TomCo Energy could be a big winner simply by coming secondReported by Proactive Investors on Wednesday, 11 July 2012 (on July 11, 2012)
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There are very few arenas in which it pays to come second. Certainly silver will come as little consolation to Usain Bolt if the world record holder loses out in London to rival and training partner Yohan Blake as he did recently in the Jamaican national trials.
The analogy is tenuous, but TomCo Energy (LON:TOM), the oil shale specialist and darling of the bulletin boards, finds itself trailing in the race to mine the thick seams of oil in Uintah County, Utah.
And yet, TomCo chief executive Paul Rankine couldn’t be happier.
That’s because he knows front-runner Red Leaf Resources will provide the test bed for the experimental EcoShale process that promises to revolutionise oil shale, effectively de-risking it for those that follow.
The relationship between the two shouldn’t be underplayed.
The commercial agreement TomCo has with Red Leaf gives it the right to use the EcoShale process in return for a six per cent royalty.
And under the terms of the deal TomCo also receives all the data generated as Red Leaf brings its pilot operation into production in 2014.
Crucially, Red Leaf should also provide an objective valuation yardstick for TomCo, although the market has been slow to pick up on this.
The value is in Red Leaf’s relationship with the French oil major Total, which has agreed to invest $320 million out of a total $400 million developing the Seep Ridge project oil shale deposit. And it ploughed in a further US$25 million acquiring Red Leaf stock.
Half the proposed capex will be used to bring on line an early production system, with the remainder spent after Total makes its final investment decision (FID).
This FID in 2014 will inevitably also be a key date for TomCo as it should also validate the AIM listed group’s business case.
It might also be the point Total looks 15 miles down the road at TomCo’s 1,000 acre Holliday Block and decides to consolidate it with Seep Ridge.
The pair are very similar in resource profile and economics.
If this doesn’t happen then it is expected to cost US$263 million to develop the Holliday Block.
This is a mining project, which means it has a JORC measured resource of 126 million barrels of high quality Kerogen, which is expected to command a premium to West Texas Intermediate oil.
The planned daily production is expected to be in the order of 9,800 barrels and the cash cost of getting it out of the ground and to the refinery (probably on America’s Gulf Coast) are expected to be in the order of US$37 a barrel.
The process itself is an interesting one, and was developed initially by the US navy in its search for a secure and reliable source of fuel for the Pacific fleet.
It involves creating a series of clay capsules, which enclose the shale oil and are heated to 725 degrees Fahrenheit using giant gas jets.
Almost half way through the 210-day cycle and out comes the Kerogen, gas and water. The two by-products will be used (the gas to fuel the heaters), making EcoShale almost self-sufficient.
Peak oil production arrives at day 150 and each capsule will produce just short of 700,000 barrels of crude.
The capsules are so secure they comply with the strictest environmental criteria and have been signed off by America’s all-powerful EPA.
So leakage of contaminants into the water table is highly unlikely.
Other benefits of the process compared to existing technologies include the use of clean natural gas burners, a two third reduction in the amount of CO2 produced and immediate land reclamation.
EcoShale is also far more economic than the existing methods such as retorts and in-situ mining, where projects routinely consume billions of dollars of capex.
For TomCo the final quarter of the year should see a JORC upgrade of the majority of its resource to the probable reserve category.
This would then allow the group to borrow against those reserves, giving it a modicum of financial flexibility.
Following that will be applications for the requisite large scale mining and water discharge permits (not that the latter will be needed as all the water needed will be on-site).
Next year will also see work on Red Leaf’s early production system get underway, with its evolution no doubt closely followed by management and investors of TomCo.
And by 2014, TomCo hopes to have all the relevant permits and be in a position to push the go button.
Of course Total might have a say in whether this happens, as might TAQA, the Abu Dhabi national oil company, which was the under-bidder on the Red Leaf deal.
The group is funded through to decision day with around £900,000 in the bank at the time of the interims and further £3.1 million held in Red Leaf shares that can be sold as and when the cash is needed.
The investment was the crucial last piece of the US$100 million funding jigsaw put together by Red Leaf.
The cash to buy the Red Leaf shares was provided by the hedge fund Altima and its founding partners, pushing its holding up to the 30 per cent threshold.
Altima and its two founding partners, Mark Donegan and Dominic Redfern, form one of the significant investor blocks. The other is Kenglo One, the investment vehicle of former City analyst Chris Brown.
Brown has a shrewd eye for an investment, and made his fortune off the back of the success of London Mining (LON:LOND).
Both Altima and Brown believe they have spotted an interesting and potentially lucrative investment opportunity.
The EcoShale process could utterly transform American oil in the same way fracking has gas, potentially unlocking an estimated 1.5 trillion barrels of shale reserves in Wyoming, Utah and Colorado alone.
“If this kicks off in the way it looks like it should then it will change the oil industry forever so that the United States would be a net exporter for the first time since World War II,” chief executive Rankine said.
Links:  Full news story
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