This article appears in the August issue of Oilweek.By Peter McKenzie-Brown
I didn’t expect the answer Byron Lutes gave me when I asked what kinds of books he reads. “I read a lot,” he said. “Just last night I finished When Giants Walked the Earth, by Mick Wall. It’s a biography of Led Zeppelin. It was great.” The choice surprised me. As we talked, however, the title seemed increasingly fitting. Surely if there’s an industry dominated by giants it’s the oilsands, yet here’s a guy leading a small company who wants to become a leader in the game.
Lutes has a ready smile and a lot of confidence in what he’s doing – turning the two-bit shell of a VSX (Venture Stock Exchange) company into a serious oilsands contender.
A chemical engineer by background, the athletic president and chief executive officer of Southern Pacific Resource Corp. graduated from the University of Calgary in mid-1986, just as oil prices collapsed from $30 per barrel to $10 and layoffs within the industry became the order of the day. “Only two of about 50 graduates in my chemical class got jobs after graduation.” Byron Lutes was one of them. As a student he’d worked at Suncor during previous summers, and the company wanted to keep him on.
Instead of getting the typical new hire’s tour of the company, though, he found himself working for Suncor just as it became immersed in labour strife. Employees at the oilsands plant had gone on strike, and he was shipped off to Fort McMurray to help operate the upgrader. “I was a coker rat,” he says. “I was swinging valves and cutting coke. It was a dirty job – all-night shifts – but I loved it because I got to learn a lot coming right out of school. I spent eight years at Suncor, doing various things. I did reservoir engineering and a year and a half stint in marketing. It was a terrific company to work for, and I got a lot of great experience.”
When he was 30, Lutes’ romance with junior oils was about to begin. “One of my former bosses, Sid Dykstra, had set up a company called Newport Energy and he asked me to join him. The company was making about 2,200 barrels of oil a day. Over the next seven years we grew it to about 30,000 and then sold out to Hunt Oil.” He stayed with Hunt for the next three years, running their Canadian operations. “That was a complete change, going from a grassroots, publically traded Canadian company to a private, very large American one. I knew I wasn’t going to stay.”
In 2002 he went to work for ManCal Energy, a privately-held company owned by Calgary’s Mannix family. “We were always growing stuff, developing it and selling it to take a profit. That was part of our game plan. We didn’t want to build up the staff complement, which was about 20 people. ManCal was another really good company to work for.”
After five years with ManCal, Dave Antony – the chair of Southern Pacific Resource Corp – approached Lutes “out of the blue” to run the company. “It’s been quite a ride. (The company) had a bunch of land in the oilsands and some exploration programs, and they needed someone to come in and lead it.”
Though the oilsands are an area where giants generally do walk the earth, Lutes sees a lot of opportunity for junior oilsands companies. “Smaller companies can move their projects forward faster, from a regulatory, financial, and execution standpoint,” he says. “They can exploit areas that a larger company may have overlooked. They (can) attract and retain top entrepreneurial expertise. There will always be room for different sizes, as in any industry, and the food chain will also likely always be there.”
The story of the resurrection of Southern Pacific illustrates two quite different business models that are part of the industry’s food chain. The company, which has an undistinguished pedigree, was first traded on the old Vancouver Stock Exchange as New Wellington Mines Limited, in 1953. According to Lutes, “Dave (Antony) and his associates find shell companies, clean them up, recapitalize them and put in a management team.” That’s one part of the food chain.
A private company known as Bounty Developments Ltd. illustrates another. Bounty’s “modus operandi is to get land positions and turn them over to another company, keeping an override on the land. They’ve been very successful with that. We made a deal with them, met some work commitments and acquired 219 square miles of land (sections) in the oilsands, most of it raw acreage. We earned an 80 per cent interest in the property.” Southern Pacific has since expanded its oilsands acreage, and now has an average 81 per cent working interest in 301 sections.
To play in the oilsands you need lots of money, and institutional investors in particular won’t touch a company listed on the Venture Exchange – too much risk. Southern Pacific needed to move to the Toronto Stock Exchange, and that required cash flow.
To get there, the company issued equity and took on debt to acquire Senlac, a Saskatchewan heavy oil property producing 5,000 barrels per day. The price was $90 million. “As soon as we had that we were a going concern, and it enabled us to advance to the TSX. That means more due diligence, but a lot more investors now will put their money into the company.” The company began trading on the TSX in June.
To look to the company’s future, you need to first look a bit deeper into its recent past. When Lutes took on the president’s role at the beginning of 2008, the boom was still around, although it had been soured by Premier Stelmach’s ill-considered and now largely defunct “fair share” royalty revisions.
“When I first joined we were getting ready to start up a major winter drilling program. The company had in the neighbourhood of $60 million in the bank, and we had a lot of core holes to drill but the market was getting choppy. So we were lucky enough – and (chairman) Dave (Antony) was smart enough – to realize it may not be easy to raise equity in the market, so we really conserved our cash.” Lutes pulls out a map. “We cut back on our drilling program but were lucky enough to find in this McKay block a significant resource that we thought could support a good SAGD project. We focused and drilled into this area and found ourselves a project.”
The company’s first oilsands production will come from two pieces of land separated by the McKay River. Especially when he talks about the first of these properties, Lutes gets visibly excited. “It’s a great property to sink our teeth into as our first green-field Athabasca bitumen SAGD project. The reservoir has all the properties you need to make SAGD work, no complications like top gas or bottom water or shale compartments, and this one can use a proven technology.”
He stresses that you shouldn’t “risk the company by using unproven technology. Let the big guys figure that stuff out. We know that SAGD will work. Reservoir thickness ranges from 15 metres to about 30 metres. It’s definitely SAGD-able.” Oil saturation in the reservoir ranges from 70-80 per cent with an average of 75 per cent, he says. The reservoir “is not as thick as some properties further south” like Suncor’s Firebag project. “However, it’s a great property.”
At the low point in the financial crisis, last year Lutes’ team prepared a SAGD proposal for submission to the ERCB. “We designed a 12,000 barrel per day project for two reasons. From a regulatory perspective, it’s the fastest way to get onstream. If you make a proposal for more than 12,600 barrels (2,000 cubic metres) per day, approval takes another year. That’s the first reason. The second is that if you develop a smaller project, you can use standard equipment. Other companies are using the same pots and pans as we’ll be using. That gives us better control of our capital costs, since that equipment is made locally. We don’t have to go to international manufacturers.”
As for expansion and timing, Lutes is characteristically optimistic. “We think we’ve got enough resource to expand. We have contingent resources, and we think we can grow our capacity up to the 36,000 barrel per day range” within two years of construction of the first project. “Our first project is going to be steaming up at the end of 2011, and on full production by 2013. We think we can expand to the east side of the McKay River and also expand the original project on the west side. We hope to have applications in by the middle of 2011. Based on our recent experience, the applications take about 14 months to process.”
The cost of the initial project will be about $428 million. For Phases 2 and 3, Lutes estimates $380 million. “The difference is that infrastructure costs for the next phases will be lower once we are in the area.” Southern Pacific will use cash flow from Senlac in Saskatchewan and from McKay to fund growth in other oilsands leases.
Outside the office, Lutes is both musical and athletic. He’s had an interest in rock music since he and some friends started up a rock band in high school: “I played bass and sang.” The guitar playing is something his three sons – Cory, 19, who is studying engineering at UBC; 11-year-old Kyle; 9-year-old Dylan – have all taken up.
His wife Kathy and he are heavily involved with soccer with the younger boys. Formerly an accountant with TransCanada, she is now a full-time mum and treasurer of her kids’ soccer club. I ask about hockey. “We absolutely love hockey. We watch it religiously but we don’t play it. The reason is that we have a genetic problem,” he deadpans. “We can’t turn right on skates.”
He can turn right on the longboard, however. Essentially a surfboard with wheels, these long skateboards can measure 1.5 metres in length, and good riders can perform complex tricks on them. “I took up longboarding this summer,” he says. “Longboards really cruise. My kids have them, and they are a lot of fun. I figure if the kids want to use them, I might as well go boarding with them. I play basketball with them, too.”
How do you sum up Byron Lutes? A guitar-playing businessman, a longboarding engineer, an executive hooked on rock concerts. Too bad he can’t turn right on his ice skates.