Profile Parkmead Group
"The future is smaller..."…
Profile Parkmead Group
Core business: Oil & gas exploration and development
Date incorporated: 2011 (established as an oil and gas company)
Annual revenues: About £4 million in 2012
Number of employees: 11 full-time + consultants
"The future is smaller ..."
The Parkmead Group is really only two years old, but the Aberdeen-based company is already making waves in the oil & gas sector, buying up strategic assets which promise to turn the new enterprise into a significant industry player – without a significant increase in the number of staff...
In July 2016, a group of new oil wells is scheduled to come into production in the Perth Oil Field in the central North Sea. Before that date, the partnership of companies which own the drilling rights will invest about £270 million in constructing a purpose-built boat (an FPSO, or floating production storage and offloading vessel) and drilling six new wells. These wells will then be hooked up to the floating platform, which houses the facilities for processing the water, oil and gas, and also stores the crude oil, which is in turn offloaded periodically via a shuttle tanker.
The new wells are expected to produce around 12,000 barrels a day, but as the North Sea oil reserves begin to diminish, this is the sort of field which promises to extend the lifetime of the industry by extracting resources which used to be regarded as too much of a technical challenge, or were simply considered too small to be profitable. But if all goes according to plan, the project promises healthy returns for investors who are ready to take on the risks – and it is scientists with specialist knowledge of subsurface geology and geophysics, working in a team with economists, who calculate those risks.
According to the organisation in charge of the project, the secret of success is “ruthless ranking and selection” of opportunities, using very strict investment criteria. “It’s like a talent contest,” says a spokesman. “You assess the potential and decide which field offers the biggest returns on investment. It’s mostly science but there’s also some art involved.”
You may think that one of the oil giants like Shell, BP or Chevron is behind such an ambitious project, but the truth is that the company which owns the rights and will be operating the wells would find it hard to field 11 players for a football team.
“Proven business model”
The Parkmead Group was re-positioned just over two years ago by its chairman Tom Cross, who had previously been in charge of Dana Petroleum until its “hostile” takeover by the Korea National Oil Corporation in 2010 – the first time an Asian state-owned corporation had taken control of a UK-owned company. Cross had taken Dana from virtually nothing to a company worth $3 billion in just 16 years, but rather than rest on his laurels, he started up from scratch again with Parkmead, bringing a core team from Dana to join him.
In its first two years, Parkmead has not made any profits and its revenues are hovering at around £2–4 million, mostly based on earnings from consultancy. But all that is about to change when its latest assets go into production. Parkmead has made a takeover offer for the Lochard Energy Group, a move which has the potential to improve the company's cash flow by about $2 million a month. Control of Lochard would provide Parkmead with a 10 per cent share of the Athena Field, currently producing about 9,000 barrels of oil per day – i.e. Parkmead’s share would be 900 barrels per day, a major increase from its current production of about 200 barrels per day.
The Lochard bid is just the latest in a series of similar moves. Parkmead’s strategy is to create a balanced portfolio of assets in pursuit of its aim to become a “significant independent oil and gas company, on an accelerated basis, using a proven business model.” And its recent acquisitions give it interests in a range of offshore assets from the west of Scotland and Shetland to the central and southern North Sea, as well as onshore assets in the Netherlands, plus an in-house consultancy which adds to Parkmead’s revenues and cash flows.
The purchase of DEO Petroleum last year (in a share offer which valued the company at £12.7 million) enabled Parkmead to acquire 52 per cent of the Perth Field, while its purchase of assets from Dyas BV in the Netherlands in March last year also gives it access to onshore resources which have already started to contribute to cash flow. The company also has a stake in Faroe Petroleum (which has 40 exploration, appraisal, development and production licences in the North Sea) and the Platypus Gas Field, and made successful bids for licences in the North Sea. These include the award of new licences in the 27th UK Continental Shelf Licensing Round in October last year, which gives it access to 25 blocks – adding to the 12 blocks already acquired. This has “bolstered our exploration and appraisal portfolio around our existing assets,” says the company's most recent annual report, “while adding extensive acreage in exciting new areas with significant reserves potential.” During the last year, Parkmead has also become an exploration operator in the North Sea for the first time, and by the end of 2012, it had a reserve base of 23 million barrels of oil equivalent (MMBOE), plus another 11 MMBOE in contingent resources.
One of the Parkmead Group’s earliest moves was the purchase of AUPEC (Aberdeen University Petroleum and Economic Consultants), which is headed up by David Rose and Alex Kemp, Professor of Petroleum Economics at the University of Aberdeen. AUPEC was founded 25 years ago and, according to the Parkmead Group's technical director Colin Percival, the company is a “world-class business” right on its doorstep, crunching the numbers for potential investments, the same as it does for major oil and gas clients, governments and large financial institutions.
As the name suggests, AUPEC was originally a spin-out from the University of Aberdeen. At the turn of the Millennium, there was a management buy-out, with the University retaining a 20 per cent share of the company. Parkmead later bought the company through a share issue and £1 million in cash – gaining a partner to help with appraisal of future investments as well as generating cash flow through consultancy fees.
The purchase of AUPEC on top of the other investments has established Parkmead as a serious industry player, but such rapid progress always comes at a price. “The first few years can be painful for investors,” says Percival, but Parkmead is still confident that it is well on course to achieve its objectives and generate significant profits in the very near future.
Learning from experience
A major part of the company’s strategy is to learn from the experience of Dana Petroleum, where Cross and several members of his team, including Percival, learned the hard way how to take on the giants in one of the most competitive industries in the world.
According to Percival, Parkmead has been able to grow “on an accelerated basis” by not repeating some of the mistakes made at Dana – for example, “not bringing disciplines in-house that we are not very good at,” and not trying to create a “mini Shell or BP.” This would have been a step backwards, says Percival.
Including a few regular consultants, the company now numbers about 15 people, but Percival says it has “no plans to increase to several hundred,” not only because this keeps running costs low, but to make sure it remains nimble and continues to develop close relationships with key strategic partners and contractors.
The business model is to have a small core execution team with “mission critical” skills such as geology (Percival’s specialist subject) and petroleum economics, plus the knowledge and experience gained through the years by the team working for many of the industry giants, then outsource other work to specialist consultants and bring in contractors to handle operational jobs such as drilling. And because many people prefer to work on a consultancy basis rather than as employees, this suits all concerned and keeps Parkmead’s overheads down. The only skills the company would never sub-contract is subsurface and commercial, says Percival, because this gives Parkmead its technical edge.
The Parkmead business model also means it makes more sense to focus on the type of opportunities which the oil and gas giants would not necessarily want to take on, for economic and technical reasons. The Perth Field, for example, is a “low deliverability” discovery, with total production expected to be about 12,000 barrels of oil a day initially, with a field life of 15 years (an estimated total reserve of 41.3 MMBOE), compared to 40,000 barrels a day in some of the bigger fields established several years ago. So, while the big producers need large “cash cows,” smaller players such as Parkmead can profit from these smaller assets.
Percival explains that as well as being relatively modest in terms of production, the Perth Field is also a technical challenge, because when the oil is extracted, it will also produce a lot of hydrogen sulphide. But Parkmead and its partners have developed a solution to deal with this problem, making the field a more practical option than many other companies thought possible only a few years ago. “The solution is nothing new,” Percival says, “but it does combine existing technologies in a new way.”
This “small is beautiful” approach is not only what makes Parkmead different, but may be how the industry evolves in coming years, especially in areas such as the North Sea. “The future is smaller,” says Percival. “Smaller companies exploiting smaller reservoirs in a difficult financial climate where technological advances make all the difference – combined with high prices for oil and low taxes – will become more significant players.”
As Percival adds, “the infrastructure (platforms, pipelines and support services) won't last forever,” so the tax structure has to be balanced to encourage investment by these smaller players and ensure that these smaller reserves are exploited, not left in the ground.
Aberdeen is the obvious place to locate a new business like Parkmead. The city is home to an estimated 90–95 per cent of the oil and gas sector in Scotland, with Glasgow and Edinburgh sharing the rest. Percival points out that this sometimes boils down to simple advantages – he can walk out of the office in Aberdeen and literally bump into someone he needs for a particular project.
In addition, says Percival, Scottish universities are still turning out a steady stream of graduates and post-graduates with the qualifications required – not just from Aberdeen but also Edinburgh and Glasgow, who provided two of Parkmead’s most recent recruits.
Now an external examiner at the University of Aberdeen, Percival himself laments the fact that his own alma mater, the University of Reading, no longer teaches “traditional” geology – ironically, the science which Parkmead needs most and continues to be in such high demand in the oil and gas sector.
Oil and gas may sometimes be an “invisible industry” to many people in Scotland, because so much of its activity is offshore, but Parkmead is making its presence felt not just in Scotland but industry-wide – despite the fact it hardly has enough staff for a football team.
Sometimes, says Percival, he’s taken by surprise when new projects spring into action, costing many millions of dollars. “You can see the whole team in the office a few feet away,” he explains, “but when the helicopters start taking off and landing, and rigs and boats start moving you realise the plans are now becoming a reality.”