OilVoice - Dragon Oil Announces 2008 Preliminary Results

Dragon Oil Announces 2008 Preliminary Results

Friday, March 27, 2009

Dragon Oil, an international oil and gas exploration and production company, today announced its preliminary results for the year ended 31 December 2008. These preliminary results are prepared in accordance with the International Financial Reporting Standards ("IFRS").

Growing Production
- Gross field production from the Cheleken Contract Area increased by 28% to 15 million barrels of oil
- Average daily rate of production reached 40,992 bopd compared to 31,997 bopd in 2007
- Exit production of 45,600 bopd achieved at the end of 2008 (2007: 40,048 bopd)
- Nine development wells completed during 2008 compared to seven in 2007
- The Group’s Rig 40 spud its first well in January 2009

Strengthening Infrastructure
- Phase 2 upgrade of export facility completed increasing loading capability
- Construction of 30 inch, 40 km oil and gas trunkline underway
- Phase 2 expansion of Central Processing Facility to handle 100,000 barrels of total liquid per day and up to 220 mmscfd of gas per day under construction
- Dzheitune (Lam) 13 platform refurbished and upgraded

Positive Outlook for 2009-11
- Complete up to 35 development wells including eight wells to be completed in 2009
- Target annual production growth of up to 15% on average in 2009-11
- Capital expenditure for infrastructure in 2009-11 estimated at US$700-800 million including US$300 million allocated for 2009 projects
- The amount of capital expenditure for drilling is mainly determined by the number of wells drilled which in turn is subject to the availability of rigs in the Caspian Sea region
- Accelerate commercialisation of the gas resources
- Pursue the diversification of asset base with focus maintained on quality

Corporate Restructuring of Dragon Oil
- Proposed corporate restructuring via creation of a new Bermuda-incorporated holding company
- Application for admission of ordinary shares for primary listing on the London Stock Exchange and a secondary listing on the Irish Stock Exchange

Dr Abdul Jaleel Al Khalifa, CEO, commented:
"I am proud to report that Dragon Oil has achieved another solid set of results in spite of the challenging economic climate towards the end of 2008. We achieved and, in some cases, exceeded our targets; the average daily rate of production increased by a further 28% and nine development wells were completed by the end of 2008. We continue to enjoy full cooperation from the Government of Turkmenistan.

"The proposed corporate restructuring of Dragon Oil will help align our corporate interests with our legal and commercial status. Dragon Oil’s strong cash position and unleveraged balance sheet will enable us to move towards the next level of development and growth to increase shareholder value."

OPERATIONS OVERVIEW

The drilling programme in the Group’s 100%-owned Cheleken Contract Area continued successfully, delivering a 28% increase in the average daily rate of production to 40,992 barrels of oil over the course of 2008. In early 2008, unusually cold weather was experienced in this area of the Caspian Sea, which temporarily affected operations. In particular, production from Dzheitune (Lam) 28/120 well needed to be shut to enable a new coflex alternative pipeline to be installed. In April 2008, the production from this well was restored to full flow.

Reserves

Proved and probable remaining recoverable reserves as at 31 December 2008 on working interest and entitlement basis were 636 million barrels and 296 million barrels, respectively.

Between June 2004 and April 2005, the Group acquired 3D seismic data over an area of 652 kms2 across both the Dzheitune (Lam) and Dzhygalybeg (Zhdanov) fields. This set of data was then processed and made available for interpretation in the Q4 2005.

Production and Marketing

Gross production during the year reflected a 28% increase over the previous year. Total 2008 gross field production from the Cheleken Contract Area was 15 million barrels of oil with an average daily gross production rate of 40,992 bopd. This compares to 11.7 million barrels of oil in 2007 and an average daily gross production rate of 31,997 bopd. The Group’s entitlement barrels are dependent amongst other factors on operating and development expenditures and realised crude oil prices. As a result of the fiscal terms of the PSA, the Group’s entitlement barrels in the current period were about 60% (2007: 68%) of the gross field production.

The Group sold 7.5 million barrels (2007: 8.7 million barrels) of oil in 2008 and held a crude oil inventory of 0.7 million barrels at the year-end (2007: 0.2 million barrels). The quantity sold during the year is lower due to change in the lifting positions and inventory movement. At the year end, the Group was in an underlift position of approximately 0.6 million barrels. The average realised price in 2008 was approximately US$90.8 per barrel (2007: US$70.9 per barrel). The realised oil prices achieved a discount of about 6% to Brent during the year.

The Group continued to market approximately 80% of its crude oil through Neka in Iran during 2008 because it offered higher netback prices as compared to the western route through Baku, Azerbaijan. The Group moved approximately 20% of its crude through Baku in order to maintain marketing flexibility. The Baku route was briefly interrupted for two weeks earlier in the year due to the conflict in Georgia. During that time 100% of production was marketed through the Iranian swap agreement at Neka. The marketing team continues to assess the possibility of opening additional routes through Makhachkala in Russia and the BTC pipeline initiating at Baku.

The Drilling Programme

Nine development wells were completed during 2008, four from Dzheitune (Lam) 22 platform (L22/124, 126, 128 and 130) using the CIS Rig 1, four from Dzheitune (Lam) A platform (LA/125, 127, 129 and 131) using the Iran Khazar and one from Dzheitune (Lam) 21 Platform (L21/132) also using the Iran Khazar.

The drilled depths of the nine wells varied between 3,000m and 4,200m. Except for L21/132, which was completed as a single string completion, the other eight wells were completed as dual completions. Initial tested rates from the nine wells varied between 916 bopd (L21/132) to 4,682 bopd (LA/131).

Further perforations were added to three wells in the fourth quarter of 2008 resulting in an incremental production of approximately 2,000 bopd.

Following refurbishment of the Group’s Rig 40, the Group mobilised the rig to begin drilling the first well in January 2009. This well was targeted at the Southern flank of the field beyond the fault line and was found to be wet. Therefore, we decided to sidetrack it in order to reach the planned depth and complete. We expect to complete three wells using Rig 40 by the year-end.

The Iran Khazar rig underwent planned maintenance and was mobilised to the designated platform to commence drilling. We expect to complete four wells using the Iran Khazar rig by the year-end. The Group has commenced discussions to renew the contract for the Iran Khazar rig, which is due to expire in Q2 2009.

On 6 March 2009, Dragon Oil announced that it had decided not to renew the CIS Rig 1 contract. The management team concluded that a higher specification platform-based rig was more suitable for drilling slanted wells to obtain higher productivity. Subject to contract negotiations, the Group expects to award a contract in Q2 2009 with an intention to complete one well by the end of 2009.

Infrastructure

A number of important infrastructure projects were awarded over the course of 2008.

In July 2008, a US$170 million contract was awarded to Petro Gas FZE for the engineering, procurement and installation of a new 30 inch, 40 km oil and gas trunkline. Once commissioned, the trunkline will be capable of transporting all the oil and gas produced offshore in the Cheleken Contract Area to the Group's onshore Central Processing Facility.

Another project integral to the success of the field development plan is the phase 2 upgrade of the Central Processing Facility to handle up to 100,000 barrels of liquid and 220 mmscfd of gas per day. In October 2008, a contract worth US$37 million for the project was awarded to Petro Gas FZE.

Other important projects underway include the phase 2 upgrade of the export facility at the Aladja Jetty to increase loading capability and efficiency and the building of the desalination plant, which is planned to ensure a constant supply of fresh water to the Group's operations as well as to the local community.

Yemen Operations Update

In April 2008, Dragon Oil announced non-commercial findings of crude oil from Block 49 of its three non-operated acreage in the Republic of Yemen. Studies for a possible commercialisation in conjunction with two existing small discoveries on Block 49 are ongoing. Geological and geophysical analysis is continuing on Block 35 in order to identify prospects to be drilled during the current exploration period. Block R2 has been relinquished after two dry holes were drilled in 2007-08.

2009 Capital Expenditure

The Group has an estimated capital expenditure programme for 2009 of up to US$300 million for infrastructure (including platforms, trunkline, upgrades to the Central Processing Facility and the export facilities). These expenditures will be internally funded. For the planning period of 2009-11, the total spending on infrastructure projects is expected to be around US$700-800 million. The level of capital expenditure is subject to approval of projects under the PSA and the availability of contractors in the Caspian Sea region. The amount of capital expenditure for drilling is mainly determined by the number of wells drilled. The progress of the drilling programme is dependent on availability of rigs.

For gas development, Dragon envisage capital expenditure in the range of US$200-250 million for the onshore Gas Treatment Plant including facilities.