Ahead of his participation in the World Energy Capital Assembly 2023, Francesco Mazzagatti caught up with us for an executive interview centred around Investment in E&P and the North Sea.

Francesco, it has been a while since we last spoke but Viaro Energy appears to have been as busy as ever in 2023. You started out with the acquisition of Spark Exploration UK’s West of Shetland assets, followed by the farm-in agreement with Hartshead Resources for the operatorship of gas fields in the Southern North Sea. Can you tell us a bit more about Viaro’s strategic direction in 2023 and the foreseeable future?

It is true that 2023 has been quite busy for Viaro and we expect to have a few more announcements before the year is out. Our goal remains the same as ever, which is to make long-term investments in the North Sea and ultimately support the exploration and production of local European energy sources to their fullest potential. Each deal we make is primarily evaluated through this lens, and we seek to maintain the right overall balance between our exploration and production investments in the North Sea.

Not only is this necessary for increasing the UK’s energy security, but also to reassure investors that the North Sea continues to be a viable source of profits. We cannot expect to meaningfully boost investments unless we realise the potential of the assets likely to make the biggest impact. Exploration assets are understandably considered a higher-risk investment, as their development depends on various factors and is ultimately not guaranteed. That said, they also allow for significantly higher returns, especially considering the general lack of financial support for E&P opportunities.

As such, I find it necessary to balance out our portfolio with investments in mature producing assets to ensure Viaro’s profitability, along with supporting their use to their full potential. As we have made considerable investments in mature assets in the past couple of years, we have been able to primarily focus on exploration and development of new fields in 2023. Our strategy will continue to be a balance between the two as we work to increase our reserves, along with a methodical increase in operatorship consistent with our growth.

The UK windfall tax remains a major challenge for North Sea operators, with an overwhelming majority of oil and gas companies continuing to cut down investments. Although the UK government has agreed to re-examine its position if energy prices return to normal for two consecutive quarters, the current prognosis is overall discouraging for the country’s economic stability, given predictions of significant job losses and increased reliance on imported energy sources. What is your view on this situation and how is Viaro navigating these obstacles?

It is eminently clear that the UK government is yet to find a way to reconcile the country’s transition goals with encouraging investments in the local energy sector. On one hand, there is a radical push to meet net-zero targets, and the windfall tax is just one controversial example of the country’s effort to demonstrate its commitment to this goal, when in fact it is a hard punishment for our industry. On the other hand, the UK government has repeatedly made pleas for oil and gas companies to increase investments in local energy sources, as the country will otherwise have to contend with hundreds of thousands of people being out of a job, as well as increased demand for oil and gas imports. This will not only disrupt its transition goals by drastically increasing emissions but also add to the trade deficit. Not to mention that a drastic decline in the production of oil and gas effectively means that the government would have to find another way of replacing the billions of pounds in taxes that it gets from our industry.

As long as we consider these different issues in isolation from each other, it is unlikely that any efforts made to address them will have meaningful results. It is very convenient and easy to single out oil and gas companies as the main obstacle in the necessary transition to sustainability purely by the nature of their operations. However, it is not reasonable to effectively punish the industry for its negative impact on the environment, while at the same time treating it as crucial to achieve the desired results. This includes acknowledging dependence on fossil fuels and highlighting the necessity of continuous investments in hydrocarbons at this stage of the transition. This is as true for government decision-makers as it is for promoters of climate justice.

I am by no means implying that the oil and gas sector does not have a lot of room for improvement in order to better support the transition to net zero. But unless a more collaborative approach to these shared goals is adopted, we will hardly achieve sustainable solutions. For producers such as Viaro, the best contribution in the transition are continuous investments in North Sea exploration and production opportunities, which are essential for the UK’s effort to ensure energy security and economic stability. Despite the challenges we are required to contend with, Viaro maintains a focus on these goals, which inform all our business decisions. Navigating the associated obstacles is simply a matter of factoring them into each one and finding the best way to work around them.

It is certainly commendable that Viaro continues being a major contributor in the North Sea upstream sector, despite the challenges associated with the transition to net zero. One of them is the increased pressure on traditional capital providers to reduce their financial support for oil and gas companies in order to meet their transition goals. What is your opinion of the shrinking pool of liquidity and the current shift to alternative sources of funding?

The finance gap in oil and gas E&P is not a new issue, but more discussions about it are long overdue if we are to tackle this challenge more effectively. While the increased economic instability of the past few years has certainly amplified it, one might argue that it has also served to finally give the issue the attention it deserves. Traditional capital providers have long been reluctant to invest in oil and gas exploration, instead opting to support mature short-cycle assets that generate quicker returns. This is not unusual, as banks and private equity funds can be said to have an overall low risk appetite compared to alternative investors.

As my mindset is to always look for opportunities that come with every crisis, I believe the current call for more investments in local energy across Europe and beyond has a lot of potential to change this status quo. It has prompted new sources of funding for oil and gas, with more investments from family offices, traders, and alternative credit funds. Such investors have different thresholds for the degree of risk they are willing to absorb, and a lot of them seek the kinds of high-risk opportunities found in oil and gas exploration, which are accompanied by equally higher returns. In order to profit from this, it will be crucial for oil and gas companies to maintain performance sheets that will reassure investors that their returns will be realised. At Viaro, we are certainly looking to take advantage of the opportunities that come with these alternative funding options and evaluate our own investments carefully to meet the desired criteria.

I expect this shift will allow traditional capital providers to be similarly reassured of the continued viability of investments in the oil and gas sector without taking a direct risk and to thus gradually increase financing. Obviously, this must also be accompanied by a change in the UK government’s radical approach to achieving net zero, currently detrimental to the UK’s economic wellbeing and a stable energy transition. As things stand right now, the pressure on banks to cut off financing for the oil and gas sector can only further contribute to the counter-productive effect of the government’s initiatives, caused by increased taxation and overall alienation of oil and gas investors we discussed earlier. I am certain that this issue will need to be addressed sooner or later for this reason, even though it is discouraging at the moment.

Your take on this issue is definitely interesting and somewhat uniquely optimistic. We look forward to hearing you speak more about the ways of plugging the finance gap during our capital markets panel at the World Energy Capital Assembly in November. For now, I would be interested to know to what extent is the shrinking pool of liquidity affecting Viaro’s commitment to future North Sea investments?

At Viaro, we see innovation and adaptability as being at the core of our business strategy and operational performance. This applies to all aspects of our operations, including our approach to navigating the financial challenges associated with our industry. We seek to stay ahead of the curve by exploring the different financing options available and ensure that our results inspire the utmost confidence in both traditional and alternative capital providers for future growth.

Despite the obstacles I have mentioned, I am pleased to say that Viaro is still a debt-free company today and our stakeholders evaluate the company’s balance sheet as a single “A” equivalent as per the S&P Global Rating. We have a strong finance team and our CFO Mr Dixit has implemented a strict cash control on a weekly basis, as well as an annual forecast that is updated quarterly.

I am confident that the North Sea’s crucial role as a stable energy source in the UK’s transition to net zero will ultimately prevail and so Viaro’s commitment remains firm. The increasing discussions about the importance of energy security at the current stage are certainly a step in the right direction, even though we have a long way to go before we see meaningful changes.

Francesco, thank you for your time. It is always a pleasure speaking to you and we are proud to have you as a member of the advisory board of the World Capital Assembly. Through your contributions to the Energy Council and Viaro’s activities in the North Sea, you have shown a truly impressive commitment to the UK’s energy sector and overall economy. Before we wrap this up, I am curious about this framed certificate from Italy that you have in your office. What does it say?

First of all, thank you for the kind words of praise regarding Viaro’s and my own activities in the UK. It has been a real pleasure to partner up with the Energy Council once again and I value all the important work that you do for the future of the energy sector. I also appreciate the opportunity to shape the direction in which the industry should be heading along with my fellow members.

It is funny that you asked me about this certificate after praising my work in the UK, because this was actually given to me by the Italian government for my “brilliant capacity of investing in the world,” representing the best of Italy abroad, and always operating in legality and transparency. It is gratifying to hear that my contributions are recognised on both sides.

Viaro Energy are a premium sponsor of the World Energy Capital Assembly 2023, held in London on 13 – 14 November.