Deepwater Contrarian

When Brian Reinsborough started Venari Resources to hunt for oil in the Gulf of Mexico during a moratorium on Gulf drilling, people said he was crazy. They’re not saying that anymore.

It’s 180 miles south of the Atchafalaya River delta on the Louisiana Coast. From there, it’s another 5,800 feet under the surface of the Gulf of Mexico, down to the seabed. Then, from the seabed, it’s down even farther. Much farther. 

Nearly six miles down, through layers of dense rock and packed sand and massive salt deposits that have likely been there for 23 million years or more. Way out there in the Gulf, and way under what’s under the water, oil courses through the geologic substrate in a formation dubbed Shenandoah-2.

A lot of oil. Maybe enough to fill a billion barrels. That’s worth a lot of money—some $60 billion, even at current prices. More than enough to handsomely repay the institutional investors that provided a $2.4 billion line of equity to back a 3-year-old deepwater oil exploration company that’s primarily responsible for finding all that oil, all the way out, and all the way down, there.

Ask the soft-spoken, Canadian-born CEO of that company, Addison-based Venari Resources, what he thinks about all that, and he’ll tell you this: “It’s pretty neat.” Actually, 54-year-old Brian Reinsborough will tell you that many things are “pretty neat.” Among them: The fact that, after nearly three decades in the oil and gas industry, he quit a big-time executive position so he could dream up Venari, write its business plan, raise the first $1.125 billion in operating capital, and quickly grow the startup into a 50-person operation with offices in Addison and Houston. 

That’s tiny by oil industry standards, especially for a firm that does deepwater oil exploration. But little Venari is already having an outsize impact, having partnered with companies like Chevron, ConocoPhillips, and Marathon Oil Corp. on two of the most significant deepwater finds—including Shenandoah-2—made in recent years. That Reinsborough dreamed-up this important, small startup at a time when drilling in the Gulf was completely shut down thanks to BP’s 2010 Deepwater Horizon disaster, which killed 11 workers and gushed millions of gallons of oil into the water, makes Venari’s quick string of accomplishments even more impressive. 

You might even call Venari’s story “pretty neat.”

From Mining to Oil

Large, brilliantly colored minerals sit on shelves that line the conference room at Venari’s Addison headquarters. Reinsborough is giving me a quick lesson on their makeup and where they’d be found deep under the Gulf of Mexico seafloor. Geology has been his thing ever since he was a kid growing up in Canada’s maritime province of New Brunswick, which lies north and east of Maine.

Petroleum didn’t become his thing, too, until after he graduated from New Brunswick’s Mount Allison University, where he studied gold and uranium exploration. But he never got the chance to be a mining mogul. Instead, Shell hired him shortly after graduation. That led to more studies, this time in petroleum geology, at the University of Alberta in Edmonton. Mobil Oil hired him from there, moving him from Dallas and Denver and paying for his masters degree in geology at the University of Texas. 

“The old wildcatters are still here,” he says. “They just come in a different package.”

After joining Nexen, an Alberta-based exploration and production company where he worked for 17 years starting in 1994, Reinsborough graduated from Harvard Business School’s Executive Program. Listen to him talk business for a few minutes, and it’s clear he was paying attention. It’s business jargon—like “risk aversion” and “criteria metrics”—one minute, then a discussion of how seismic imaging software works the next. And when the CEO talks about the foundation of Venari, he talks like a master’s student. 

“My theory was that the industry would eventually emerge from the moratorium on production that was put in place after the Deepwater Horizon incident,” he says. “And when the industry did emerge, there would be what I called a ‘commercial dislocation.’ In other words, the industry would thematically and perceptionally ‘over-risk’ deepwater because of the moratorium and the incident. Because of that, industry executives would want to share risk capital as they’d drill.” 

Working from that theory, Reinsborough formed a thesis: “There was room for another company in the market to absorb some of that perceived risk. There was a void in the market. And I also believed that during the moratorium, oil companies would not relocate their people. They would keep their geologists and geophysicists working their prospects in the Gulf. So, when they got the opportunity to drill again, the best prospects would be drilled first. I formed a pure-play company to take advantage of those best prospects.”

Building a Company

Before there was a theory or a thesis, there was a blank sheet of paper. In 2011, after spending a decade in Dallas as president and CEO of U.S. operations for Nexen, Reinsborough resigned. “I had everything as a CEO,” he says. “I even had use of a corporate jet. But after I left, I had nothing except a small office by an elevator bank.”

The small office was one of several at Broad Oak Energy, an Irving-based oil-and-gas company owned by Warburg Pincus, a private equity firm that holds dozens of different companies in its portfolio. Warburg also employs several different “executives-in-residence”—leaders who are tasked with coming up with new ideas that, ideally, will lead to new products or entirely new companies that go against the conventional business wisdom. 

Reinsborough spent a month thinking about where he wanted to build a company, and how he wanted to build it.  “No one in the office even knew who I was or what I was doing,” he says. “It was probably the most productive month I’ve ever had in my whole career. There were no meetings, no phone calls, no distractions. I was at work by 8 o’clock and I’d leave by 4 p.m., just because by then I was mentally spent. On the first day, I literally brought a sheet of paper and started to think and write.”

A month later, he had his theory and thesis for building a countercyclical company—one set to capitalize on the work stoppage in the Gulf. He had Warburg’s backing and his own confidence (“I fundamentally believed in my ideas,” he says). And a few months later, he had a fully fleshed-out business plan. All he needed was $1 billion. 

He needed to raise the money with no assets, with hardly any employees, with an ongoing global recession, and with that moratorium on drilling in the Gulf of Mexico still in place. When Venari’s two big deepwater finds caught Forbes’ attention last year, the magazine said that not only did Reinsborough’s business plan seem counterintuitive and contrarian, “It seemed downright nuts.” 

That’s exactly what a lot of big investors told Reinsborough when he brought his no-longer-blank sheet of paper to them in 2011 and 2012. To win over the skeptics, Reinsborough focused his sales pitch on three components. One: The opportunities created by the moratorium on Gulf drilling. Reinsborough’s theory suggested that the moratorium had given numerous companies time to study top deepwater prospects. So, he told investors, as long as Venari had enough money to put up serious cash toward wells that can cost as much as $300 million, it would be able to partner with those companies on their finds. 

Venari doesn’t build or operate wells; its mega-company partners like Chevron do that. Venari’s job, as per its meaning in Latin, is simply, “to hunt.” But hunting doesn’t come cheap six miles below the bottom of the sea. 

“We were going into a very, very capital-intensive part of the industry,” Reinsborough says. “We were going into a place populated by giants. So I needed to have a big splash in terms of funding for these companies to pay attention to Venari. Raising $1 billion was fundamentally important.” 

The second of Reinsborough’s components was that new seismic technologies miles under the ocean floor would make finding giant oil fields easier than ever. 

Earlier this century, geologists trying to see through dense layers of salt under the sea floor were like Superman trying to see through lead. Today, that salt layer is no longer a complete blind spot that confuses seismic measuring equipment. And thanks to better three-dimensional imaging and supercomputers that can crunch trillions of numbers at once, it has gotten easier to calculate the meaning of seismic waves that are constantly flowing into floating research stations. That’s opening opportunities that no one could literally see before the past few years. 

“We’re imaging massive structures that we think hold massive amounts of oil,” Reinsborough says. “And technology is the key. You can see these prospects better than you could historically because of the new ways to shoot data.”

That’s where the third component comes in: people. Reinsborough brought many of his top explorationists at Nexen, all of whom have deepwater research experience, with him to Venari. That, he says, was the key to making Venari viable in a competitive industry dominated by bigger companies.

“Everybody has the same data sets and the same technology today,” Reinsborough says. “It’s what you do with the data, it’s what the geologists and geophysicists see in the data that makes the difference. And our team is the best at working with the data. That’s really the secret sauce that makes this work.”

Now that Venari is working, Reinsborough is able to laugh about the investors who wrote him off in his initial fundraising round, some of whom wanted in on the second round of financing Venari capped earlier this year after bringing in $1.375 billion. 

“You know,” he says, rounding out his “o”s in a peculiarly eastern Canadian fashion, “it was right in the middle of the moratorium that I came up with the idea for Venari. So, yes, I can see why people would say, ‘This is a little crazy.’ But are we crazy now? Absolutely not. We’ve created a multibillion-dollar organization, and I don’t know how big we’re going to get from here. It has been fun to prove the naysayers wrong.”

Way Above Average

The world that exists miles below the seafloor, where temperatures can exceed 100 degrees Celsius, is a mysterious one. Though the visioning technology of what’s deep, deep down has improved, it’s far from perfect. In fact, it’s only about as “perfect” as an average hitter in baseball. Only one in four deepwater wells—drilled because geologists are fairly certain there’s a good amount of oil to be found there—pay off in the end. 

Venari is above average. Way above average (especially for baseball hitters). The company’s success rate at finding significant oil deposits in wells it suggests drilling, according to Reinsborough, tops 60 percent.

The reason: those “criteria metrics” Reinsborough likes to talk about. He says nearly everyone at Venari who doesn’t work in the back office gets a voice on whether or not to pursue a drilling project. 

“You need to do your due diligence before you invest in a well,” he says. “And the technology has evolved to let you really understand the technical risks of what you’re doing. But when you say yes to a well, it’s still a big risk, so you always get anxious about what you’re going to get once you get close. Thirty years ago or more in East Texas, the wildcatters had some surface geology and some seismic technology. But they also had their instincts. We do, too. We have instincts with more data. So the old wildcatters are still here. They just come in a different package.”

When we met in the mineral-laden company conference room, Venari had just reviewed its 100th potential drilling deal. A team of executives, meeting at the same conference table where Reinsborough and I spoke, had declined 90 percent of those potential deals.

They’ve subsequently checked in on all of them to find that the success rate on the deals they’ve declined is just 15 percent, and no major oil fields are among those successes. “You have to look at your successes,” Reinsborough says, “but you also have to look at the things you say you don’t want to do.”

Even the recent cascade in oil prices hasn’t knocked Venari off stride. It doesn’t have to worry about the price of oil—and the impact that will have on its investments in various wells—until those wells begin producing oil in 2019-2020. It takes years to get a six-mile-deep well up-and-running. That’s partly because of the technical difficulties involved in drilling to those depths, and partly because of increased safety protocols put in place after the Deepwater Horizon accident. Those protocols have made drilling times longer, more expensive, and, Reinsborough believes, much safer. 

“It was a terrible incident environmentally, and the human toll was huge as well,” Reinsborough says. “But the silver lining is that the industry is better prepared than it was then, and I believe the Gulf of Mexico is one of the safest places in the world to drill offshore because of that incident.”

Still, risks remain, both in terms of safety and in long-term prospects for growth in Gulf oil. “The economics [of exploration] are currently challenging because of high costs, technological limitations, and low recovery rates,” says Imran Khan, a senior analyst at energy consultant Wood Mackenzie. “Unless these obstacles are overcome, it will be difficult for the region to grow in the next decade.”

Although Wood Mackenzie says a record-high 1.9 million barrels of oil will come out of the Gulf in 2016, it also says that number will plateau by 2021 because older wells will cease production. Venari, though, is only invested in newer, deeper, fields—none of which will produce a sellable drop of oil between now and ’19. That means the company is insulated from the recent drop in oil prices—for the moment, at least. But it will need to score more finds before the first of its oil starts paying off. 

“This business is not for the faint of heart,” Reinsborough says. “If you’re worried about a dry hole here and there, we’re not the company for you. But the successes pay off the failures, and Venari has had a lot of successes. But we do live in a bubble at Venari. While the industry is in a tough spot right now, we have plenty of money. We’re hiring people. We’re investing in the best opportunities. That’s a bit of a surreal environment to be in right now. But that’s an environment we created.”   

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