JKX.L Regulatory News (JKX)

24 Jul 2007 07:00

JKX Oil & Gas PLC24 July 2007 6 CAVENDISH SQUARE LONDON W1G 0PD, ENGLAND, UK Tel: +44 (0)20 7323 4464 Fax: +44 (0)20 7323 5258 Web site: http://www.jkx.co.uk For Immediate Release 24 July 2007 JKX Oil & Gas plc JKX announces proposed acquisition of Russian gas field for US$50 million JKX Oil & Gas plc ("JKX") has agreed the conditional acquisition of 100% of the southern Russian Koshekhablskoye gas field (the "Field"). The acquisition is subject to consent from JKX's shareholders and will be executed through wholly owned subsidiaries of JKX acquiring 100% of the Field's licensee Yuzhgazenergie LLC ("YGE") for a cash consideration of US$50 million. Miller and Lents Ltd, independent oil and gas consultants engaged by JKX, hasestimated that remaining proved gas reserves in the Field are 114 billion cubicfeet ("Bcf") and proved plus probable gas reserves are 216 Bcf. This wouldrepresent an increase of approximately 85% in JKX's proved plus probable oil andgas reserves. The Field was discovered in 1972 and produced a total 89 Bcf of gas beforeoperations were suspended in January 2006. In June 2006, YGE was granted a new20 year licence to rehabilitate and further appraise and develop the Field. YGEexpects to commence development operations on the Field before the end of 2007,with first gas planned for 2008. Peak production of 50 million cubic feet perday ("MMcfd") is planned for 2011. JKX will fund the transaction from existing cash resources. Dr Paul Davies, Chief Executive of JKX, said: "This strategic acquisitionrepresents a significant opportunity for JKX to increase its reserves and assetbase and to capitalise on its proven experience of operating in the region. Thepurchase of the Koshekhablskoye Field will provide us with a timely entry intothe dynamic Russian gas market." ENDS For further information please contact: Dr Paul Davies / Bruce Burrows JKX Oil & Gas plc 020 7323 4464Michael Ansell Investec 020 7597 5970Anthony Cardew / Sofia Rehman Cardew Group 020 7930 0777 Overview of Proposed Acquisition JKX's wholly owned subsidiary, Adygea Gas B.V., has signed a conditional saleand purchase agreement with Mostotal Investments Limited ("Mostotal") to acquire99.9% of YGE, a company with limited liability incorporated in Russia for a cashconsideration of US$50 million, subject to adjustments including in respect ofcash or indebtedness in YGE ("the Transaction"). Of that US$50 million, US$40million is payable at completion of the Transaction and US$10 million is payableafter completion in two tranches of US$8 million and US$2 million provided thata number of conditions have been satisfied. JKX expects that the acquisitionwill be completed in the last quarter of 2007. Mikhail Bernstein, the General Director of YGE, owns 0.1% of YGE. This 0.1%interest will be transferred at completion of the Transaction to JKX UkraineB.V., another wholly owned subsidiary of JKX. It is intended that MikhailBernstein will continue to serve as General Director of YGE after completion ofthe Transaction. He has 30 years of experience in the oil and gas business, ofwhich approximately 10 years has been spent in southern Russia. Shareholder Approval In view of the size of YGE's proved and probable reserves relative to those ofJKX and the fact that the acquisition is a related party transaction for thepurposes of the UK Listing Rules, the Transaction is conditional, amongst otherthings, on the approval of shareholders. The acquisition is classified as a related party transaction because theprincipal vendor, Mostotal, has a common parent shareholder with GlengaryOverseas Limited ("Glengary"). Glengary is a substantial shareholder in JKXholding 25.48% of the share capital. A circular containing a more detailed description of the proposed transactionwill be sent to shareholders in the next few weeks. The circular will alsocontain a notice convening an Extraordinary General Meeting at which theapproval of shareholders will be sought. Background to and Reasons for the Acquisition JKX has stated that its strategy is to develop a portfolio of oil and gasinterests in and around the states of the former Soviet Union to increase itsreserves and asset base. This acquisition represents a significant step towardsmeeting this aim. The Directors consider that the Transaction complements the Group's fundamentalskill of being an efficient developer of onshore gas fields in the region andprovides an opportunity to make a material contribution to Group reserves andproduction, utilising Group resources without hindering existing operations. The Directors also consider that the timing of the Transaction is opportune asthe domestic gas market in Russia is undergoing rapid change. Whilst Gazpromremains focussed on maintaining exports to Europe, domestic demand is increasingsignificantly. Accordingly, an opportunity exists for independent companies toparticipate in this growing domestic market. Gas prices in Russia are regulated on a regional basis by the "Federal StateTariff" (FST), which has risen strongly in recent years - averaging 25% year onyear for industrial users since 2000. The Russian Government is committed toraising the price of domestic gas and has decreed that the FST for industrialusers will converge with the net-back price of gas exported to Europe, currentlyabout $4/Mcf. Assuming its present rate of growth continues, the FST forindustrial users is expected to achieve net-back convergence by 2011. Information on YGE and the Koshekhablskoye Field YGE was granted the licence to rehabilitate, and further appraise and developthe Field in June 2006. The licence expires in May 2026. The Field is located in the Republic of Adygea, one of the autonomous republicsof Russia situated in the foothills of the Caucasus Mountains. It is an areawith relatively well developed infrastructure. The Field was discovered in 1972 and, at its peak in 1993, had produced at anaverage rate of 20 MMcfd. When operations were suspended in January 2006, theField had produced a total of 89 Bcf. Miller and Lents has estimated provedreserves at the Field to be 114 Bcf and proved plus probable gas reserves of 216Bcf as at 1 April 2007. JKX believes that there is substantial appraisalpotential within the licence area and Miller and Lents has estimated possiblereserves of a further 271 Bcf. YGE expects to commence development operations on the Field before the end of2007 with first gas planned for 2008. Peak production of 50 MMcfd is planned for2011. Tectonically, the Field is located in the East Kuban Depression. The Field'sstructure is defined by a well pronounced asymmetric anticline with abrupteastern flanks and relatively flatter western flanks. The Field is characterisedby deep (4,800 to 6,000 metres) gas and condensate production from two producinghorizons, the Oxfordian and the Callovian. The recoverable reserves at the Field as at 1 April 2007 as estimated by Millerand Lents, are set out in the table below: Reserves category Net gas reserves, Net condensate reserves, Billion cubic feet, million barrels, (Bcf) (MMbbl)ProvedDevelopedNon-producing 104 0.22Proved Undeveloped 10 0.02Total proved 114 0.24Probable 102 0.22Total proved + probable 216 0.46Possible 271 0.57Total proved + probable + possible 487 1.03 Reserves under the Russian classification system in the Field as at 31 December2006 were stated to be C1 and C2 gas reserves of 14.5 Bcm (512 Bcf) and 3.5 Bcm(125 Bcf) respectively, and C1 and C2 condensate reserves of 161 Mt (1.3 MMbbl)and 29 Mt (0.2 MMbbl) respectively. The gross assets of YGE as at 30 April 2007 were US$2.3 million and profits forthe period 16 January 2006 until 31 December 2006 were US$37,000. Field Development Plan YGE has prepared a development plan in respect of the Oxfordian horizon and hassubmitted it to the Russian authorities for approval. In the development plan,YGE proposes that it will re-enter, repair and re-complete ten of the wellswhich were drilled to the Oxfordian horizon by previous licensees of the Fieldand which gave commercial gas flows. The gas in the Oxfordian horizon contains some carbon dioxide and hydrogensulphide, both of which can be corrosive. Corrosion was recorded in a number ofthe wells in the Field and this may have accounted for the suspension ofproduction from the Field in the period before the licence was granted to YGE.In order to ameliorate the corrosive properties of the carbon dioxide andhydrogen sulphide, YGE will employ the appropriate steel and, if necessary,corrosion inhibitors. YGE expects to commence workover operations before the end of 2007 with the aimof achieving peak production from the Oxfordian horizon of approximately 50MMcfd by mid 2011. Workover of the wells will require the replacement of thetubing string in most of the wells and, potentially, some of the casing. Incases where this proves to be uneconomic, the Company would propose substitutingnewly drilled wells to the Oxfordian horizon for the workovers. YGE intends to drill an appraisal well to the underlying Callovian horizon assoon as it can contract a suitable rig. Almost 85% of the 150 Bcf reserves inthe Callovian horizon are in the possible category. For further information please contact: Dr Paul Davies / Bruce Burrows JKX Oil & Gas plc 020 7323 4464Michael Ansell Investec 020 7597 5970Anthony Cardew / Sofia Rehman Cardew Group 020 7930 0777 This information is provided by RNS The company news service from the London Stock Exchange