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2 Things You Must Know About KrisEnergy Holdings Ltd’s Business

Recently, I started reading a book titled The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters by Gregory Zuckerman. It recounts the story of the men who started the shale gas revolution in the United States.

For those unaware, the USA is currently experiencing an energy renaissance. There’s a huge boom in the production of oil and gas there due to the exploration for fossil fuels in what is called shale formations. To give some sense of scale to the shale gas revolution in the USA, there’s some talk that the country might even become completely energy-independent in the near future.

An eventful meeting

Earlier this week, I was  invited to a media lunch event hosted by the management of KrisEnergy Holdings Ltd (SGX: SK3). The meeting was insightful with management sharing the details of how much work is actually needed to extract oil and gas out from the ground. The talks had made me more appreciative of our energy sources and I walked away from the meeting being infected by the oil bug; I spent the next few days after the meeting reading up on everything I could find about the oil and gas industry. And, one of the reading materials happened to be Zuckerman’s book – but I digress.

So, how does an oil and gas exploration company such as KrisEnergy Holdings actually work? For many investors, the business activities of such companies are like unfathomable black holes.  But the thing is, KrisEnergy Holdings’ business can be quite straight forward. Management groups the company’s business activity into four main stages. Let’s explore the first two here:

First stage: Pre-Exploration

This is where it all starts. Exploration and production (E&P) companies such as Kris Energy would source for new areas to drill by first identifying areas which might be worth further study. They do so by analysing data such as public geological records. Once the company is comfortable enough with one particular area, it would acquire the contract area for it to start the exploration stage.

Second stage: Exploration

Once in control of an area, the company would hire third-party contractors to acquire new seismic data from the area. The company would then reinterpret these new data. If the area is indeed a commercially viable production area, the company might then find more investors to fund the project to start drilling exploration wells. This process of finding new investors is called “farming-out”; the act of new investors investing into a project would thus be called a “farm-in”. Once there’s enough capital, the E&P company would start drilling exploration wells which may or may not lead to a real discovery of oil. If the company manages to find a well that can indeed produce oil and gas in an economically viable manner, the process will be moved to the next stage known as Appraisal/Development. If that’s eventually cleared too, the process then reaches the final stage, which is known as Production.

Foolish Summary

Although the process looks straight forward, it must be noted that the details involved will all the steps – researching an area; negotiating deals to acquire contract areas; dealing with different governments and local communities etc. – can be very complicated.

Couple the above complexity with the high amounts of capital needed for such ventures and you might start to see why the E&P industry can have pretty significant barriers to entry for new players.

I’d be touching on the final two stages of KrsiEnergy’s business activitiy soon, so stay-tuned!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.