TransAtlantic finding 'enormous' upside potential in Turkey, elsewhere

Don Stowers, Editor, OGFJ

EDITOR'S NOTE: A native of Sanderson in Terrell County in West Texas and a graduate of Oklahoma State University, Malone Mitchell developed Riata Energy into a hugely successful oil and gas company before selling controlling interest in the company in 2006. The company was subsequently renamed SandRidge Energy. After stepping down from SandRidge, he founded Mitchell Group, a privately held oil and gas company that includes Riata Management and Longfellow Energy. Mitchell also serves as chairman of TransAtlantic Petroleum Ltd., which has assets in Turkey, Romania, and Morocco. OGFJ Editor Don Stowers recently caught up with Mitchell to discuss his plans for TransAtlantic. CEO Matt McCann also sat in on the conversation.

OIL & GAS FINANCIAL JOURNAL: TransAtlantic Petroleum's story begins with Malone Mitchell. How has your proven track-record of success throughout your oil and gas career, especially with entrepreneurial projects such as Riata Energy, led to your decision to form TransAtlantic Petroleum?

MALONE MITCHELL: Don, it all starts with a love for the oil and natural gas industry. Identifying key prospects, developing your core assets, and building value are just a few of the basic skill sets required for success. And even that sometimes isn't enough.

In the case of Riata Energy, we started out with $500 and a razor-sharp focus on the Permian Basin. We studied the geology. We identified key prospects. And, we acquired properties that provided strong upside potential.

In the months and years that followed, we applied our technical expertise and know-how to drive production and grow reserves. We also expanded and purchased additional assets in the Permian – assets that were contiguous with our legacy properties. Before long the play started to blossom. Companies of all sizes began purchasing and developing properties in and around our acreage in West Texas and in the Piceance Basin in Colorado. The long-term outlook was so strong that we contemplated a public offering in 2006. However, before we filed for an offering, Tom Ward (chairman and CEO of what is now SandRidge Energy) approached us. He made us an offer that we accepted. At the time of the deal, Riata Energy was the largest private US land driller.

While TransAtlantic Petroleum is a vastly different company than Riata Energy, we're seeing many of the same opportunities in countries around the world and the ability to implement the same strategy we used in building Riata.

OGFJ: Through the years, you have implemented a vertically-integrated strategy with your E&P companies by acquiring oilfield service companies and equipment. How does Viking International, TransAtlantic's service arm, complement your international exploration efforts?

MITCHELL: To start, a lot of E&P companies shy away from vertical integration. Many operators find it too difficult to manage or don't believe the returns justify the investment. At TransAtlantic Petroleum, however, Viking International and our vertical integration strategy are critical. The strategy delivers strong returns and is core to our operations.

Much of our success in this arena stems from Turkey's limited access to key equipment, rigs and other services. In fact, only two oil service companies in Turkey are able to drill below 8,000 feet. The vast majority of wells have never been exposed to fracture stimulation equipment. And the costs for many of these services are prohibitively expensive. Upon learning this, we quickly assessed the situation. We studied the issues, and in December 2008 we began purchasing rigs and equipment to deploy and service our operations overseas.

Almost immediately, we started to see positive results. On the E&P side, we saw a significant reduction in finding and development costs. On the rig side, we have strong demand for our own accounts and are starting to see demand for third party opportunities. And, on the equipment leasing-side, we gained access to equipment that very few companies in Turkey, Romania, or Morocco have. We've even received tremendous support from agencies within the Turkish government.

OGFJ: TransAtlantic Petroleum has E&P operations and holds interests in 12.6 million gross acres split between Turkey, Romania, and Morocco. However, your core focus and investment lie in Turkey. What potential does Turkey offer TransAtlantic, its shareholders and potential investors?

A successful pump of the first modern fracture stimulation in Turkey on the Kepirtepe-1 well in the Thrace Basin in October 2010.

MITCHELL: The upside potential in Turkey is enormous. Modern 3D seismic, re-entry into shallow wells, fracture stimulation possibilities, and the near-term potential for horizontal drilling all provide opportunities to significantly increase production, grow reserves, and generate cash-flow.

In fact, Don, the majority of the wells that have been drilled in Turkey have never even been exposed to fracture stimulation. And unlike other operators that don't have access to the equipment required to fracture stimulate these wells, TransAtlantic Petroleum does. Our fracture stimulation equipment just arrived in Turkey this past October. While it is true that the majority of our efforts remain with conventional and re-entry projects, we have near-term plans to explore for unconventional natural gas in the Thrace Basin. We will also continue to seek strategic acquisitions that add to our footprint and drilling inventory in Turkey.

OGFJ: The Thrace Basin in Turkey is the country's largest producing gas province providing opportunities for both conventional and unconventional gas exploration. Tell us a little about your recently announced acquisitions and how they add to your growth efforts.

MITCHELL: Acquisitions are a key growth component at TransAtlantic Petroleum. Just last month, we announced the potential acquisition of Thrace Basin Natural Gas for $100.0 million in cash and 18.5 million of our common shares. Upon closing, the acquisition would add 600,000 net onshore acres and 25.0 MMcf/d to our current Thrace Basin natural gas production of 10.0 MMcf/d. We would acquire 35% of the acreage and production for the stock. Private investors would acquire 65% of the production and acreage for the cash. In addition, our company will acquire 100% of TBNG's oil field service equipment and five additional rigs.

In October, we closed on our Zorlu acquisition in which we purchased between 50% to 100% working interests on 18 exploration licenses and one production lease from Zorlu Petrogas and Amity Oil and Gas. In total, our company received nearly 1.0 million net acres in the Thrace basin and 730,000 gross and net acres in Central Turkey.

To put it simply, our recent acquisitions have really done three things for our company. One, we have been able to add producing assets to our portfolio. Second, valuable rigs and service equipment have been acquired to assist us in our drilling, completion and 3D seismic efforts in Turkey. Last, the acquisitions have increased our acreage footprint opening up large, multi-year drilling inventories across our vast acreage in Turkey.

OGFJ: Tell us about your exploration joint venture with TPAO, the Turkish National Oil Company. Will you be evaluating and developing unconventional fields?

MITCHELL: Yes. The partnership with TPAO will focus on unconventional projects in two onshore blocks – 3791 and 3165 where we will re-enter four old TPAO wells, as well as begin drilling four new wells on the two blocks. These wells will target tight sand and shale formations that do not produce under normal conditions.

Yilmaz SAKALLIOGLU, geophysical coordinator, on location for a seismic shoot at its Edirne project on License 4350 in Central Turkey.

Our access to oilfield services equipment, combined with the partnerships' joint exploration expertise, will allow us to exploit and develop additional natural gas production that will be used in Turkey. TransAtlantic has a 30% interest in the Thrace Basin and a 40% interest in southeastern Turkey.

In October 2010, we successfully pumped the first modern single fracture stimulation with TPAO on the Kepirtepe-1 vertical well on License 3791 in the Thrace Basin and recorded IP rates of 4.0 MMcfe/d with a small water cut. We expect to complete the vertical well by year-end and will continue to test additional old wells with non-developed gas flows in the area.

OGFJ: Are you working on any other partnerships or joint ventures?

MITCHELL: Yes. We have several large tertiary basins where we own 100% where we are now seeking partners. In these plays we prefer to hold closer to a 50% working interest. That approach worked very well for us and our partners in West Texas.

OGFJ: What is it like working in Turkey? Does the government want to help companies develop their natural resources or do they put up roadblocks?

MITCHELL: In my view, the Turkish government gets bad press in the West. We have found them very pro-development and progressive. Some of the laws and procedures are different than we have in the US, but it just takes a little time to learn them. We have found access to the energy minister and other government officials to be very easy, and those folks are really interested in changing a situation where they are only producing 3% to 5% of their energy needs.

OGFJ: Local natural gas prices are nearly $8.00 per Mcf. What will you do with the gas produced in the Thrace Basin, which is closer to European markets? Will you export some of it, or is it all for domestic consumption in Turkey?

MATT MCCANN: Turkey imports more than 95% of its gas consumption – more than 3 bcf per day. So any gas produced in the Thrace Basin is going to be used domestically. Several large gas pipelines that come in from Bulgaria run right through our acreage and continue to Istanbul and elsewhere in Turkey. However, we're free to market the gas anywhere we like. Turkey is in the process of privatizing its LDCs (local distribution companies). The main gas grid is government owned, but it's open access. And it's got, by US standards, very low transportation rates. You have a very dynamic bid process, and you can actually take your gas out of the country if you wanted to, but since there is such a large demand inside the country, we don't really see this as a factor.

OGFJ: The arrival of the company's fracture stimulation equipment has the potential to unlock significant unconventional as well as horizontal drilling targets in the Thrace Basin. How does owning your own service equipment benefit your unconventional operations?

MITCHELL: It's absolutely essential. As mentioned previously, efficient access to oilfield services in Turkey is difficult. Many of the services simply don't exist, or if they do, they are prohibitively expensive. We are using our own oilfield services equipment to complement our E&P initiatives. We are re-entering wells that have lain dormant for decades. We're fracture stimulating existing wells to enhance production. And we're using our 3D seismic services to identify basins that are conducive to hydrocarbon accumulation. Our seismic equipment not only helps us to identify new and potential prospects, but it also helps our E&P division to drive down costs and operate more efficiently.

We have utilized 3D seismic in nearly all of our field prospects in Turkey, Romania, and Morocco. Our company has shown its ability to acquire seismic very quickly and efficiently. A few months ago, we shot almost 100 km2 in nearly three months at our exploration prospect in the Malatya Basin, Turkey.

OGFJ: Your company also has oil development operations in Southeast Turkey. Can you tell us a little about the oil potential in Turkey and how TransAtlantic is growing its oil assets?

MITCHELL: The majority of the southeastern area is predominantly oil, whereas the majority in the Thrace Basin, which is on the north and west side of the country, is mainly gas. We have active seismic crews and active rigs running in both areas. We also have quite a bit of acreage scattered out through a number of other basins that are much more under-explored and where there has not been significant past production.

The exploitation techniques we're using are driving production rates and leading to increased rates of return. For example, we recently performed an acid job on one of our Arpatepe wells in Southeast Turkey. The first acidized well was producing at 30 bo/d before our re-entry. After completing the acid pumping job, the Arpatepe well came online at 500 bo/d. To date, the well is producing about 300 bo/d. Again, 3D is playing an important role in field development as we are 85% complete with a 270 km2 3D seismic shoot covering the Arpatepe Field in the Paleozoic trend where we are targeting the Bedinan sandstone.

The Selmo Oil Field, to the northwest of the Paleozoic trend, provides locations where we can perform acidizing jobs as well as grow our operations with the drill bit. We recently added a second drilling rig with which we hope to drill 16 wells by year-end 2010. Our Selmo Oil Field is currently producing more than 2,000 bo/d from 35 wells.

OGFJ: In addition to unconventional opportunities in the Thrace Basin, TransAtlantic is exploring the Dadas Shale in Southeast Turkey. Please provide us an update on what you are seeing in the area and what potential may lie in the Dadas Shale.

MITCHELL: The Dadas shale is an exciting shale oil play in Southeast Turkey that covers an area about the size of the Barnett Shale in Texas. It is Silurian age and the equivalent of the Woodford or Marcellus here in the states. It sits on top of the Bedinan sandstone that we have been producing oil from on our Paleozoic trend acreage. Surrounded by our producing Arpatepe oil assets, the area looks prone to formations that could be very conducive to fracture stimulation jobs. Recent core samples taken from wells in the area show the Dadas is very rich organic shale which we plan to test with our Goksu-1 well. This prospect creates an additional catalyst for gas and oil production potential that our modern fracture stimulation equipment can potentially unlock.

A view from the drilling rig derrick on Rig I-9, located in Southeast Turkey.

OGFJ: In addition to your prospects in Turkey, can you describe what you're doing currently in Romania and Morocco?

MITCHELL: In Romania, we – along with Sterling Resources – have one of the more prospective shale blocks. We've got 1.4 million contiguous acres in the Silurian Shale, which is like the Woodford Shale in the US. There's a lot of opportunity. People talk a lot about European shale prospects, but I can tell you that without the frac equipment and without horizontal drilling equipment, all it's going to be is talk. We've actually built the equipment and hired people, so we are farther along than most. It's kind of early – we've just started pumping our first fracs – but there are shales and tight sands. Everything we have here in the States, you have over there. Our Viking Drilling group is bringing in rigs that are capable of drilling horizontal wells, and this will begin in December. We intend to pad-develop a lot of these fields, and there are a number of reservoirs that appear to be good horizontal candidates.

OGFJ: Will you be doing horizontal drilling in Turkey as well?

MITCHELL: Really in all three countries – Turkey, Romania, and Morocco. We've not had much success in Morocco until just recently, and we still don't know enough about how significant that is or isn't. We still have to determine our long-term plans there. But Romania has a world-class petroleum system and the Romanians have been producing oil and creating new technologies for extracting oil for a long time. We like our prospects there.

OGFJ: Can you talk a little about the impact of well stimulation?

MITCHELL: The Thrace Basin has been the focus of our early stimulation. There you have a number of main horizons that exist in the basin where you start encountering gas as shallow as 1,000 feet and go all the way down through 18,000 feet. It's not unusual to have as much as 5,000 feet of apparent pay. There are giant rich shales and sand sequences. Our efforts to date are to understand how to pump the right stimulations, get the fluid right, and understand pad sizes and geometry. This year we're going in and generally pumping single-stage jobs in each of the main formations. We're evaluating how those wells do and gaining an understanding what's going on with the belief that by next year we'll be pumping 6 to 10 to 15 fracs back to back at these same wells, very similar to what we are doing in the States. You have to understand that many of these structures only have one or two wells that were drilled as long as 50 or 60 years ago by Texaco or Huffco. So you know where the gas is. You know what your downhole pressure is. You know what your gas quality is. And you know what your unstimulated flow rates are. We just have to go to where the gas has already been found and figure out how you take a well that's capable of making 200,000 or 600,000 or 900,000 unstimulated and get the right frac recipe and the right frac jobs to take that up to much bigger levels. As obvious as this is to all of us, if you go somewhere where this technology has not been applied, it opens up tremendous opportunities for you.

OGFJ: Are there any final comments you would like to make?

MITCHELL: Our team will diligently continue to implement our key corporate strategy which is to implement the old lessons we have collectively learned in the past and apply those to our expansion efforts with TransAtlantic in Turkey, Morocco, and Romania. Investors should remain steadfast in evaluating the company's ability to capitalize and execute on its drilling programs, acquisition opportunities and growing our service business. Tremendous oil and natural gas upside potential lies in Turkey, and TransAtlantic is focused on conventionally and unconventionally exploiting those resources.

OGFJ: Thanks very much for your time.

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