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Please correct if incorrect: The incumbent prime minister is Luvsannamsrain Oyun-Erdene who has been in office since 27 January 2021. Ukhnaagiin Khürelsükh stepped down as Prime Minister but continues as chairman of the ruling Mongolian People's Party.
The facts have to be faced; very simply PM doesn’t have the financial clout to develop Mongolia’s oil reserves in blocks XX and V. The Mongolian Government knows this, Petrovis knows this and certainly PetroChina knows this. The only people that don’t appreciate this are certain board posters still dreaming of £1 parties!!
The position of Petrovis is interesting. While they are our largest shareholder, their percentage of the equity has declined from more than 50% to about 25% over the past ten years thanks to the dilutive Bergen deal and subsequent placings in which they did not participate. Actually, I don’t think Petrovis has subscribed for equity since 2010, ten years ago. While they did participate meaningfully in very early fundraisings, their equity interest emanates primarily from the original deal with Cap Corp whereby Petrovis became the dominant shareholder by contributing licence applications. Moreover, Petrovis has been very active for many years in promoting the Mongolian refinery as they are more interested in securing a contract for supply of refined product for their downstream oil distribution business than they are in their equity in PM.
Thank you OJAY for your helpful response.
While we cannot rule out the possibility of a conditional deal with a JV or farm-in prospect I consider it most unlikely, even with PetroChina who I doubt would contemplate a deal with a financially very weak partner. If PetroChina has any interest in PM’s licences they might consider a takeover bid for PM if they were confident of getting approval of the Mongolian government. While the Mongolian government would prefer not to be become overly reliant on Chinese state companies, they may have to be pragmatic because of lack of options as they have to secure long term supplies and viability for the planned refinery and PetroChina cannot be enthusiastic about seeing its declining crude oil production being diverted and not exported to China. While there is obviously considerable uncertainty, I believe there will be a resolution, nevertheless the clock is ticking.
Serious questions have to be addressed to clarify PM’s predicament while the EL remains unapproved. Firstly, a year ago MB stated that provided the EL was issued by the end of March, the planned 2020 operations would not be adversely affected. On the assumption that the 2021 plan will essentially be the same as that planned for last year it is reasonable to assume that the same timing issues apply and there is now less than 6 weeks to the end of March.
The key question: will the regulator approve an operating plan that is unfunded and take it on trust that PM will achieve a successful funding in order to commence operations at the start of the drilling season, i.e., by the end of April? There is barely enough time for this scenario even if the EL is approved imminently.
So, what are the scenarios if the EL is not approved by the end of March? Clearly, without the EL there is no realistic possibility of a deal with PetroChina, JV with or farm-in by a new party, or loan finance. In such circumstances PM would have to consider an equity fundraising, but I question whether this would be feasible. Firstly, PM would have to convince potential investors that the funds would be targeted at Block V exploration i.e., the Raptor prospects and possibly Heron development in the event that the EL were finally approved. Such a fundraising would have to be completed before PM runs out of cash and remains solvent i.e., before the end of Q2. There are significant issues to consider: firstly, would potential investors be prepared to risk investment for block V exploration given the Mongolian Government’s failure to approve the Heron EL, and the limited life of the block V exploration licence, extended for only one year. Secondly to raise, say, $20 million for the Raptors would surely be at a very substantial discount to today’s share price, and result in massive dilution.
The problem lies squarely with the Mongolian government and not with Mike Buck and team and I like to think that the government is working on a solution even at this eleventh hour. The government has a lot at stake, not least of which is adequate feedstock for its refinery.
Consider the statement made by PM earlier in January: “Under the law, the Exploitation Area (EA) is to be determined by mutual agreement between MRPAM and the Company.” So, after 14 months since the application was submitted, PM and its investors do not know how much of block XX will be included in the hoped-for EL. Will the EA comprise the entire Heron structure? Will the EA extend beyond the Heron structure and include the Gazelle structure? How much, if any, of the historic exploration expenses pre the Heron-1 well will be recoverable costs under the block XX PSC provisions. The fact is the application process hasn’t progressed to providing answers to these key issues.
OJAY
The highest price paid was 135p in a placing in 2010. My lowest was 1.73p in July 2016. I added quite a few last year. I remember you questioning why I didn’t take profits when the share price peaked in February 2017 at over 30p. At that time the chat on the board was SP estimates by Xmas that year - £1 parties.
Just a thought for you over this weekend: As you were a shareholder in 2010 you will recall what happened to the SP in early 2011 when the first two wells on block XX were drilled. Initial indications were favourable, and the share price soared to over 200p, many people considered that £10 was a realistic expectation with favourable testing and further drilling successes on block XX. It was not to be – the oil had migrated, which was finally determined when about 10 -11 wells had been drilled before any were probably tested. This exhausted PM’s very substantial cash avails which had been raised, in all about US$55 million.
If PM had drilled on the Heron 1 location back then instead of the first wells DT -1&2, the company would be a significant producer today and without the horrendous equity dilution and reversal of all our fortunes. It really doesn’t bear thinking about!
By the way, do you or anyone else know the potential cost recovery under the block XX PSC?
GKahn
Very well said Allan1953, I agree 100% and am appalled by the ignorant and inappropriate postings of some on this board. I have been a shareholder since day 1 on AIM, i.e., for nearly thirteen years and currently hold over 1% of PM’s equity. I am fully supportive of the company and particularly its CEO who has shown incredible patience and professionalism throughout, particularly in these difficult times.
GKahn
What MB actually said was that the operations plan for 2020 would not be affected if the EL was granted before end of Q1. It is reasonable to assume that the 2021 operations plan is little different from that for last year, in which case the government has two months to approve the EL before PM’s operations plan for this year becomes time critical.
The reason that the approval has taken so long may be attributable to the issues facing the Mongolian Government to develop a realistic strategy to bring into production sufficient supply of crude oil for its refinery.
BREL: Thank you, very succinctly put and it is very refreshing to see that someone on this board is considering the broader issues to be addressed for the development of the Mongolian oil industry and hence to appreciate how such issues will inevitably impact PM. More thoughts on this over the coming days.
GKahn
I have been a shareholder since day 1 and have been adding appreciably over the last few months and now hold over 1% of the equity. However, I have no intention of adding any more, even if the EL is granted.
My biggest worry is that the Mongolian Government does not appear to have a strategy to develop and to bring into production sufficient crude oil for the refinery to be economically viable. A costly big white elephant in the middle of nowhere?
The groundbreaking ceremony for the refinery in Altanshiree soum, Dornogovi aimag, was held on January 15, 2021.
During the global epidemic, with the support of the Governments of Mongolia, the Republic of India, relevant government agencies and local communities, engineers from Engineering India Limited, a project management consultant (TMM), worked together with the Mongolian Petroleum Refinery. As a result of the work, the project implementers emphasized that the construction of non-technological facilities of the plant is starting today. Ambassador Extraordinary and Plenipotentiary of the Republic of India to Mongolia MP Singh personally attended today's ceremony.
The general contractor for the construction will be JMC Projects India of India. Within the scope of this work, in addition to the administrative building, warehouse, repair shop, fire brigade building, first aid center, laboratory, reception room, water supply system and site infrastructure will be built.
Lets hope there will be adequate domestic crude production for the refinery to operate at capacity (30,000 b/d). Given that PetroChina's fields are in decline, the pressure to find and bring on new production will become a pressing issue for the Mongolian Government
If I recall correctly, there was a comment from MB re approval of the EL before Christmas 2019 but both he and the MRPAM execs appreciated that it was unrealistic and said in jest. Before the end of Q1 2019 was the realistic target.