Epsilon Energy

Help thy neighbor┬áFred Zaziski, CEO of oil and gas exploration and production company Epsilon Energy, talks to Gay Sutton about the companyÔÇÖs strategy on risk and expansion, and why, in such a cutthroat industry, competitors help their neighbors. Epsilon Energy is a relative newcomer into the highly competitive oil and gas industry, one of a new generation of companies that are locating and extracting these valuable resources, often exploiting areas that had previously been deemed too difficult.Formed in 2005 by Zoran Arandjelovic, who is also chairman of Capital Z Corp; Kurt Portmann, chairman of Orbis Equity Partners; and John Wilson, president of Western Land Services, the company went public in October 2007.During its first four years in operation, Epsilon has acquired a broad portfolio of interests, in accordance with its strategy of diversifying effort and spreading risk. Its activities range from reliable low-risk gas-producing properties in the United States and Canada to potentially high-yielding oilfields in the Middle East and Africa. Over this short period of time, work has progressed to the point where the efforts are split 50/50 between exploration and production.The company kicked off its first project in the Lower Huron Shale of West Virginia. This is now delivering a steady output of gas and has a substantial life expectancy of 60 to 70 years. ÔÇ£We now have just over 100 wells there with 100 percent success rate,ÔÇØ says Zaziski. ÔÇ£I would say the only risk involved with drilling in this area is mechanicalÔÇöthat something may break on the rig.ÔÇØThe company has also established a significant presence in one of the most exciting new gas-producing regions to emerge in the US in recent years, the Marcellus Shale region. Huge gas reserves had long been thought to exist deep beneath the rock in an area that stretches from New York to West Virginia and as far west as Ohio. But now that new technologies have emerged that make it possible to extract gas here, the region has become a hot spot for the industry.Epsilon began accumulating leasehold acreage in the Pennsylvania region of the Marcellus two years ago and then launched what it calls its Highway 706 project. ÔÇ£We have eight wells drilled there to date, and weÔÇÖre in the process of putting in our infrastructureÔÇöour compression station and gathering system. We should be able to go into production within the next 60 days.ÔÇØ┬á The company is looking to develop in other areas of the Marcellus region and is currently applying for permits to drill and build the infrastructure on a property in New York State. It is also in the early stages of exploration in two further North American regions. One is in the St. Lawrence lowlands in Canada, where Epsilon is working in conjunction with Gastem. The other is an area of around 31,000 gross acres in the Bakken Shale region of Saskatchewan, where drilling will commence this September.As part of the strategy of spreading risk and diversifying effort, Epsilon is also reaching out to the oil-rich Middle East, where the risks are perhaps a little higher but the returns could also be greater. Having acquired a 57 percent interest in Block 41 in Yemen, the company has drilled four exploratory wells over the past 14 months and is currently evaluating the data.With constantly improving technology and the increasing value placed on accessible oil reserves, areas that had previously been shown to produce oil but not at a commercially viable rate are now being revisited. Block 55 in Oman is one of these. ÔÇ£And thatÔÇÖs 100 percent ours,ÔÇØ says Zaziski. ÔÇ£A discovery well drilled there in the early 1980s was producing 230 barrels a day, but in the ÔÇÖ80s that was considered to be nothing, so the oil company just walked away.ÔÇØ In todayÔÇÖs marketplace thatÔÇÖs an attractive prospect.Perhaps the most interesting new prospect that has caught EpsilonÔÇÖs eye is in Ethiopia. ÔÇ£This is our pie in the sky,ÔÇØ Zaziski says. ÔÇ£ThereÔÇÖs huge potential in Ethiopia; itÔÇÖs one of the few places where you have the chance of finding something really big. Yet very little work has been done there, and no work has been done in the area weÔÇÖre exploring.ÔÇØ┬á Zaziski admits that Ethiopia was probably the companyÔÇÖs highest-risk initiative to date. ÔÇ£But it was very cheap: our commitment to get it going was very minimal. And the nice thing about it is that the terms are such that we have plenty of time to do it.ÔÇØ So far the company has identified an area with potential and is evaluating the survey data.The oil and gas industry is notorious for being located in some of the most inhospitable regions of the worldÔÇöthe frozen wastes of Canada and Russia, or the deserts of the Middle East and Africa. ÔÇ£Anywhere in the oil and gas fields you have to be pretty much self-sufficient,ÔÇØ Zaziski explains. ÔÇ£You take your own communications systems with you, truck or fly in your food and water, and so on.ÔÇØ┬á Each new project, each new region, presents a unique set of challenges, requiring innovative technical and operational solutions. ÔÇ£So your first well is typically the most difficult,ÔÇØ Zaziski continues. ÔÇ£As you move forward, you learn by your mistakes.ÔÇØ Self-sufficiency, however, does not mean being secretive. ItÔÇÖs during the initial bidding process that oil companies are direct competitors. Once exploration begins, itÔÇÖs in the interests of all neighbors that they communicate and share their knowledge and experience. ÔÇ£Some like to keep everything a secret, but I donÔÇÖt regard my neighbor as my competitor. We talk to all our neighbors to see what theyÔÇÖre doing to lessen the drilling time, what theyÔÇÖre doing to make the wells more productive, what techniques work on their fracturing and so on. And we tell them what has been successful for us. This benefits us all by cutting down the time to drill a well and giving us better production.ÔÇØEpsilon is always on the lookout, always searching for the next big discovery, and like most in the industry, dreams of being the first to exploit it. But searching for new sites is a time-consuming activity. For every 100 sites, maybe only one warrants a second look. ÔÇ£Take the Marcellus. Three years ago nobody thought about the Marcellus in North America. Now itÔÇÖs the hottest place here. ThereÔÇÖs going to be another one like that in two, three, four years from now, and weÔÇÖd love to be the people to find that.ÔÇØ ÔÇô Editorial research by Ryan Kirkey┬á