(EnergyAsia, February 21 2011, Monday) — Later this year, the arid coastline of north-west Peru will set the scene for the start of an ethanol production project that could transform the profitability of AIM-listed integrated energy group Maple Energy. After years of major engineering work, ethanol will begin flowing from what promises to be one of the lowest cost production operations of its type in the world, the company told Stockopedia.

Maple came to UK’s AIM exchange in July 2007 with a portfolio of Peruvian oil and gas exploration, production and processing assets, together with plans to develop its new US$254 million ethanol project which is now fully funded to completion in the second half of 2011. The economics of the new facility are impressive, not least because Peru’s coastline offers ideal conditions to grow the most efficient feedstock for ethanol production – sugar cane.

Starting on just over half of a land bank totalling 13,500 hectares, Maple has designed an environmentally conscious operation that is expected to produce up to 35 million gallons of ethanol per year for export, together with 37 MW of electricity from a co-generation power plant.

In the six months to June 30, 2010, Maple delivered revenues of US$35 million, up from US$28.3 million year-on-year, with pre-tax profits coming in at US$100,000 against a loss of US$15.5 million. Ebitda rose to US$5.3 million from US$2.4 million.

Over the last 12 months, the Maple Energy share price on AIM (they also trade in Lima) has fallen from a high of 84.75pence in January 2010 to a low of 41 pence last August and recently traded at 69.5 pence. Maple’s peers include AIM listed Gold Oil and Toronto listed Petrominerales (TSX: PMG), both of which have oil assets in Peru. Meanwhile, AIM groups GTL Resources and Clean Energy Brazil have ethanol interests in California and Brazil respectively.

Production will mark a major turning point for Maple, which last year sold its 14.3% stake in its first major project in the country – the Aguaytia gas and electric power project – for $28 million to Duke Energy. That deal streamlined its portfolio down to a modest oil production arm, a refining and marketing business based from the Pucallpa refinery and a chance shale gas discovery on the Santa Rosa prospect in Block 31-E (the company had originally be drilling for oil). Maple’s chief executive, Rex Canon believes the ethanol plant will have a major impact on the company’s future.

Rex, you have been with Maple Energy since the late 1980s. Tell me about the business and your strategy in Peru?

We are an independent energy company focused on Peru. We’ve got different business units, one is ethanol and the other one is in the hydrocarbon space. The biggest project is our ethanol project up on the north coast of Peru.

We had a predecessor company, which was in the US and which was also under the Maple name, and we were in the oil and gas production business, we operated at one time over 500 wells. We were also in natural gas gathering and processing, which means we were building and operating natural gas pipeline systems and gathering systems as well as processing plants which extracted gas liquids from gas production. We came down to Peru in the mid-1990s to look at opportunities.

The political landscape was changing in Peru at the time and they were just starting to discuss the privatisation of the oil and gas, and the electricity sectors. So we really came down here early on, and we ended up signing agreements with the government which got us into both the oil and gas business and also into the power business.

Our first big project at that time was to develop a $273 million fully integrated natural gas and electric power business, which included developing the first gas field to be commercialised in Peru ever – that was Aguaytia.

What triggered the move from Aguaytia into the ethanol space?

Aguaytia was a project conceived by Maple and it was our team that was responsible for developing it, constructing it and putting it into operation. That was our first big project in Peru. We have since done other things in the oil and gas sector and got interested in ethanol in the last few years.

We have a production, refining and marketing business in the central jungle of Peru. We were following ethanol because there are mandates all over the world to mix ethanol with gasoline. Just by being here in Peru, we knew the best feedstock for producing fuel grade ethanol was sugarcane, in terms of cost efficiency and energy efficiency.

Peru was arguably the best place in the world to grow sugarcane in terms of yields. That is what getting us focused on that opportunity and we now have a project that is under construction, fully integrated and we expect it to go into commercial operation in the second half of this year.

How challenging is it to put something like this together?

In terms of doing large scale greenfield projects in Peru, we’ve already done that before with the Aguaytia project.

A lot of the challenges have been overcome in that we have got all the key permitting in place and we have got the financing. We are substantially into the construction and a very significant part of the work that remains is being done under contracts that, in most cases, are fixed price and they’re very solid project-financed style contracts. There were certainly a lot of challenges but we have overcome most of those and we are in position to be in commercial operation in the second half of next year.

How complex has it been to negotiate this project with the Peruvian authorities?

It’s easy from the standpoint that it is a new industry really for Peru. There’s actually one other project that’s recently gone into operation, we’ll be the second one, but essentially this is a new industry as far as ethanol is concerned.

Peru has been producing sugar cane for a long time but as far as the concept of producing fuel grade ethanol this is something that is really more recent. It is a greenfield project and we’re creating jobs.

During the operation phase we’ll have 500 to 600 permanent employees, but if you look at the indirect employment created through other service providers, it is several multiples of that number. So we’re creating jobs, it’s a new industry and it is something that we have had a lot of support for, not just from the federal government and regional government but also from the local communities.

Will you be exporting the ethanol or processing it through your own refinery?

We are not really intending to produce this for our refinery, this is principally an export-driven business. There is a mandate for ethanol in Peru; the requirement here is that 7.8% of motor gasoline is to be ethanol. Now that particular mandate is being rolled out right now so it is already in effect in some parts of Peru but it is going to take another year or so to roll that out nationwide.

But even once that is rolled out nationally the demand in Peru is around 25 million gallons or so per year. Our production is expected to exceed that. There’s another project already in operation in Peru and I expect that there’ll be other projects.

While we may be selling some in the local market, this is principally an export-driven business.

We will be producing a very high quality product in terms of technical specifications but we’ll also be meeting all the sustainability requirements for the European market. We are using the most efficient feed stock, sugarcane, we are converting arid lands to production; there is nothing that has been cultivated on a commercial basis out there before. The coast of Peru it is really an arid coast, and we are using ‘drip irrigation’ so there is no issue about competition for water. It is about as green as you can get.

What are your longer-term plans?

The first step for us is that we actually own 13,500 hectares and we also have a substantial amount of water rights. Our plan in the first phase is to develop 7,800 hectares of cane plantation, and that is underway right now. In the next phase we will increase that total plantation up to about 10,000 hectares. We are looking for other opportunities in the river basin area we are in as well as other areas in Peru for other potential projects.

What impact will this project have on your financial performance in the years to come?

We have a production, refining and marketing business that is producing revenues and it has a stable source of cash flow.

Once we go into operation on our ethanol project the top line revenues from that business are expected to exceed what we are doing in the oil and gas business.

Our oil production is in the range of about 500 barrels a day, which is high quality crude oil that we’re producing from fields that we operate and have 100% interest in.

We own some of our own drilling rigs and work-over equipment, and we have an ongoing programme to maximise and optimise what we can get out of those fields. In addition to that we purchase natural gasolines from Aguaytia Energy, which was the business that we developed but later sold, on a long term basis and that feed stock goes into our refining operation.

The short story is that integrated business of production, refining and marketing is really just something that we are not spending much capital on at the moment, we are just trying to optimise what we can out of the existing business.

There is an opportunity in shale gas that requires further evaluation. We were drilling an oil prospect and while we didn’t find oil we did drill into a fairly significant deposit of shale gas. It needs further evaluation to determine the possibilities.

You brought Maple Energy to London’s AIM market in July 2007. Why do you think the company should be a stock worth watching for retail investors?

The big events coming up, I think this year certainly, will be going into commercial operation on the ethanol business.

We expect to be among the low-cost producers worldwide. We expect our direct production cost to be in the range of 75 cents per gallon. If you consider the administrative cost on top of that of about 14 cents a gallon and our transportation, storage and marketing estimates, you get to an all in projected cost of about $1.28 per gallon.

That is really a delivered cost at Rotterdam, which is what we are expecting our target market point to be. Prices of ethanol now are in the range of $3 to $3.25 per gallon. Ethanol is a commodity and the price varies every day but there is quite a bit of spread there.

Considering our expected production, there is a lot of cash flow that we expect to come out of that business once we go into commercial operation. The big changing point is going to be when we do go into commercial operation.

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