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Vermilion looks to Europe amid sanctions on Russia

A crude oil storage tank, left, and crude oil pipe operate at the Vermilion Energy pipeline and storage site in Vaudoy-en-Brie, near Paris, France, on Friday, Sept. 24, 2010. Companies are racing to drill for unconventional oil near Paris in a bet the area around the French capital is similar to sprawling Bakken Shale deposit in North America, estimated to hold billions of barrels of crude. Photographer: Antoine Antoniol/Bloomberg

Antoine Antoniol/Bloomberg

Vermilion Energy Inc.'s Lorenzo Donadeo is bullish on Europe, as his company looks to unlikely countries such as France, the Netherlands and Ireland to help drive production growth.

Despite Europe's image as a land of carbon taxes, fracking bans and green energy enthusiasm, Mr. Donadeo says it's a good place for an independent Canadian oil company to do business. And now, the crisis in Ukraine is expected to keep upward pressure on natural gas prices on the continent, while encouraging governments in Western Europe to look for domestic supplies to help wean them off their dependence on Russian energy.

Last week's downing of a Malaysian jetliner – with the death of 298 people – is certain to heighten and prolong the political crisis.

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"It just reaffirms that we're currently in an environment where Russia is becoming more and more aggressive," Mr. Donadeo said in an interview. "And if you're a European, you're relying on Russia for 30 per cent of your gas and you have to look at how you are going to find alternatives to that. And having someone like Vermilion that is active and investing is a good thing for them."

The United States is imposing new sanctions on Russian companies and that action could have consequences for the country's massive energy exports, Capital Economics' Caroline Bain said in a report.

"If the Western response is to further tighten sanctions on Russia, commodity supplies may be negatively affected, potentially leading to markedly higher prices," the economist wrote. "The most severe possible consequence of deteriorating relations between the West and Russia would be disruption to Russian energy supplies to the EU, whether as a result of Western sanctions or Russian manipulation."

Even before the most recent apparent attack on a passenger jet, Mr. Donadeo said the Ukrainian crisis was creating major waves in the European energy market, threatening deliveries of Russian gas through the transit country and keeping prices elevated due to political risk premiums.

Like many Calgary intermediates, Vermilion maintains a focus on booming North American production, with significant assets in the Cardium and Duvernay plays in Alberta and Saskatchewan's Williston basin. But its European production provides premium prices often unavailable to competitors in Calgary.

Vermilion believes the ongoing crisis will support European gas prices at $10 to $11 (U.S.) per thousand cubic feet (mcf) for the foreseeable future, while liquified natural gas – Europe's only alternative supply – will fetch $12 to $13 per mcf.

At the same time, the company produces 11,000 barrels per day of oil in France – making it the country's largest single producer. It sells the French crude at a $15-a-barrel premium to what producers in central North America receive. The company has interests in two conventional fields – one in the Paris basin east of the capital, and another in southern France around Bordeaux.

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While the French government recently imposed a moratorium on hydraulic fracturing over concerns about threat to ground water, Mr. Donadeo said the nearby residents have welcomed conventional oil production, in large part because much of the tax revenue goes to local governments.

"They are very supportive of our activity because the more we do and the more production we add, the more we contribute to their local budgets, which allow them to build their schools and upgrade their roads and that sort of things," he said.

The fracking ban won't affect the company's current growth but Mr. Donadeo said the company could exploit some unconventional plays should the government in Paris ever allow it.

But the company sees greater potential in European gas, especially in the Netherlands and Ireland.

In 2009, it purchased an 18.5-per-cent interest in the Corrib gas play in western Ireland's offshore, in which Royal Dutch Shell PLC is the operator. The project had run into problems when local residents objected to Shell's plans to bring a pipeline ashore at the Sruwaddacon estuary in Broadhaven Bay, but the company is now building a tunnel under the bay through which it will pipe the gas.

When it begins producing in 2015, Corrib will boost Vermilion's production and cash flow by 25 to 30 per cent.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More


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