The UK is considered to be a significant hydrocarbon consumer and is fortunate enough to have the reserves of the North Sea on its doorstep. However with these reserves having been depleted over the past 20 years there is an increasing reliance on imports; some industry experts are forecasting that 90% of the UK’s oil could be imported by 2020. Unfortunately the figures for gas aren’t much better with Britain importing around 40% of its gas currently and experts predicting an increase to around 80% by 2015.

This increasing vulnerability to gas imports was highlighted during the cold snap this winter when the National Grid had to issue an appeal for more gas as consumption soared and cold weather brought about technical problems to existing pipelines. The appeal was highly warranted too as according to the National Grid the UK would have approximately 7 days worth of stored gas supplies to go on if no imports could become available.

One company looking well placed to improve the UK’s increasing hydrocarbon deficit is Europa Oil and Gas (AIM: EOG).

EOG are a “Europe-focused” oil and gas exploration and production (E&P) company current production in England. The company is fairly unique to the AIM market, not only because many of their core assets are based in England, but because they are profitable on UK oil production revenues last year of nearly £3 million.

Compared to many of its peers on AIM, Europa Oil & Gas is a tightly run, conservative company, but nonetheless it has plenty of potential tucked away in its portfolio and is keen to drive forward with proving up reserves across its EU portfolio. Also unlike many other junior oil companies, the directors of the company still retain a sizeable equity stake in the company, and therefore have their own interests aligned more directly with shareholders. The founders demonstrated their support by dipping into their pockets to the tune of £165,000 to buy more shares over the last 12 months. Yet unlike many companies with a market capitalisation under £25 million, Europa enjoys relatively good liquidity in its shares.

Aside from production in England, Europa has many appraisal and exploration projects in two key EU jurisdictions: France and Romania. In these two areas, Europa owns undeveloped discoveries capable of yielding over 100 million barrels of oil equivalent (mmboe) in reserves net to the company.

The company have current 2P reserves (Proven and Probable) of 0.8 million barrels of oil (mmbo) with un-risked potential resources from exploration projects nearing 60 mmbo. It is in the intermediate Contingent Resource category (undeveloped discoveries) that Europa is anticipating to grow strongly in 2010 to up to 120mmboe. Considering their assets are located in countries of moderate to low political risk and economic instability, the share price of 18p already seems to present fair value.

To get a better feel for the company however we will look at each of their assets in turn starting with their core UK assets.

UK

In the UK EOG has three producing assets: Crosby Warren, West Firsby and Whisby.

The Crosby Warren oilfield (100%) is currently producing around 45 barrels of oil per day (bopd) and has a production enhancement program underway which should see production increase to 100 bopd by April 2010, primarily from frac stimulation technology, proven to be extremely efficacious in CW-1, now going to be applied to the CW2 well in the coming weeks.

The West Firsby field (100%) has recovered well from the fire in mid-2009 with production averaging around 70 bopd however when the facilities upgrade takes affect this should increase to around 140 bopd, expected May 2010. A new production well is planned for later in 2010, which should target two reservoir zones and have the potential for doubling field production.

At the Whisby field (65%) production is consistently at or around 60 bopd with no immediate plans to tinker with this solid performer.

EOG also have exploration projects within the UK - including the Hykeham prospect in Lincolnshire (75%). Hykeham-1 was drilled in late 2009 and found 4m of net oil pay. Currently there are flow tests underway and the group is anticipating this will contribute to the cashflow stream in the very near future. Several exploration prospects are due for 2011 drilling: Wressle, Caistor and Holmwood, the latter being situated close to the Brockham and Albury Fields and planning determination is expected for an exploration well in May 2010.

Europa is aiming to increase production in the U.K. from the current rate of around 180 bopd to 500 bopd by year-end.

Romania

Outwith the UK, all of the group’s assets are at an exploration/development stage.

Arguably the most enticing of which is the Voitinel prospect in Romania (28.75%), where the potential resource for the block has been recently upgraded to 400 billion cubic feet (bcf) from a previously estimated 50-100 bcf.

This upgraded and unrisked figure is equivalent to approximately 23 mmbo which if realised would substantially increase the company’s reserves. Further testing and appraisal work is underway, with a second zone test and frac treatment due in April and the potential for this block should not be underestimated.

Elsewhere in Romania the company has four other concessions covering vast quantities of land in relatively unexplored regions. Exploration and development work will be ongoing throughout 2010 giving the potential for resource updates. The Company anticipates participating in the Barchiz well (20%) in 2010, offsetting the 50mmbo Gemana Oilfield.

France

In France the company has two licenses namely Tarbes Val d’Adour and Bearn des Gaves of which EOG has a 100% interest in both.

At Tarbes Val d’Adour the company is looking to redevelop the Osmets oilfield which was shut down by Total (NYSE: TOT) in the 1980’s due to uneconomical oil and gas prices. EOG plan to retrieve all the existing seismic data from Total to determine best drill locations though believe the property could hold some 2.2 mmbo.

The Bearn des Gaves license is the last of the group’s so-called core assets though is certainly not least. This prospective field shares its location with the prolific Lacq gasfield which is the largest in France holding a cool 5 trillion cubic feet (Tcf) of gas. Initial evaluations estimate the field could hold as much as 1.7 Tcf of gas, equivalent to 100 mmbo.

The field is currently at very initial appraisal stage with newly reprocessed 3D seismic being used to better define the potential reserve. However, it appears to be a diamond in the rough and management will be very excited about discovering what may await them under the surface.

Poland, Ukraine and NW Africa

The group has further interests in Poland, Ukraine and Western Sahara though the Ukraine interests have been put up for sale with the others at relatively early stages of development.

All these concessions have their own merits though the Western Sahara interests hold by far the most exciting exploration potential they are in close vicinity to prolific hydrocarbon bearing basins in Algeria and Mauritania. Furthermore the company own 100% interests in these vast licenses (80,000km2).

EOG await political developments in Western Sahara and continue to monitor their Polish royalty interest in the Ropa oil discovery.

Summary

At present the company looks to be in a very strong position going forward. Consistent revenue should cover the costs of the upgrading and enhancing of their UK operations to increase production.

In addition EOG completed a placement for £1.75 million in September 2009 which, as far as AIM placements go is an extremely modest amount and shows managements reluctance to dilute existing shareholdings.

With many small cap oilies it is often the case that management place too much emphasis on finding the oil and getting it out the ground to make a quick buck. However Managing Director Paul Barrett and the rest of the board have ensured the company is in an all round sound position whilst locating some high impact exploration prospects.

In addition they do genuinely seem to have the interests of shareholders at heart. It is not often that when an accident such as a fire leads to a decrease in oil production that the board take a pay cut to ensure the financial well-being of the company.

News from the first exploratory target will be the Hykenham prospect from which investors will be updated about its true potential around June/July 2010. The Voitinel prospect should yield test results in May 2010 and the icing on the cake may be the Bearn des Gaves license which could potentially develop into a world class petroleum asset.

Either way investors or management alike have plenty to focus their attention on over the next couple of years.