a lot of work for Athabasca to do to prove to antsy investors, who have seen their shares slump dramatically since the IPO, that it can actually produce the bumper crop it keeps promising. “The onus is on us to show it,” says Bryan Gould, Athabasca’s vice-president of corporate development.
To understand Athabasca, a company that has embraced foreign partners, made no apologies about dramatic changes to its business strategy and leavened it all with a healthy dose of big ambition, it doesn’t hurt to understand Svarte. He grew up in a small town in Norway in a family of teachers and engineers and opted for a career in oil and gas. But the most natural employer, what is now Statoil, the Norwegian national oil company, was never high on his list. He wasn’t up for a stodgy career. “I was never really drawn to those state type enterprises,” he says. “And I wanted to see the world.”
So after studying engineering, he left for the United Kingdom to work in the North Sea for Conoco. He moved to Paris and eventually took up with Total, a company that once again dispatched him far and wide. His work took him to South America, Kazakhstan, Russia, Azerbaijan, Asia and Africa. He came to Canada in 2005 and found himself working for a company that had, at the time, barely a dozen employees, but big dreams for Alberta, where it would pledge $20 billion in investments around Fort McMurray.
As vice-president of oil sands, it was Svarte’s job to grow those dreams. He was there when Total bought out Deer Creek Energy for $1.67 billion. He discovered that he liked working in the oil sands, whose scale resonated with things he had done before.
“I worked in Kazakhstan before I came here. And typically in the Caspian Sea, you’re talking about 12 billion barrels recoverable,” he says. “So I think if I had gotten to work on small things here, I would have had a hard time to find motivation for it.”
Plus, he liked the idea of transforming the boreal forest into something else. “To me, it’s a challenge of building things,” he says.
That perspective came in handy when Bill Gallacher came calling. Gallacher had, together with Ian Atkinson, a Calgary-based engineer who is now Athabasca Oil Corp.’s vice-president of geoscience and development, found what they believed was a huge overlooked asset. Reviewing microfiche and core samples a half-century old, some of which had not been opened in many years, they found promise in areas west of the traditional oil sands development zone. “We found pure bitumen,” Gallacher says. “So we started a bidding process to acquire the land.”
But they needed someone to run the company. Gallacher and Svarte started talking. In one conversation, Gallacher asked Svarte to note the things he wanted in a company. The resulting wishes – a big company with big money and a big, contiguous land position – almost perfectly matched a list Gallacher had scrawled on a paper and brought to the meeting. Svarte was hired in 2006.
It didn’t take much thinking to conclude, though, that developing a prize the size of the oil sands was not something a couple of guys with a dream, or even $100 million, could do. But Svarte had a different perspective from many others in Calgary. He had no philosophical problem with grabbing outside dollars through joint venture partners.
“All the way from day one we thought that was the model,” he says. “To me it was natural, because every international oil and gas development consists of normally two to four partners.” Plus, when he went to drum up interest, he had a Rolodex that came in handy. While still with Total, he had worked in both Kazakhstan and eastern Siberia alongside PetroChina, the company engaged in their initial deal, a joint venture that could ultimately be worth $3.9 billion.
It was the first. It will not be the last. A second joint venture – also for oil sands assets, though not as big as the first – is on its way. Another will probably be needed to tap the firm’s carbonate rocks, which require technological ingenuity to access and which could one day produce 400,000 barrels a day. Yet another will likely be called upon to finance the remaking of Athabasca and its foray into the deep basin.
That move has dramatically changed the complexion of a company that had put down roots in the Fort McMurray area and looked like an oil sands company. The way Svarte tells it, it came down, in part at least, to corporate boredom. Athabasca’s exploration team had done its work in the oil sands. It was looking for something else to do, and saw the early days of the Bakken boom in the United States, where underground fracking was bringing huge new volumes of oil to surface. They figured the same must be true in Canada, and started looking around.
“We saw all this land available after we did the studies and figured, ‘We really like this,’ “ Svarte says. It was an about-face for a company built on the oil sands, and Athabasca acknowledges a good half of its investor base was initially unhappy. But Svarte had grown up in big diverse companies, so “I was probably more open to seeing a bit of a bigger picture and trying to grow a bit more.”
Plus, fracked oil promised a major bonus: cash flow. Deep basin crude is costly to develop – at $10 million a well, it adds up quick. But the oil comes on fast, paying back costs in a hurry, and at a higher profit, with an expected 30-plus per cent return. That makes it a cash generator for the oil sands, where an expected return in the teens is lower but can be sustained for much longer.
“You always worry about being pure play or not,” Svarte says. “But I’ve seen so many times through history that companies who were not pure play have split up to become that and regret it afterwards.”
The deal is coming. It’s just around the corner. It’s almost here. Executive vacation plans are being cancelled to make it happen.
It’s not often that a company spends as much time telegraphing its intentions as Athabasca with its looming joint venture, talk that has, by one investor’s calculation, boosted its share value by some $3, a huge amount. In August, the stock jumped 12 per cent on news that the company was considering a joint venture, reportedly with the Kuwait Petroleum Corp. The promotion around a looming deal is, some say, plain weird. “They’re just odd. They’re really promotional,” says one Calgary investor who runs billions in the energy space.
And, the investor says, Athabasca’s strategy carries shades of the same. This is a company whose founding expertise is in the oil sands, but now says half of its production will be outside Fort McMurray, and fully a quarter won’t even be oil, but natural gas. “As a proper investment it doesn’t make sense to me, given the lack of clarity on its strategy and the lack of clarity on how it’s going to move it forward.”
That sentiment isn’t isolated: Athabasca went public at $18 per share. It now trades at around $13. It was one of the biggest energy IPOs in Canada. It’s also been one of the biggest disappointments.
But the skepticism that exists in markets has been at least partially balanced by those who say Athabasca’s moves outside the oil sands have given it the underpinning it needs to be a mid-sized Fort McMurray producer – a rare breed in a region filled with global energy titans. Because as it turns out, producing extra-light oil, called condensate, is helpful to a company that needs condensate so its thick oil sands crude can flow down pipelines. It is the same for natural gas, a critical ingredient in the manufacture of oil sands crude.
“I believe strongly in that integrated process. It worked for Suncor. It will work for these guys,” says Rafi Tahmazian, a senior portfolio manager with Canoe Financial in Calgary. Plus, that deep basin play? Turns out, Athabasca called it right. They got in for, on average, $150 an acre. Land there now has now traded up to $4,000 an acre. And that condensate, which Athabasca consciously chased? It sells for more than oil. It is the most valuable hydrocarbon produced in Alberta today.
“It’s either bald-ass luck or very strategic,” says Tahmazian, who has never owned Athabasca, but says it has an important role to play. “We need it to happen. There’s a definite appetite in the investor marketplace for a more aggressive growth oil sands player. And if they’re able to demonstrate that they can play in more conventional assets, that gives me significantly more confidence in the business.”
That, Tahmazian added, is already happening. This summer, Athabasca raised its 2012 output guidance by some 2,000 barrels, saying it expects to exit the year at 10,000 to 11,000 a day of production.
Or perhaps something bigger. Athabasca is barely a corporate infant, just on the doorstep of pumping its first oil. There will be all manner of opportunity for missteps and failures. There is a possibility that the company won’t last, if it falls victim to the ambitions of someone larger than itself. Bryan Gould, for example, wanted to buy Athabasca outright when he worked at Shell.
Yet Svarte says the dream is to build the company into something bigger. He already knows what he wants it to look like: Canadian Natural Resources Ltd., the Alberta oil patch wunderkind. Svarte is attempting to follow in CNRL’s footsteps by taking full control of his hydrocarbons, building pipelines and processing facilities to ensure he is not beholden to others. He, of course, has a good long way to go to narrow the 600,000-barrel-per-day chasm that divides Athabasca from CNRL. But for a man who once figured out how to turn orange berries into profit, it is perhaps understandable to hope the future brings ownership of one of the sweetest berry patches around.
“Since I started working in Canada, CNRL was my favorite company,” Svarte says. “And obviously if there’s one company I’d like to try to approach as an ambitious goal, it is CNRL. They did everything right.”