I grabbed a taxi and headed up to the Le Meridien Hotel in Etiler, a neighborhood in Istanbul, Turkey. I was on my way to have breakfast with N. Malone Mitchell III. He is the CEO, chairman and 40% owner of TransAtlantic Petroleum (TAT).

Malone’s company is the best way I’ve found to play a fascinating emerging energy story. It comes with risk, but offers a potential two–five times return on your money over the next few years…

Let me start with the big picture in Turkey.

The country sits on large untapped resources of shale gas. Nobody yet knows just how much natural gas Turkey might hold. One guess puts Turkey’s shale gas reserves at 20 trillion cubic meters. A fraction of that in Ukraine drew a $10 billion investment from Shell last month.

The irony is that Turkey depends heavily on expensive imports for both oil and gas. The two nearby charts tell you all you need to know. The first shows you how Turkey imports nearly all of its oil needs. The second shows you the same story for natural gas with an even steeper curve.

On the day of my meeting with Malone, Reuters released a story on Turkey’s gas potential. Malone got it on his phone while we were eating breakfast and showed it to me. A key excerpt:

With domestic gas consumption rising and [Turkey’s] geographic location meaning it is also well placed to supply international markets, major exploitable reserves could be a game changer for Turkey’s economy and highly lucrative for whoever finds them.

“We are keen to exploit this method and we must make economic use of shale gas,” energy minister Taner Yildiz told Reuters, saying it would be a priority for the near future.

This sets up the macro appeal of TransAtlantic. The other part of the appeal is in the micro, which begins with the talented Mr. Mitchell himself. He is a self-made oil and gas billionaire, a successful builder of companies. He is also, as I noted above, a big shareholder. And he has been buying more of late.

I’ve been following TransAtlantic for a few years now. It has been a longtime holding of my Mayer’s Special Situations newsletter. I share it with you here because it is one of the most intriguing ideas I have in Turkey and a good way to get exposure to a unique energy story.

It has not been a happy story to date. Over breakfast, Malone and I talked about the challenges TAT has had so far.

There has been a big learning curve in figuring out the geology. In many ways, TransAtlantic’s experiences mimic those of other successful unconventional plays. “It can take two years of failures before it all comes together,” Malone said.

There has also been the challenge of finding the right mix of people and getting the right systems in place. Malone told me about the intricacies of Turkish tax accounting, for instance. And he related some stories about personnel issues.

It is always easier to draw up the blueprint than to put it into action — especially in emerging markets. On the positive side, Malone said doing business in Turkey was as easy as doing business in Texas or Oklahoma from a regulatory point of view.

And though there have been setbacks, the plum of Turkey is as ripe as when Malone got involved in March 2008. He said Turkey then was like Texas in 1938 — a practically virginal land flush with oil and gas possibilities.

I asked him if he was still as excited about it as he was then. “Yes,” he said, “but I wish we knew then what we know now. Knowledge comes at a price.”

Frustrated by delays in ramping up production, the market has all but abandoned the shares. They now languish at around $1. Even just the value of its proved reserves — the so-called SEC PV-10 value — is about $1.75 per share (pretax). That gives the company no credit for whatever lies in its 5 million acres of underexplored land area. Yes, 5 million acres.

I asked Malone what he thought the market was missing with TransAtlantic.

“Well, the market thinks we aren’t going to do anything,” he said, thinking about that languishing share price. “The truth is if we weren’t a public company, I’d be fine about where we are.”

Indeed, the company is in a good position in a strategic sense. It has those 5 million acres locked up on long-term leases. It was early enough that it grabbed some of the best acreage. There are only three oil companies of consequence in Turkey: the national oil company, a privately held oil company and TransAtlantic. Everybody who comes after gets the crumbs left by these three.

Besides, TransAtlantic is already doing its bit to provide oil and gas to Turkey’s thirsty industrial base. In the Thrace Basin, TransAtlantic gas supports the city of Bursa. About 60 miles southeast of Istanbul, the Ottomans captured the city in 1326 and made it their first capital. Surrounded by forested hills and fruit orchards, it was once a Silk Road city. Today, there are nearly 2 million people in Bursa and it is home to thriving automotive and textile industries.

And there are a couple of big catalysts on the horizon that could make 2013 the year when the cards finally turn up right for Malone and his fellow shareholders.

First, Turkey’s unconventional oil and gas plays are getting more attention. Just a couple of days after our meeting, Malone would attend Turkey’s first shale gas and oil conference at the Bilkent Hotel in Ankara. There is an excitement in the air about what could happen in Turkey. And it is still very early.

The buzz could help Malone as he is trying to nail down a joint venture to accelerate the development of TransAtlantic’s acreage. The JV, Malone has said before and repeated at breakfast, could be as big as the sale of Viking (the company’s oil field services arm). For reference, this sale brought TransAtlantic $164 million, gross. As the whole market cap of TAT is only about $370 million, a JV that brought in that kind of cash would be huge. (And it is gravy on top of the $1.75 SEC PV-10 value I mentioned earlier.)

Second, the company is drilling some potentially high-impact wells. We should get the results on these wells within in the next six months. Malone was optimistic that these would bring strong results. Exciting results here could also light a fire under the stock.

I was glad to meet up with Malone. I have confidence he will figure it out and make it work. I think he is honest. He also owns a bunch of stock — an owner-operator, for sure. His track record of success is beyond dispute. All in all, a good mix, in my experience.

Reflecting on what TAT is building, I thought about how a bigger oil outfit will one day want to own it all. “Someday, somebody is going to want to write you a big check,” I said.

Malone said nothing, but his expression and his eyes told all. Exactly, they seemed to say. Exactly.

Sincerely,

Chris Mayer

Read more: How To Play Turkey’s Shale Boom http://dailyreckoning.com/how-to-play-turkeys-shale-boom/#ixzz2NUtPxnh0

Turkey’s estimated shale gas reserves total 1.8 trillion cu m, state news agency Anatolia Wednesday quoted the president of Turkish Association of Petroleum Geologists Ismail Bahtiyar as stating.
Bahtiyar was reported as saying Turkey has considerable potential for producing shale gas from areas in the southeast of the country and in the European province of Thrace.

Turkey’s shale gas potential has excited considerable speculation in the local media following a joint venture agreement signed last year between Shell and state upstream operator TPAO to prospect for shale gas in rock formations in the Diyarbakir region of southeast Turkey.

Reports have claimed reserves as being anything between a few Bcm and 20 Tcm.

Shell is expected to begin drilling test wells later this year.

Turkish energy minister Taner Yildiz last week denied reports of major shale gas finds in the Konya, Ankara and Kirsehir regions stating that as yet there have been no confirmed finds of commercial reserves of shale gas in Turkey.

–David O’Byrne, [email protected]

–Edited by Maurice Geller, [email protected]

* Several firms eye exploration licences, official say

* Southeastern region around Diyarbakir main prospect

* Major reserves could reduce reliance on imported energy

By Orhan Coskun and Evrim Ergin

ANKARA/ISTANBUL, Feb 18 (Reuters) – Turkey is hoping to find shale gas reserves big enough to help reduce its energy import dependency and is in talks with foreign firms about widening exploration after encouraging early signs, industry officials said on Monday.

The government is hoping that major shale gas reserves lie in basins in its southeast, east and western Thrace regions and officials say several firms, including smaller players already looking for conventional oil and gas, are keen to explore.

With domestic gas consumption rising and its geographic location meaning it is also well-placed to supply international markets, major exploitable reserves could be a game changer for Turkey’s economy and highly lucrative for whoever finds them.

“We are keen to exploit this method and we must make economic use of shale gas,” Energy Minister Taner Yildiz told Reuters, saying it would be a priority for the near future.

Shell is drilling for shale gas in the region around the southeastern city of Diyarbakir, while Canadian firm TransAtlantic Petroleum is also active in the region.

“Companies from the UK, U.S. and Canada are keen on shale gas production in Turkey,” said one senior energy ministry official, declining to be named because talks with potential partners were ongoing.

“These firms are in close contact with Turkish companies to obtain licences and to collaborate with them. They are also talking to state firms and are drawing up projections on possible sites and what can be done in the near future.”

At least one foreign company was expected to sign an agreement for shale gas exploration this year, officials said.

Estimates of how big Turkey’s shale gas reserves might be vary wildly.

One senior energy official said data from some international bodies suggested Turkey could have a massive 20 trillion cubic metres (cbm) of total reserves. Another industry expert said proven reserves so far stood at just 6-7 billion cbm.

That compares to an estimated 1.2 trillion cbm (42 trillion cubic feet), according to the U.S. Energy Information Administration, in Ukraine, where Shell signed a landmark $10 billion shale gas deal last month.

“At present it is not possible to predict (Turkey’s) shale gas reserves,” Shell’s Upstream International Director Andy Brown told Reuters in Ankara last Thursday, adding Shell would complete its exploration in Diyarbakir by the end of the year.

“We will be able to make an assessment only after we complete the first well, and then we’ll be able to see the full picture,” he said.

EARLY DAYS

Turkey is keen to cut down on an energy bill which last year stood at $60 billion and is pursuing a strategy to develop domestic resources including nuclear, coal, solar and wind energy. For now, shale gas is seen as a potential boon.

“It is not only a matter of locating reserves. Establishing how economic this gas will be is just as important,” said a senior official from state-owned energy company TPAO.

“Turkey’s annual gas consumption of 47 billion cbm as well as the amenities of shipment and proximity to international markets will certainly make production attractive,” he said.

Unconventional oil and gas resources such as shale are often located in the same sedimentary basins as conventional oil and gas fields, as appears to be the case in Turkey.

In many cases, the shale or tight rocks which are targeted by horizontal drilling and hydraulic fracturing were the original source for the oil and gas found in more conventional reservoirs.

Experts say the vast Dadas Shale basin in southeastern Turkey, a region around Diyarbakir where TransAtlantic and fellow Canadian-listed firm Valeura Energy are drilling, is one such example.

TransAtlantic said in October it had completed its first horizontal oil producing well in Turkey, an investment in the sort of production technology that would be required for Turkey to exploit its shale reserves.

Shell is expected to drill three more wells in Diyarbakir this year as it prospects for shale gas, although officials say if commercially viable reserves are found, any production would be unlikely before at least 2016.

Turkey’s government, struggling to diversify energy supplies to an increasingly demanding population, is likely to want any viable reserves exploited as quickly as possible.

“It is early days in terms of determining the size of the shale gas (or oil) resource and shale developments, but I understand early results are encouraging,” said Yvonne Telford, analyst for Wood Mackenzie’s upstream research service.

“Turkey’s existing onshore oil and gas production and transport infrastructure provides a ‘good fit’ for shale gas or oil developments,” she said.

Turkish environmental groups have lobbied against greater use of coal and nuclear energy but there has so far been little sign of the sort of opposition to fracking, the controversial drilling method used to extract shale gas, that has been seen in some other countries.

France banned fracking in 2011 after concerns were raised that fracking could pollute groundwater or trigger earthquakes.

via Turkey’s shale gas hopes draw growing interest | Reuters.