THE BLOG
11/27/2012 11:08 am ET | Updated Jan 27, 2013

Oil Juniors Set High-Risk Investment Trend: Interview With Emperor Oil CEO Andrew McCarthy

Risk perception isn't what it used to be. Ask the swelling ranks of Canadian junior oil and gas companies braving high-risk venues like Sudan, Iraq and even Yemen.

Technological advances and the shale revolution are making risk easier to digest. And political risk is no longer limited to developing countries. Plus, risk is increasingly relative: Ask anyone who's been caught up in the politics of the Keystone pipeline.

Sudan is a case in point. While instability and a very fragile peace with South Sudan remains a threat, there is also growing optimism. The philosophy is this: Sudan and South Sudan will come to terms for the sake of economic growth, and oil will get them there. The prize: An estimated five billion barrels of oil.

In an exclusive interview with Oilprice.com publisher James Stafford, Emperor Oil CEO Andrew McCarthy reveals:

• Why investors are hitting up high-risk regions
• Why Africa is more opportunity than risk
• How political risk is no longer limited to developing countries
• Why Shale WILL live up to the hype
• Why conventional oil is still a great investment
• And why human ingenuity will prevail

Emperor Oil (TSXV: EM.V) is an international oil and gas company with a focus on the Middle East and North Africa. Most recently, the company has renegotiated the terms of a joint venture gas deal in Turkey and introduced a significant conventional oil project in Sudan.

JS: Oil and gas juniors are now setting up shop in high-risk countries like Sudan, Iraq and even Yemen. What's behind this new era of risk, and are we likely to see more of this?

AM: This question creates an opportunity for risk comparison -- is it less risky to drill a mile below the ocean surface and create the kind of disaster we saw BP (NYSE: BP) deal with in the Gulf, or do we continue to look for work in regions that have accessible resources and are anxious to advance their economic position along with the health and welfare of their community?

JS: So you are saying that on a comparative level even North America has become a political risk? And that in this balancing act, volatile places like Sudan do not necessarily pose any greater political risk?

AM: Yes, there are always risks associated with any investment. The US halted all exploration in the Gulf of Mexico for extended periods following the BP disaster. This is a risk that few would have foreseen when exploration and development began in a country whose level of political risk is considered to be negligible.

JS: Furthering your point, there have been a number of other unforeseen political risks, both in the U.S. and Europe...

AM: Certainly. The U.S. banned all exploration and production in the Marcellus Shales in the State of New York. The U.S. has also stalled the construction of Keystone XL pipeline that would link the U.S. to Canada's oil sands. In Canada, we have seen the province of British Columbia place a moratorium on offshore drilling. Across the Atlantic, we have also seen Europe place a moratorium on all shale exploration and development.

JS: What is your message to investors who still view Africa and the Middle East as too risky?

AM: Based on all of these North American and European developments, is it any less risky than operating in developing countries?

JS: Which brings us to Emperor's operations in Sudan. When South Sudan declared independence in July 2011 it took with it some 75 percent of the known oil resources. Since then, the situation between Juba (the capital of South Sudan) and Khartoum (the capital of Sudan) has been tense and even bloody. How will this affect exploration and extraction?

AM: Well, now we have healthy competition due to the secession of the south and the need for both countries to maximize their economic opportunity. The skirmishes fought in the spring were quickly squelched when both countries realized the impact it was having on their economy and their people. Rather than fight over existing production they have chosen to expand their resource development so that there is a larger pie to share.

There have certainly been many difficulties over the years but the country recently emerged from a democratic process that the South secede in a diplomatic fashion. Both countries are now keen to advance, and the competition to succeed is healthy and beneficial. Of course, one also has to remember how truly enormous this country is and how remote some of the areas are in which much of the oil reserves are located.

JS: There is also the question of infrastructure. South Sudan is seeking alternatives to transiting oil through Sudan, and Juba is extremely optimistic about the prospects of a new pipeline from South Sudan to Kenya. This is all part of Kenya's massive regional infrastructure plan -- the $24.7 billion Lamu Port-South-Sudan-Ethiopia Transit corridor (LAPSSET). How feasible is this pipeline? What are the implications for Khartoum?
How much would Khartoum stand to lose in transport revenues if this pipeline is realized?

AM: I think this is an unnecessary undertaking that will be difficult to finance for many different reasons. Pipelines are exorbitantly expensive to build and would seem especially unnecessary given the fact that they could face similar problems to those which they have just overcome in Sudan [in terms of prohibitively high transit fees].

It is doubtful that a new pipeline would have any negative effects in Sudan. If anything it would likely cause the country to push for further exploration and production so as to maximize the infrastructure already in place.

JS: The International Energy Agency (IEA) forecasts a drop in Sudan's oil production through 2017. This contradicts Sudan's own projections that it could double production in the next two years. How realistic is this?

To read the full interview please visit Oilprice.com

James Burgess is an analyst with Oilprice.com. He is a successful small cap investor with a focus on early stage renewable energy companies.