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OJAY: For me, the biggest risk is whether the border with China will be closed next year as this could limit operations by Chinese contractor and crews. Once the exploitation licence is granted PM will have to negotiate a deal with PetroChina for marketing Heron crude oil as well as modify Heron wellhead to be a producer and construct a pipeline connection to PetroChina’s gathering system. The exploitation licence needs to be granted soon for all this to be implemented in time for Heron to be producing in first half next year.
Severity: Critical Alert May 26, 2020
Entry/Exit: Mongolia extends restrictions, border closures through at least June 30 due to COVID-19. Domestic measures eased in Ulaanbaatar.
This alert began 27 May 2020 02:40 GMT and is scheduled to expire 30 Jun 2020 23:59 GMT.
Incident: Restrictions
Location(s): Nationwide
Time Frame: Indefinite
Impact: International travel restrictions, transport and business disruptions; possible movement controls
Whether or not the land border is remains closed, Chinese drilling crews would require VISAs to enter and work.
In addition to the likelihood that the border remains closed, there are a number of outstanding matters to be resolved before Heron can become cash generative:
1 land use which apparently from the Jaran article continues to be a problem, notwithstanding the assurances given in August last year: “all processes for obtaining the land permits for the Heron and Gazelle well sites have been completed and issuance of the permits is waiting on final signature by the local governor.” Has he signed?
2 issue of block XX exploitation licence.
3 agreement with PetroChina for the delivery and marketing of Heron crude into its gathering system.
4 conversion of the Heron well to a producer and installation of the pipeline connecting to PetroChina’s gathering system.
5 a deal or funding to meet the capital cost of the capital expenditures for Heron.
We can only hope that all of the above can be achieved in the coming months so that operations can resume next Spring, and, most importantly, that Covid 19 will not be an inhibiting factor next year.
The most positive result recently for PM was the extension of the exploration licences for blocks XX and V.
The extension of the exploration licences and the recent update on the status of the block XX exploitation licence application process indicate that PM is confident that the licence will be granted – apparently, it is just a question of when. If this is the case, why has the company not proceeded with converting the Heron-1 wellhead to a producer and the pipeline connections to the PetroChina Block X1X gathering systems so that iHeron-1 can produce? This would enable production and cash flow to commence immediately after the exploitation licence is issued. So, what is the hold-up? I doubt it is lack of adequate funds and, while I don’t know the likely capital expenditure, this should not be an insurmountable problem. The most likely issue preventing PM from proceeding is land-use approval by the local MATAD authority. PM has signalled that this is no longer an issue on the basis that the Mongolian Government has assured PM that the matter has been resolved. However, based on the recent Jaran article, it is still not resolved. It is time we had the truth about the ongoing land-use issue and why the company cannot proceed with expenditure to enable Heron-1 production?
Jimi
I think you are probably spot on - the matter should be clarified in an RNS. As regards an operations update for Block XX, I don't believe that there is much that the company can say at this point. They have probably completed their analyses and planning, but they can't progress arrangements for off-take of Heron production with PetroChina, and farming or JV for Block XX until the exploitation licence is granted.
Recently, one poster reminded us of the accumulated losses. The figure from the latest financials is US$126.5 million as at the 2019 year end. This raises the question of how much of this will be allowable for cost recovery when Heron production and oil sales commence. The quantum could be considerable, particularly if the drilling expenses from the McGay era can be recovered. It seems to me that the quantum needs to be agreed with MRPAM and other government departments e.g. Treasury before finalisation and approval of the exploitation licence. While this could be very material for PM, it would also be a significant consideration for any potential farminee for Block XX.
In order to appreciate the possible quantum, all admin and other overhead expenditures since day 1, i.e. over more than 12 years, should be deducted from the US$126 million figure as well as all expenditures relating to Blocks IV & V. If the early exploration expenses incurred about 10 years ago on Block XX are allowable for cost recovery, the quantum could be as much as US$40-50 million; the NPV of which could exceed PM’s current market cap. Food for thought; and certainly a matter to be resolved and announced in due course. Getting this agreed could be a factor causing delay in the deliberations over the exploitation licence, particularly if an independent audit were required.