BPZ Energy (AMEX: BPZ) is an American oil and gas production company based in Peru and Ecuador. BPZ sells its oil and gas to Perupetro, the Peruvian national oil company; however, though the company owns 2.4 million acres, it only produced 40,989 barrels of oil in 2007. The company was able to achieve a rate of 13,650 barrels per day, but this production was not consistent. Only 2 wells have been drilled and .03% of the land was developed. It has spent the past few years applying for necessary permits and building the infrastructure necessary; it has been allowed to drill as of 2007. Peru and Ecuador are increasingly using natural gas to satisfy their growing needs for electricity, as the economies of the two developing nations bloom, creating new demand for BZP natural gas. At the moment, though, both nations have a significant portion of their energy produced by hydro-electric dams. In 2007, Peru produced 22.7 billion kilowatt-hours of electricity, 82% of which was from hydroelectricity, while Ecuador produced 11.3 kilowatt-hours, 63% from hyrdroelectricity. The price of oil per barrel in 2000 was less than $20 a barrel while it averaged $72 a barrel in 2007. Oil futures also reached a record high on July 3, 2008 when they hit $145.85. The higher oil prices go, the more favorable BZP's margins will get.
BPZ has exclusivity rights to explore, drill, and extract oil and gas from approximately 2.4 million acres in northwest Peru and 10% rights over an already developed block in southwest Ecuador. The company operates exclusively in these regions of Peru and Ecuador. Although the company has the ability to undertake offshore drilling projects, it does not have all the necessary equipment to fully map ultra deepwater oil reserves. The Peru and Ecuador contracts allows for an exploration period of up to 30 years and a production period of up to 40 years. BPZ is in the development stages and has spent most of its effort in Peru procuring necessary equipment, licenses, data, and contracts.
The table below illustrates how BPZ has large tracts of undeveloped lands. In fact, only .03% of its lands is considered developed, and it only two productive wells are in place as of 2008. It has spent the past 5 years procuring necessary permits to operate, and has begun production as of 2007. The company has been able to achieve 13,650 barrels per day, but this has not been consistent. Production was also interrupted and temporarily stopped due to a fire on one of BPZ's ships used to transport the oil.  However, with at least 110 million barrels of reserves discovered and much of the region yet to be mapped, BPZ's future production levels look promising.
|Property||Undeveloped Acres||Developed Acres||Productive Wells|
The extensive costs from exploring and beginning the early stages have risen dramatically since 2003. BPZ has not produced an actual revenue from its oil and gas sales until 2007. The result is that the company has created costs without generating revenue. BPZ has spent over $38 million in 2006 and over $100 million in 2007 in development, construction and equipment costs. These costs include platforms, pipelines, wells, barges, and power plant equipment. BPZ predicts its costs will fall in the future after it is able to establish a significant number of developed wells, while its revenue will rise from the income generated from sales.
All sales of oil have been made to Perupetro, the Peruvian national oil company. The disruption or failure of this company will cause a disruption in BPZ supply chain. The company already has difficulty moving the oil from its offshore drilling sites to mainland and had to rent two ships from the Peruvian Navy in order to keep up with the levels of production. The loss of its major customer will force BPZ to ship the oil elsewhere. However, it is unlikely that Perupetro will have any fiscal problems since it is the sole national oil company for the nation. BPZ only began producing in oil and natural gas as of 2007. The sales to Perupetro have all been short-term contracts, and as BPZ expands and develops the majority of its territory, it will likely take on other customers around the world.
Higher gas and oil prices have increased the demand for new oil deposits, the value of existing ones, and the desire to fully utilize mature reserves. The larger profit margins have allowed companies to spend more money on the exploration of new deposits. Industrial growth in China, India and other emerging markets has raised the global demand for oil. On top of that, oil and gas output has slowed in recent years. This has led to speculation that the world has pasted the peak oil production. The resulting price hikes have elevated the utilization rate for oil rigs. The price of oil per barrel in 2000 was less than $20 a barrel while it averaged $72 a barrel in 2007. Oil futures also reached a record high on July 3, 2008 when they hit $145.85. These higher prices have made BPZ's fuel deposits more valuable and have increased the company's expected net profit.
Peru's Organic Hydrocarbon Law No. 26221 states that all hydrocarbons below the surface of the country are the property of the nation. However, Perupetro has been designated to oversee the extraction and production of the oil and gas deposits. Perupetro is also given the power to contract and appoint companies to extract and refine the fossil fuels. In order to receive a contract from Perupetro, a company must continually meet the Regulations Governing the Qualifications of Oil Companies. These regulations require a company to have the technical, legal and economics means to fulfill the contract and favor a domestic company over a foreign one. BPZ is also mandated to pay royalties between 5% to 20% based on production to the Peruvian government, while it must pay an average of 23% royalties to Ecuador.
BPZ is dependent on the continued economic growth and subsequent continued rise in need of natural gas of Peru and Ecuador. Peru currently produces 22.7 billion kilowatt-hours of electricity, 82% of which is from hyrdoelectricity, while Ecuador produces 11.3 kilowatt-hours, 63% from hyrdroelectricity. The rest of the energy comes from thermal plants. BPZ expects both nations energy needs to rise greater than their hydro-electric capabilities. Ecuador industrial growth rate is 1.4% and it imports 1.723 billion kilowatt-hours of electricity. Peru, on the other hand, does not import any electricity, but it has an industrial growth rate of 9.3%. This means that there is a market to feed Ecuador's electricity imports and to support Peru's industrial growth. In January 2008, one of the ships BPZ was chartering from the Peruvian navy to transport fuel caught fire on the dock and sank. The ship had approximately 1,300 barrels of oil on it at the time of the incident. Earlier in 2006, one of BPZ's barges was grounded on a sand bank. The barge had to be dislodged and inspected for damage. The incident cost BPZ approximately $1.1 million. Peru's inability to have secure and safe ports and clear and well maintained channels increases BPZ's cost of operation. Events such as these are much more infrequent in fully developed, modern ports.
As of 2008, BPZ was much smaller than its competitors in terms of gas output. However, BPZ agreed to a joint venture with Shell Exploration, a branch of Royal Dutch Shell (RDS'A). This agreement gives BPZ access to resources of one of the largest competitors in the oil exploration field. Shell Exploration has the ability to more effectively fund and undertake deepwater oil exploration in regions such as Block Z-1 to fully discover and utilize the oil reserves. BPZ is able to have the licensing and agreements with the Peruvian government to undertake the drilling and exploration. Shell Exploration had attempted to get the necessary permits prior to BPZ, but had failed.
There are many companies within the oil and gas exploration industry, the following 4 companies are all involved in Peru and are BPZ's closest competitors. However, because of the commodity nature of oil and gas, the fossil fuel market is determined only on price. As long as demand remains higher than supply, BPZ and its competitors will have little difficulty finding a buyer for their output.
|Crude Oil (Bbl/d)||13,650*||454,794||770,000||542.5||1,544,000|
|Natural Gas (Mcf/d)||184,000*||734,246||5,087,000||1,395||4,799|
Note:*These numbers were the maximum production levels BPZ was able to achieve. These production rates were not consistent during 2007.