Calima’s business strategy is classically counter-cyclical, designed to take advantage of momentum returning to the oil and gas sector after the savage downturn in global oil and gas prices that started in 2014.
In response to the sudden decrease in price the oil industry reduced its capital expenditure by over 60% through 2015 and 2016. Expenditure on exploration was disproportionately cut because of its discretionary nature and lack of short-term impact on balance sheets. As a consequence the oil industry’s rate of discovery dropped to just over 6 billion barrels of oil equivalent in 2016, a level not seen since the 1940s. This meant the industry only replaced 12% of what the world consumed in 2016. To put this in perspective, offshore oil discoveries in 2016 were around 2.3 billion barrels of oil but that was 90% less than what was discovered offshore in 2010.
The dramatic reduction in reserves replacement does not have an immediate impact upon global oil production but with fewer new oil and gas field developments in the pipeline it does begin to have an impact in the medium term. The industry reacts, as it has in all previous cycles, by reducing its cost base so that most developments become profitable at the new prevailing lower prices. Some analysts are reporting deepwater breakeven prices reduced from approximately $80/barrel in 2014 to approximately $50/barrel in 2017. It has been claimed that deepwater developments in the Gulf of Mexico are now cost competitive with mainstream US unconventional plays.
As the industry and the capital markets adjust to a new price outlook, Calima believes focus will shift from reductions in capital expenditure to repairing reserve inventories and seeking growth opportunities. Some analysts predict a modest increase in capital investment for 2017, which may be an indication of the beginning of a new cycle.
Calima proposes to take advantage of the currently dislocated market to acquire projects where investment in geoscience can add disproportionate value in the short to medium term. In addition to the Montney Project and the other assets held by Calima, the Company will seek projects that could be the cornerstone of new oil and gas companies or should appeal to larger companies seeking opportunities for material growth.
The strategy is opportunistic and is not necessarily full-cycle in that the Board will focus on projects where there is a realistic chance of realising value for shareholders in the short to medium term.
The incoming management team have the necessary geoscience and commercial skills to identify suitable growth projects for Calima.
The first opportunity being pursued by the Company is to develop a position in the Montney play in Western Canada.