Canadian juniors are increasingly looking to expand their horizons to opportunities offered abroad, taking advantage of the larger land opportunities and exploration potential of developing markets. While their horizons may span the globe, most executives agree that having a Canadian address gives them a unique advantage not found elsewhere in the world.

Krishna Vathyam, CEO of South America-focused Petrodorado, chose to headquarter in Calgary over Houston and London. "Having a Calgary address is helpful in securing funds. People are willing to talk to you, especially when you're drilling internationally," he says.

The company, which has assets in Colombia, Peru and Paraguay, recently raised $75 million to fund its drilling activities in that region.

Mark Dolar, CEO of U.S.-focused Nextraction Energy, agrees. "We came to the conclusion that the Canadian junior market was the best place to build a small-scale company and grow it into a large one," he says of the company's decision to base its operations in Calgary. "That element is not available in the U.S. The Canadian market is well-governed and transparent, which is very important when bringing investors into projects."

Much of the attraction can be attributed to the regulatory structure of the TSX Venture Exchange, which is based in Calgary. A subset of the main TSX, the TSXV is geared towards smaller companies who do not yet qualify for the big board. The companies listed on the TSXV benefit from more efficient access to the larger capital marketplace. For investors, the TSXV provides a well-regulated market for their higher-risk shares.

"A company can grow in this market, then move on to the main Toronto exchange, then naturally to the New York stock exchange. It's a nice transition for growth," says Dolar.

Growth is, of course, the aim of Canadian juniors lured abroad by the promise of large land acquisition and the tantalizing potential of untapped reserves. The sheer number of Canadian and multinational companies operating in the home patch means that there is less opportunity to acquire viable land. "Western Canada's pretty crowded right now, very gas-oriented," says Dr. Richard Walls, CEO of C&C Energia, a Colombia-focused junior.

Canadian juniors are flocking to Colombia after a series of government initiatives aimed at making the oil sector more attractive to foreign companies. The Agencia Nacional de Hidrocarbonos (ANH) introduced new, sliding-scale royalty rates that replaced a flat rate of 20% with a scale ranging from 8% to 25%, corresponding to the amount of oil produced. The ANH also mandated regulations providing companies the rights to their entire resource block, including reserves and production, and the subsequent income derived from it (subject to existing royalty rates). The reforms triggered massive exploration and development and resulted in continual solid growth in the country's reserves.

"It's an attractive place to explore," says Walls. "The economic terms are good, the technical risk is reasonable, the financial risk is reasonable on an international scale, and it's light oil."

Colombia plummeted into virtual civil war in 1948 and has suffered one of the world's longest-running civil wars. Today things are much brighter. "We have nine blocks: four in the Llanos Basin, two in the Magdalena Valley and three in the Putumayo Basin," says Walls. "All of our production is in the Llanos, but we're just starting to explore in the other blocks. The reason the Putumayo has been less developed in recent years is because it had historically been an area with a lot of security issues. That's now subsided a lot and companies have started to come back in and develop the area."

Petrodorado's Vathyam agrees, believing that the returns can be incredibly rewarding for companies in Colombia. "You can spend $20 million in a block and come back with a $1-billion valuation. That doesn't happen every day, but if one comes in then it's been worth it."

"We're focusing on Colombia because it has very good fiscal terms, so that if you make even a small discovery, you can make a lot of money as a result," agrees Alastair Hill, CEO of Suroco Energy. "There's a very clear licensing system regulated by the ANH. There are many different basins and blocks, and lots of turnover of acreage and deal flow, all of which are good for small companies.

"We're focused in the Putumayo basin because it's an area that now has a workable environment. It hasn't seen a lot of drilling in the past 15 years. We'll be drilling eight wells there this year."

Recognizing the risks inherent in such an emergent province, Suroco has chosen to adopt an "exploration plus" model. "The way we've tried to build the company is on a balanced portfolio model," says Hill. "The pure exploration model is very volatile; it can end in spectacular success or dismal failure. It's not as sustainable as the model we're following.

"We have reserves, production, cash flow and a suite of low-risk drilling opportunities. We also have opportunities where we can extend our drilling program to slightly higher-risk drilling appraisal and step-out wells that will be a big focus this year. Then we have classic exploration blocks with medium- to higher-risk opportunities with higher rewards if we're successful."

There are 20 Canadian companies listed on the TSX and TSXV with operations in Colombia. "It's a good location for a small-cap company," says C&C's Walls. "I am not sure if it's a great place for multinationals, because I'm not sure if the opportunities are big enough. But I think we can compete against them as a smaller company.

"The opportunities to grow are better. I don't know how a large-cap company who has to replace 20,000 to 30,000 barrels a day of decline can make those economics work with the overhead."

The track record of Colombia's success has not gone unnoticed by the investment community. Previously, an un-risked resource barrel received a valuation of zero. Since March of 2010, they are receiving valuations ranging from 20 to 50 cents, largely due to the success that the country has had in exploration.

Colombia's neighbors to the south are trying to replicate that success with their substantial oil reserves. Argentina is just starting to reclaim its position as a South American energy powerhouse after a devastating financial crisis rocked its economy nearly 10 years ago.

Canadian companies are taking a renewed interest in the opportunities available, undoubtedly spurred on by the "Gas Plus" program put forth by the Argentine federal government. The program is designed to provide a more immediate investment return by offering higher prices for gas production from recently exploited reserves. It allows companies to develop gas resources that wouldn't have been touched under the previous price regulations.

Pure-play Argentine companies are becoming the "flavor of the day," according to Dwayne Warkentin, president and CEO of Argentine-focused Madalena Ventures.

"I was awestruck," says Murray McCartney, CEO of Crown Point Ventures, which operates solely in Argentina. "I hadn't seen such an economic opportunity since the 1980s, when all of the supermajors in North America started to divest themselves of their non-core assets. I saw pools with 25% recovery rates and good IP rates."

Crown Point's estimates suggest that under current drilling and operating costs, the Argentine pools had the potential returns of about five times the money, according to McCartney.

"The country has gone through tough times economically during the past eight to 10 years and production and reserves have declined significantly, so I saw an opportunity. They have to get their production and reserves up or else there are going to be serious consequences for them in terms of balance of payment and trade issues," he adds.

Though the rewards may be exponential, operating in developing markets is not without its challenges. Volatile economies, political upheavals, insufficient infrastructure and drumming up interest in projects are all obstacles to working abroad.

Madalena's Warkentin only sends money into Argentina on an as-needed basis due to the country's history of privatization and volatile political climate. And despite the excitement surrounding the asset potential in Colombia, production in the country is much more risky. As Vathyam, referring to his assets across Latin America, warns, "The decline curves are unknown. We've seen companies blow up by buying production, so our strategy is to focus on exploration, which has traditionally been very successful."

Today, Argentina is typically described as being "a stage behind" Colombia. As McCartney is keen to point out, however, "Argentina has a lot of advantages that you don't find in other parts of South America. First of all, it's an industry that's been around since 1912.

"You have good infrastructure, a knowledgeable workforce, and good access to rigs. Also, once we've completed and equipped the well, it's only days until we're generating cash flow. I think it's a country that's incredibly blessed with an array of physical assets, and through a sequential set of circumstances has fallen on hard times."

While investors are catching on to the potential in more-established markets like Colombia and Argentina, companies with assets elsewhere still find it challenging to generate interest in their operations outside of the more traditional oil-focused areas. David Johnson, CEO of Sagres Energy, believes that companies must provide investors with "an education" regarding their assets in lesser-known markets. The company has holdings in Jamaica and Guyana as well as Colombia.

"People are surprised at what they find," says Johnson. "Jamaica is on the verge of happening. There's a good tight story there but it's on the fringe."

According to Johnson, Jamaica is a huge strategic resource. The country has a production capacity of 45,000 barrels of oil a day, two refineries that are upgrading their capacity, and three deepwater ports. "The country is hungry for the business." Paraguay is also poised for investor attention. Despite having discovered a basin along the Argentine border that's produced 150 million barrels of oil for their neighbors, there has been no activity on the Paraguayan side. That is set to change, according to Petrodorado's Vathyam. "I knew the potential of the block, so we made a deal to acquire it," he says. "We think it's huge, but is somewhat of a forgotten land due to circumstances, not geology."

Jack Schank, CEO of Sonde Resources, is holding onto to the company's Tunisian assets despite planning to refocus on its Canadian assets. Sonde has a 780,000-acre exploration concession in Tunisia, where it has successfully drilled an exploration well. "As of yet, I'm not sure what it's worth," he says. "I want to see what the first 50% is worth before I figure out if we want to monetize it or not."

On the operating front, companies are faced with longer wait times for approvals and environmental impact assessments to be processed. The availability of rigs poses a challenge as well. In Argentina, for example, rates of utilization for available rigs hover close to 90%. In some areas of Colombia, production has been halted on occasion due to protests and blockades from a concerned public.

Executives, however, are confident that the rewards outweigh the risks. "You have to be disciplined and rigorous," says C&C's Walls. "As long as governments stay out of the regulatory environment, companies should be fine."

As Madalena's Warkentin puts it, "You're a pariah one year and the next year you're king. We happen to be king at the moment."

Though the challenges of basing a company in Canada while operating abroad are not without merit, executives generally feel that the distinct working environment of the country is an asset that cannot be found anywhere else.

Mike Smith, CEO of Paramax Resources, a gas-focused junior operating in western Idaho, says, "We've got the complexities in the foothills, the shallow gas in the plains of Alberta and the shale-gas plays. I think that when you operate in such a diverse environment it forces everybody to push the envelope to find new ways to extract hydrocarbons from the ground."

John Hodgins, president of Connaught Energy, a Canadian junior with gas assets in the United Kingdom, agrees. "Working in western Canada is a way of keeping your tools sharp," he says. "Canada and the U.S. probably have the best onshore technology in the world in terms of the pace of development, whether it's drilling or in completion techniques or facilities. It works anywhere, in any weather, and the pace of development is so rapid. As long as we're engaged here then we'll be right on the edge of the technology."

Looking beyond North America allows juniors to secure far larger land positions than would be within their reach at home. In India, Bengal Energy has interests in two off/onshore blocks. In Australia, Bengal has interests in five blocks, demonstrating that the juniors are not limited to emerging jurisdictions when seeking to secure large tracts of land. In total the company controls 2.2 million acres net.

Bengal CEO Chayan Chakrabarty explains that transparency is key when building land holdings in jurisdictions such as India. "It is difficult to operate in India, but companies that persevere and can go beyond the bureaucracy can be successful."

"In order for India to have wanted to work with us, they needed to know us. So rather than knocking on doors trying to find deals, we decided to participate in a national bid round. We were able to demonstrate who we are and what we're about through a very transparent process and were able to find a partner. It's a lot easier to get deals in western Canada, but when opportunities like those in India present themselves, you have to act."

For Bengal, combining local knowledge with North American knowhow and perspective allows the company to leverage its assets. "The Cauvery Basin has about 30 discoveries and is reasonably understood by people from ONGC, who have historically dominated the region, but not by the industry in general," says Chakrabarty. "It is our argument that there is an upside both from an exploration and exploitation standpoint.

"We focused on the Cauvery Basin because of the potential and because we could quietly acquire the kind of land base we need. The geology is not complicated, but some of the play types that we are targeting are different than those that the exploration companies in India are focusing on, so it's a different way of thinking."

The gas sector in North America might be experiencing some of its toughest times in memory, but on the other side of the world, demand for the "green" hydrocarbon is outstripping supply. Demand for natural gas in Asia is leading intrepid Canadians to some of the world's most exotic locations.

Eaglewood Energy is a Calgary-based junior focused on Papua New Guinea. According to CEO Brad Hurtubise, "Papua New Guinea is full of natural gas and...has advanced by leaps and bounds on the energy side in the last couple of years. Since May 2007 when Exxon made their announcement on the $15-billion PNG LNG project, the country has become an energy hot spot."

"Drilling is expensive when compared to Alberta, but we're exploring for a Tcf of gas, not Bcfs...We've discovered very condensate-rich gas on our PPL 259."

Eaglewood is not reliant on a second-party LNG infrastructure and has found some novel ways to sell its product. "Our early monetization strategy is to strip the liquids, sell them and ship them down river to local or export markets. We're looking to sell gas to the local markets as well.

"All of the electricity generation in the province is powered by diesel, including the OK Tedi mine, and we would like to displace diesel power with gas power. In the last couple of years small-scale LNG technology has made smaller gas discoveries economically viable. We have a method whereby we can monetize our resource and turn molecules in the ground to dollars in hand."

Companies should be careful of over-diversification, both geographically and in terms of asset mix. Jack Schank, who recently took over the helm of Canadian Superior Energy and rebranded it as Sonde Resources, is busy refocusing the company on a smaller basket of assets.

When Schank inherited Sonde, it had properties onshore in Canada, a 50% interest in a large offshore block straddling the Libya/ Tunisia boarder, a Trinidad and Tobago LNG project close to securing regulatory approval and a LNG regasification scheme in New Jersey.

Schank explains: "We are in the process of focusing on what we want to do, with the aim of being a Canadian oil-weighted E&P company with a high-profile international asset."

At the time of this interview, in early 2011, Sonde had recently entered into an agreement to sell its Trinidad property. "After the sale of Trinidad we went from $3.05 to $3.60 a share and with the announcement of the success in Tunisia we settled at $4.20," he notes.

"We have a growth story and I think that our story will be well received...," he says. "It will take another six to nine months before the Canadian Superior legacy is shaken off...but...the word is leaking out." In three or four years time, Schank reckons that, "Sonde will have added two or three assets in Canada and four or five times our current level of production (500 BOE/d), though Tunisia could dwarf that."

Conclusion

Conforming to the national stereotype, the Canadian oil and gas sector is understated. But make no mistake about it, the sector is huge and set for sustained growth. Canada has more known oil in place than any other jurisdiction in the world. While making long-term predictions in the oil game is a fools' game, it is not inconceivable that the country could one day become the largest oil producer in the world.

The country faces numerous hurdles if it is to achieve this goal and return its gas sector to growth. The most immediate challenge is labor. The industry and the various governments are keenly aware of this, though it will likely remain a constraint on growth in the near term.

The second challenge is access to new markets and the building of existing markets (in the case of gas). Canada is totally dependent on the U.S. for markets. The relationship between the U.S. and Canada is good, and the U.S., still the world's largest market, has a great respect for fair and open trade. However, it's not healthy to have only one customer, and Canadian oil is increasingly being branded as "dirty" south of the border. The North American gas supply glut looks to be a long-term, structural issue and it is essential that Canada builds LNG infrastructure to evacuate its product to Asian markets. The nation could also do a better job at building domestic demand for gas.

Canada's third, and most intangible, challenge is the image of the oil sands. The industry must continue to innovate to bring its well-to-wheels carbon footprint down, and the country must do more to ensure that the sector is fairly portrayed in the international media.

Canada is currently the world's sixth-largest producer of oil and the fifth-largest producer of gas. However, it should be recognized that all of the countries above Canada in both metrics, apart from the U.S., bar or severely limit the participation of foreign private capital in their hydrocarbon sectors. For the investor looking for foreign growth targets and confidence that their property rights will be respected, Canada heads a very short list.

Despite the challenges, the future looks very bright for the Canadian oil and gas sector. In a world of increasing consumption and declining conventional reserves, Canada's vast unconventional asset base will drive the nation for years to come.

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