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High-Risk Investing Is the New Trend in Energy: Interview With Andrew McCarthy, CEO of Emperor Oil

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McCarthy discusses a new trend in energy-company investments: the high risk play. Plus, a true look at the energy situation in Africa.

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James Stafford: 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?

Andrew McCarthy: 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.

James Stafford: 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?

Andrew McCarthy: I think that they are more than realistic. The main pipeline and port in Sudan is more than capable of handling the capacity. The resources are proven and available.

James Stafford: Despite the problems between Juba and Khartoum, Emperor seems confident that development and production will proceed without interruption. Can you tell us more about your recent progress in Sudan that boosts this optimism?

Andrew McCarthy: Emperor has signed an MOU to acquire a 42.5% interest in concession Block 7 in Sudan. The other 57.5% is owned by the country's energy company, Sudapet. Block 7 is 10,000 sq km in size and tens of millions have been spent on the property. The property has three discovery wells which have been drilled, capped and are waiting for production. Initial production will be shipped by truck using existing roads which connect the property to the country's main pipeline, located approximately 60kms away. A tie-in pipeline will be constructed during the second phase of development.

James Stafford: Beyond Sudan, another key area of focus for Emperor has been Turkey, a key strategic player in Middle East oil and gas, where oil majors like Chevron Corporation (NYSE:CVX) and ExxonMobil (NYSE:XOM) have significant interests. What can you tell us about Emperor's recent activities here?

Andrew McCarthy: Emperor has a JV agreement with a partner in the Catalca Block in Turkey's Thrace Basin. A major gas discovery was made on the property, which is located 30 kilometers west of Istanbul and only 5 kilometers from the natural gas pipeline supplying the country. The short-term plan is to complete the discovery well and connect it with the pipeline tie-in located only 5kms away. The long-term plan is to drill 5-10 more wells and expand the resource significantly.

James Stafford: In high-risk countries, what should investors look for risk mitigation?

Andrew McCarthy: Management with experience and diplomatic skills; a country with a history and commendable track record in negotiation and resolution; resource potential; development costs; production curves.

James Stafford: Certainly, the reverse would be true as well?

Andrew McCarthy: Yes. In Sudan, for instance, Canadians have an excellent reputation for quality work. They embrace the community and are willing to share their technologies and knowledge with the local people. Canadians are seen as net contributors and effective partners whose relationships are valued.
No positions in stocks mentioned.
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