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Talisman Energy prepares to sharpen its drill bits

Former corporate raider Talisman Energy Inc. is re-shaping itself as a more aggressive explorer, as high energy prices keep acquisitions out of reach, its chief executive says.

In an interview with the Financial Post, Jim Buckee said a lack of reasonably priced acquisitions has pushed his firm to shift gears and spend more money to find reserves through the drill bit.

"Nowaways, there aren't that many truly undervalued assets or companies around, and so you have to go back to the basics, which is exploring," Mr. Buckee said. "The truth of the matter is that we weren't doing it before."

Talisman, which produces gas in North America and oil internationally, allocated 13% of this year's $2.7-billion budget to higher-risk exploration, up from a typical 5% of its spending in the past.

One of the areas the firm has targeted for increased exploration is Western Canada, a region some of Talisman's competitors are leaving because they see it as too mature.

Talisman conducted an extensive geological review of Western Canada this year and came up with new exploration ideas that are yielding results, he said.

They include looking for natural gas at depths of 10,000 to 12,000 feet that are virtually unexplored. Most wells in the basin are less than 6,000 feet deep.

"Higher prices justify smaller, deeper things and justify taking more risk," he said.

The company is also targeting for exploration Alaska, Colombia, Peru, Qatar, onshore Trinidad, Malaysia, offshore Indonesia and Libya, where it hopes to lock up an exploration sharing agreement.

Talisman, spun out of BP PLC in late 1992, was an industry high flyer in its early days because of a successful acquisition strategy that quickly boosted its holdings. Investors soured on the firm when it acquired a share in an oil project in Sudan in 1998 that turned into a public relations nightmare. As the only Western oil company operating in the African country, it was targeted by human rights activists concerned it was creating new revenue for the Sudanese government.

Talisman, with a market capitalization of $12.5-billion, sold the holdings last year, ending a drag on its stock. Its shares are up by a third so far this year, closing Friday at $32.55.

Mr. Buckee said the Sudan experience sharpened its sensitivity to political risk. He said his company will avoid places like Russia that don't have established reporting and accounting systems, rule of law, arbitration.

"I think Sudan was unique," he said. "I don't think there are possibly any other countries that have a confluence of issues that exist in Sudan," he said. "I suppose that we are more aware of the potential for other forces to grow and get difficult, but I can't think of anywhere else that have similar issues."

Mr. Buckee said the energy industry globally de-emphasized exploration in recent years, contributing to the tight global supplies that are driving up energy prices.

The easier way to please the market and boost earnings was to squeeze production from existing fields and cut exploration expenses, he said.

Industry consolidation also played a role, as did the fact that the supermajors put exploration on hold while moving forward with big projects already on the go.

But he said lack of exploration is not the only reason there have been fewer discoveries since the 1960s.

He believes a bigger reason is that the hydrocarbon age is nearing its "end game" as fields deplete and few new ones are expected to be discovered.

Those who believe that abundant deposits are waiting to be discovered are misguided, said Mr. Buckee, who holds a Ph.D. in astrophysics from Oxford University.

"There is precious little in the world now that isn't known about or hasn't been tried," he said.

"I don't think there is going to be any new Middle Easts or Saudis hanging around. There aren't many unexplored basins."

And he warned the inability to boost supplies means oil and gas prices will stay high for a long time.

"I think we are going to see real difficulties with energy, and the real solution will be conservation imposed by price."

The energy business continues to be an attractive one to be in because smaller discoveries are becoming more valuable.

"If you find 50 million barrels in a US$10 a barrel world, it's the same as a 10 million barrel discovery in a US$50 world," he said.

Still, Mr. Buckee said growth strategies will be tough for all, and mergers between big firms are unlikely because they're not value generators.

Instead, oil and gas firms that used to look similar are differentiating themselves, such as focusing on international, North American natural gas, or the oilsands business.

But he remains a skeptic of the oilsands business, an area that has been embraced by others because the deposits have an abundance of crude reserves and there is no exploration risk.

"The economic difficulties ... lead you to say, for me there must be something better to do. I wouldn't say that is for all times and forever, because these high prices cover up a lot of sins."

© National Post 2004

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