Heritage Oil Limited, an independent upstream exploration and production company, announces that it has entered into a non-binding Memorandum of Understanding ("MoU") with Genel Enerji A.S. The MoU is subject to various conditions and execution of binding documentation to acquire Genel Energy International Limited ("Genel"), a private independent oil and gas exploration and production company, which holds licences in the Kurdistan Region of Iraq ("Kurdistan"). The proposed acquisition would be paid for wholly in new shares of Heritage and would result in Genel shareholders owning approximately 50% of the enlarged ordinary share capital of Heritage. It is anticipated that following the Proposed Acquisition, the Company, as enlarged by the acquisition of Genel will be re-named HeritaGE Oil plc.
Heritage’s management believe that the Proposed Acquisition will offer considerable shareholder value as it will create a prominent Main Market London listed production company which should have the financial capacity to bring into production its enlarged development and exploration portfolio, create the infrastructure for the development of the Taq Taq and Miran assets in Kurdistan, while also generating significant cash flow following the commencement of oil exports on 1 June 2009.
Highlights
• Proposed Acquisition will create an Anglo-Turkish integrated oil company with two core areas; Kurdistan and Uganda
• Genel is a private, independent E&P company in Turkey, and was awarded its first licence in Kurdistan in 2002
• Genel has interests in two producing oil fields, being the joint operator of the Taq Taq field holding a 55% working interest (44% participating interest) as well as having a 25% working interest in the Tawke field
• In addition, Genel owns 25% of the Miran licence (the balance of which is owned by Heritage), 40% of the Duhok licence, 40% of the Barbahar licence and a 20% interest in the Chia Surkh licence
• Genel also owns the right to develop the Taq Taq Petroleum Refinery. This refinery in Kurdistan is primarily being built through the phased construction and operation of a 60,000 barrels of oil per day (?bbl/d?) refinery in the vicinity of the Taq Taq and Miran oil fields. The phased construction of the refinery is expected to be completed by 2012 with 40,000 bbl/d expected to be operational in 2011
• The Enlarged Group will own a number of key licences in Kurdistan where exports from the Taq Taq and Tawke fields commenced on 1 June 2009. Production is transported by the main export pipeline to the Mediterranean port city of Ceyhan in Turkey and marketed by the State Oil Marketing Organization ("SOMO")
• Net production to the Enlarged Group from Kurdistan is currently approximately 30,000 bbl/d and is estimated to be around 43,000 bbl/d by year end 2009, which should generate significant cash flow
• Cash flow generation should provide the financial flexibility to fast-track development of other assets within the Enlarged
Group’s portfolio
• The Enlarged Group will benefit from the additional expertise of Genel with its experience in developing the Taq Taq field, and local knowledge which should result in considerable costs savings and other benefits to the development of the Miran field
• Genel recognises the advantages of Heritage’s Main Market London listing, its highly prospective portfolio, a proven technical team and management with a history of finding significant oil resources
• Based on current information, management expects the Enlarged Group to have estimated proved and probable reserves of approximately 300 million barrels of oil with multi-billion barrels of oil potential
• Suspension in trading of Heritage shares to be lifted following the release of this announcement
Summary of Transaction
• Heritage will issue 260 million ordinary shares, constituting 100% of the current issued share capital of Heritage, in exchange for acquiring the entire share capital of Genel
• The proposed executive board of the Enlarged Group following completion will include: Mr Tony Buckingham, the current CEO of Heritage, who will be appointed as Executive Chairman of the Enlarged Group; Mr. Mehmet Sepil, the current CEO of Genel, who will be appointed as CEO; Mr. Mehmet Emin Karamehmet, currently Chairman of the Çukurova Group, who will be appointed as Executive Director and Mr. Paul Atherton who will remain as CFO
• A prospectus and circular describing the proposed transaction are being prepared, including relevant Mineral Experts’ Reports for the key assets of both the Company and Genel
• The Proposed Acquisition would be classified as a reverse takeover of Heritage under the Listing Rules of the Financial Services Authority and accordingly, would be subject to the approval by a majority of Heritage’s shareholders voting at an extraordinary general meeting to be called by Heritage at the appropriate time
• The Enlarged Group will be one of the largest E&P companies listed on the Main Market of London and would be expected to become a member of the FTSE100 index
• The eligibility of the Enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority
The Enlarged Group would be an Anglo-Turkish oil company with a unique footprint in Kurdistan, producing oil for export and for the local markets, together with an exciting prospect in the Albert Basin in Uganda. The Enlarged Group should benefit from the additional expertise of Genel, with its proven track record of turning exploration into production in Kurdistan. Together with the Ugandan assets and other assets in Africa, the Middle East and Russia, the Enlarged Group would create a leading London listed international E&P company. The financial flexibility of the Enlarged Group should also facilitate the fast track development of oil production in Kurdistan and Uganda.
It was recently announced that Genel was the nominated party by the Kurdistan Regional Government ("KRG") to acquire third party back-in rights to a number of licences in Kurdistan including the Tawke and Miran licences and there exists an associated long-term community and corporate social responsibility support liability of approximately US$1.1 billion to fund local infrastructure projects within Kurdistan which is to be funded gradually from Genel’s future profits. In the event of a change of control of Genel, approximately US$605 million of such liability will become the direct responsibility of Genel’s vendors to be settled on terms acceptable to the KRG. The remaining US$495 million will remain a long-term liability of Genel’s acquirer and will be payable to the KRG each quarter on an asset by asset basis from a percentage of the future oil profit share of Genel. As part of the due diligence, and in consultation with the KRG, an understanding of this liability is a key part of determining the relative valuation of Genel. As the Proposed Acquisition, if completed, will be classified as a reverse takeover of Heritage under the Listing Rules, applications will be made in due course to the UK Listing Authority and the London Stock Exchange for the Enlarged Group’s ordinary shares to be admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange respectively. The eligibility of the Enlarged Group to be admitted to the Official List has not yet been agreed with the UK Listing Authority.
Information on Genel
Genel is a private, independent E&P company. Genel is 56% owned by the Çukurova Holding Group, which itself is one of the largest industrial and commercial conglomerates in Turkey, and which has a number of investments across the automotive, telecommunications, media, textile, energy and information technology sectors.
Genel has been operating in Kurdistan since 2002, following the establishment of Kurdistan as an autonomous region of Iraq. Genel’s interests are set out in the table below. Genel also has a 100% interest in a development project for an oil refinery near the Taq Taq and Miran fields.
Taq Taq oil field Genel was a signatory to the original Production Sharing Contract ("PSC") for the Taq Taq oil field in July 2002, which was subsequently updated and re-signed by the KRG and Genel in January 2004.
In July 2005, Addax Petroleum International Ltd (a wholly-owned subsidiary of Addax Petroleum Corporation, an E&P company listed on the London and Toronto Stock Exchanges) farmed-in to the Taq Taq licence. In November 2006, Genel (55%) and Addax (45%) formed TTOPCO, a special purpose entity responsible for all petroleum operations under the Taq Taq licence. Genel and Addax currently hold 44% and 36% interests in the PSC, respectively, with the KRG retaining the remaining 20% interest.
The PSC was revised and amended on 21 November 2006. The revised PSC extends the geographic scope of the original PSC to include further exploration acreage, which encompases the Kewa Chirmila exploration structure that is currently being drilled. The PSC was further amended on 26 February 2008 in light of new legislation (the KRG Oil and Gas Law of Kurdistan, dated 8 August 2007).
The appraisal phase of the Taq Taq field’s development has been completed and the field development is in the process of being finalised. A total of 11 wells have been drilled in the field.
On 1 June 2009, export of crude oil commenced from both the Taq Taq and Tawke oil fields through the main export pipeline to the Mediterranean port city of Ceyhan in Turkey. The crude oil is marketed by SOMO.
Taq Taq currently has gross production capacity of 40,000 bbl/d, which is in the process of being expanded to 70,000 bbl/d by year end. Crude is currently trucked approximately 115km to an uploading facility at Khurmula and further pumped into the export pipeline Kirkuk - Yumurtalik, which has a total capacity of 1.6 million bbl/d. A pipeline extension from Taq Taq to the main export pipeline is planned with a capacity of 450,000 bbl/d at an estimated cost of approximately US$130-150 million. Once the pipeline construction is completed over the next 12 months, the Taq Taq field production is expected to gradually increase from 70,000 bbl/d base production at year end to production of 162,000 bbl/d by year end 2010. The spare capacity in the field pipeline is expected to be used to carry future Miran production and other nearby discoveries.
Tawke
Genel has a 25% interest in the Tawke PSC, which is 55% owned and operated by DNO International (?DNO?), a Norwegian E&P company listed on the Oslo Stock Exchange. The KRG holds the remaining 20% interest in the PSC which is carried exclusively by DNO.
Tawke has also commenced exports and due to its favourable location, a pipeline has already been constructed to the main export pipeline. This pipeline was completed in Q1 2009. The Tawke oil field commenced production on 1 June 2009 and gross production is expected reach 50,000 bbl/d by the year end.
Miran
Genel has a 25% interest in the Miran PSC, an exploration asset. The balance of the interest in this PSC is owned by Heritage. The KRG’s interest in the Miran PSC is carried until there is a commercial discovery, upon which the KRG has a back-in right to obtain 25%, thus pro-rata diluting the interests of both Genel and Heritage.
Heritage believes that first production from Miran could be fast tracked to begin as early as the end of 2009. Miran is located adjacent to Taq Taq, requiring an extension to the pipeline of approximately 30 km, allowing Miran to access the Taq Taq infrastructure and the export pipeline.
Genel’s other exploration assets in Kurdistan
• Kewa Chirmila licence - 44% interest in the licence and joint operator, 36% owned by Addax and the KRG has a 20% carried interest. An exploration well is in the process of being drilled, following the acquisition of a 2D seismic survey in 2007
• Duhok licence - 40% interest in the Duhok PSC, an exploration asset, which is 40% owned and operated by DNO. The KRG will retain the remaining 20% interest in the PSC
• Barbahar licence - 40% interest in Barbahar PSC, an exploration asset. Genel is operator under the PSC, with a further 40% interest to be assigned to a third party (still to be determined). The KRG will retain the remaining 20% interest in the PSC
• Chia Surkh - 20% interest in the Chia Surkh PSC, an exploration asset and a further interest to be assigned to two third parties (still to be determined)
Proposed New Executive Directors to the board of Heritage
Mehmet Sepil, proposed CEO of the Enlarged Group, 55, is a graduate of the Civil Engineering Department of the Middle East Technical University, in Ankara, Turkey and holds a Master of Science Degree in Coastal and Harbor Engineering from the same university. Mr. Sepil has over 27 years of construction engineering, financial and administrative management experience in construction and high tech companies, which includes advanced field operations, international contracting and business development experience within NATO, the US and Turkish Government projects as well as private sector projects.
Mehmet Emin Karamehmet, proposed Executive Director, is Chairman of the board of directors of the Çukurova Holdings Group.
Proposed Acquisition of Genel
The Proposed Acquisition will create the Enlarged Group with expected net working interest production of approximately 45,000 bbl/d by year end, increasing in the medium term to approximately 90,000 bbl/d from the Taq Taq and Tawke fields in 2011, with the potential to double production with the development of the Miran oil field. The development of the refinery will, in addition, allow increased production by up to 60,000 bbl/d once the refinery is running at peak capacity.
Based on current information, management expects the Enlarged Group to have net proved and probable reserves of approximately 300 million barrels of oil and multi-billion barrel oil potential.
In addition, the Enlarged Group should offer shareholder value with high impact exploration programmes in Kurdistan and Uganda and further potential in other areas: Tanzania, Malta, the Democratic Republic of Congo, Mali and Pakistan. The Enlarged Group will retain strategic focus on the Middle East and Africa.
The KRG has been consulted on the Proposed Acquisition and welcomes the transaction.
Commenting on today’s announcement, Dr Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional Government said:
"We are very pleased that the two companies are coming together. The new Company, trading on the London Stock Exchange, will bring together an integrated plan for the development and fast track production of the Taq Taq and Miran oil fields. The financial capability and skill base of the enlarged Heritage should ensure earlier production and therefore significantly faster generation of revenues for Iraq to create substantial value as an employer, as a tax payer and as a provider of oil revenue for the benefit of the people of Iraq."
Tony Buckingham, Chief Executive Officer of Heritage, commented:
"The potential combination of our two companies brings together a long held ambition to develop the assets in our core areas. We believe that shareholders will support the transaction which is anticipated to create significant shareholder value by bringing these fields to production in a timely manner and generating cash flow to explore and develop our multi-billion barrel resource potential both in Northern Iraq and Uganda. Heritage also recognises the strategic benefits of working with a partner such as Genel with a track record of turning exploration into production in the region and the positioning it will provide with respect to the rest of Iraq and the Middle East."
Mehmet Sepil, Chief Executive Officer of Genel, commented:
"We are excited about the possibility of combining with Heritage to create a significant Main Board listed company with a strong financial capability and access to international capital markets, international expertise and with the aim of expanding the activities of the Enlarged Group in other countries in the Middle East. We intend to bring our world-class Taq Taq and Tawke assets into production immediately and the Miran asset subsequently. Production will be for both exports to the world market and also to serve the local market, generating significant cash flows for the benefit of all shareholders. The combination of Heritage with its worldwide experience and Genel’s Turkish nationality together with its significant long experience and track record in the Kurdistan Region would help to develop our assets in an efficient and timely manner and would deliver excellent value to all stakeholders including the people of Iraq."
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