Highlights:
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The Subba and Luhais oil field development contract in Iraq is virtually completed.
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Petrel has received all US$7 million due from the sale of the Company's shareholding in Subba and Luhais. Petrel maintains a 10% profit interest.
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Petrel has applied to participate in the 4th Oil Licencing Round in Iraq.
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The Company await parliament approval on the Tano 2A licence block in Ghana where Petrel holds a 30% interest.
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Reprocessing of over 760 kilometres of seismic lines on Tano 2A has identified a number of promising areas.
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Petrel has submitted applications for blocks in the Porcupine Basin area offshore Ireland.
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The company has over US$6 million in cash.
John Teeling, Chairman, commented:
"Waiting is frustrating for shareholders, management and employees. We are waiting for necessary approvals in Ghana on the Tano 2A block. We are waiting for a hydrocarbon law in Iraq to clarify our position on the Western Desert block 6. We are an applicant in the current licencing round in Iraq, but that too will take time. We have gone back to our 1980s origins by using our extensive Irish offshore database to apply for blocks in the new licencing round. We are well funded and ready to move once necessary approvals are obtained."
Statement Accompanying the Preliminary Results
Petrel has been in existence for almost 30 years. This will undoubtedly come as a surprise to many shareholders who know only of our Iraqi activities. It was set up in 1982 to explore for oil offshore Ireland - but that venture failed. Following an abortive and expensive incursion into US oil and gas, the company value was virtually written off. David Horgan, currently the Managing Director, bought the shell in the mid 1990s and financed it, initially for African exploration in Namibia and Uganda. Then an opportunity opened in 1999 to go into Iraq, which was and is the best hydrocarbon province in the world. We exited Africa.
In Iraq we worked with the Ministry of Oil under the Saddam regime. Since 2003 operating in Iraq has become more difficult, complicated and dangerous. In the last eight years Iraqi oil development has languished with production levels only now getting back to pre-war levels. There is no clear set of rules, there is no new Hydrocarbon Law. We had an early success getting access to a 10,000 sq km block in the Western Desert and a very substantial success in 2005 with the award of the Subba and Luhais US$197 million (Engineering Procurement and Supervision of Construction) development contract to a Petrel/Makman partnership. But repeated changes in rules and personnel made it difficult to operate. Nevertheless we obtained two further Technical Cooperation Agreements in Iraq, to produce evaluators of both the Merjan and Dhurfiya fields. The world's supermajors have rushed in and accepted service contracts on sub-economic terms.
Work progressed on Subba and Luhais. There was a hiatus while payment was received for work done and acceptable Letters of Credit put in place for future payments. Inflation, design changes and delays meant that any profit was likely to be small, so Petrel negotiated with Makman to obtain an exit payment of US$7 million plus a 10 per cent profit interest while remaining operator of record. The project is now 94% completed and will soon operate as a 200,000 plus barrel a day oil producer. In one of the most unstable and dangerous areas on Earth a state of the art world class project has been delivered. No one was killed, international suppliers have been paid and the Iraqi people will shortly have additional exports of over US$700 million each year.
But Iraq was proving an impossible location in which to obtain oil concessions so Petrel sought to leverage its Iraq experience by exploring in Jordan.
The Jordanian experience was good, but costly and ultimately unsuccessful. We got licences, we did the necessary work, we identified targets but drilling was going to be expensive and was deemed too risky. We were unable to joint venture the project so we dropped it.
We next sought to build on our international contacts.
Ghana is the hottest hydrocarbon exploration area on earth. Recent giant offshore discoveries are drawing Ghana to the first rank of oil producers. Petrel, with two associate companies and a local partner, applied for, and obtained, a concession, Tano 2A close to the big Kosmos/Tullow discoveries. Cabinet and parliament approval is taking a long time, understandable when you realise that the legislators have to learn about and understand the effects and impact of oil wealth. The curse of resources is well known.
In a return to our roots we have applied for blocks in the current Irish offshore licencing round. Irish offshore exploration has not been successful to date with five small discoveries from over 200 wells drilled. But technology improves and oil prices are high. Petrel has for many years maintained a significant library of Irish offshore seismic and well log data. This database has been analysed and new data added. Our team have put together applications for a couple of blocks. No awards have been made to date.
Why oil and why Iraq?
Growing world demand particularly in the large emerging markets is expected to grow to 120 million barrels a day by 2020. Current capacity cannot meet that demand. Finding new supplies is becoming more difficult and expensive. The vast new discoveries offshore West Africa are in ultra deep waters and will require hundreds of billions to develop. The even bigger discoveries offshore Brazil, at total depths approaching 10 kilometres, will require as yet undeveloped engineering technology and vast sums of capital.
Contrast this with Iraq. Over 70 discovered undeveloped oil fields with known resources of over 150 billion barrels and potential to go to 300 billion matching the Saudi Arabian reserve figures. Capital and operating costs will be the lowest in the world. Cash operating costs could be under US$2 a barrel. Technical, management and geological skills are in country. The infrastructure is good when compared to offshore Africa and Brazil. Iraq is simply the world's best hydrocarbon province. We have been there for twelve years, we have maintained an office in Baghdad, we have experienced staff. All we need is the opportunity.
Petrel has prepared and submitted a detailed proposal to participate in the Fourth Licencing Round. The focus is on oil prone acreage becoming available from January 2012.
Iraq
The Subba & Luhais project will be completed by end 2011. While we are the operator of record, day to day operations are under the control of Makman who paid Petrel US US$7 million to take 100% ownership. We maintain a 10% profit interest. Despite facing obstacles that would defeat most groups, Petrel/Makman have delivered the contracted elements of a 200,000 barrel a day oil development.
We continue to maintain an interest in the former Block 6. It should be noted that this nomenclature refers to areas included in blocks advertised over a decade ago. It is not the same as the Block 6 offered in recent rounds. Petrel began to work on the 10,000 sq km Western Desert area formerly known as Block 6 in 2000 and reached agreement with the authorities on a work programme in 2002. No final signatures were obtained. Article 40 of the draft hydrocarbon law requires the Ministry of Oil to review 2003 agreements to operate in accordance with the law. We think and hope that this means a revision of financial terms and a new work programme. We are ready to begin field work once agreement is reached.
Ghana
The Petrel board of directors and management team has extensive experience in resources in Africa. While waiting for a clear path in Iraq, an opportunity arose to apply for a highly prospective onshore/offshore block in Ghana, Tano 2A, close to the massive discoveries of Tullow and Kosmos. A consortium of four companies applied for, and obtained the 1,532 sq km Tano 2A block. The target is a multibillion barrel discovery in the prolific Cretaceous geological structure. Terms in Ghana are good. The agreement was signed in 2010 with the Ghana National Petroleum Company (GNPC) and is now working its way through cabinet and parliament. The agreed work programme requires a minimum expenditure of US$25 million in the first three years including a well. While awaiting ratification we have acquired, processed and analysed 769 kilometres of seismic and studied five horizons at different depths. We have identified a number of promising areas.
Offshore Ireland
Petrel, in a previous guise and time, was an active participant in Irish offshore exploration working on three blocks in the Irish Sea (Kish Basin), Celtic Sea (Block 57/1) and Porcupine (Blocks 35/23 and 35/24). Nothing commercial was discovered. In the past year the Irish government has offered large offshore blocks totalling 500,000 sq km. The fiscal terms are very good, title is not an issue and there is a positive State attitude. They need to be positive as drilling results have been poor and exploration costs will be high.
Following a detailed review of newly constructed seismic base maps together with analysing well log data on over 50 holes a number of leads were identified. Petrel has submitted applications for blocks in the Porcupine Basin.
Future
Petrel with over US$6 million in cash is well financed for all current activities. We are active in Iraq, Ghana and now Ireland. We are very hopeful of participating in the 4th Licencing Round in Iraq. The status of our Western Desert interest awaits the passing of the Hydrocarbon Law. Once parliament approves our Ghana licence we will move quickly. We know what we want to do and have the cash to do it. Many shareholders have been patient for a long time and we appreciate that support. They understand that we have no control over the decisions of sovereign states. Building a successful hydrocarbon company in politically uncertain areas is high risk but, in the areas we are, the potential is great.