OEX.L Regulatory News (OEX)

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Business Review

External Impact on the Petroleum Industry

This last year has seen COVID-19 and an oil/gas price slump negatively affect both project continuity and funding support across our global industry. India in particular has been significantly affected by COVID-19, its associated lockdowns and hot spot management and as a result there has been a general slow down in our industry and progress on projects including our Cambay project.

None-the-less the Company remains committed to its headline Cambay Project in India with the belief that the problems of the last few years will resolve and a return to activities in the office and the field and to restart the appraisal/development program will occur.

Oilex Strategy

During 2019-2020, Oilex continued to focus on its core project, Cambay, in India while also evaluating potentially value accretive new business opportunities elsewhere, ranging from discovered undeveloped resources with exploration upside to existing discoveries and production. As such, Oilex gained entry and subsequently on-sold a package of licences in the Cooper-Eromanga Basins in Australia and established a foot-hold in the East Irish Sea in the UK. These activities follow a well-defined strategy focusing on proven super-basins with world class source rocks, well defined fairways, undeveloped discoveries, progressive regulators, open access to data, existing infrastructure and demonstrable upside potential for junior companies.

Cambay Field, Onshore Gujarat, India

(Oilex - 45%, Operator)

Oilex is the Operator of the Cambay Field and holds a 45% participating interest. The remaining 55% interest is held by Joint Venture partner, Gujarat State Petroleum Corporation Limited (GSPC).

Exploration and production in the region started in the late 1950s and early 1960s and the area has a history of hydrocarbon production from a number of vertically stacked reservoir sections. Oilex's focus is on a tight siltstone Eocene aged reservoir which has potential for Multi-TCF gas resources within the license area and which requires application of specific drilling and stimulation technologies for commercialisation.  A secondary conventional reservoir is present in the Oligocene section.

The PSC area is located onshore in the state of Gujarat in the heart of one of India's most prolific hydrocarbon and leading industrialised provinces. The project is ideally located near a major industrial corridor and approximately 20 km from the existing national gas pipeline grid. It is well-positioned to commercialise production in the fast-growing, demand-driven domestic energy market.

Development of the potential gas resources in the Cambay PSC has been held up for some years as the result of a dispute with GSPC. In May of 2018, Oilex announced that it had issued an Event of Default Notice (EOD) to GSPC for failure to pay US$3,054,832 of its participating interest share of expenses. In July 2018, the Company announced that it had issued a notice to require GSPC to withdraw (EoW) from the PSC and to transfer its participating interest to Oilex following the procedures defined by the Joint Operating Agreement as GSPC had not remedied the EoD within the prescribed allowed time. Oilex's action were driven by its desire to return to a drilling programme in the PSC with a pilot test to drill and flow test the identified gas resource.

In August 2018, in response to the EoD and EoW, GSPC served notice of an exparte Order from the High Court of Gujarat directing Oilex not to take any coercive steps against GSPC to transfer its participating interest. A number of hearings in the High Court took place until 5 November when Oilex announced the final decision of the court which further delayed the implementation of the EoD and EoW under the conditions that GSPC deposited a sum of approximately US$1.1 million, a bank guarantee for approximately US$3 million with the court, and commenced arbitration proceedings. GSPC met these conditions. In September 2019, Oilex announced that it had reached an agreement with GSPC to resolve the dispute with the support of the Indian Directorate General of Hydrocarbons (the national regulator) as a signatory to the Agreement. The agreement revolved around GSPC's exit from the PSC through placing its 55% Participating Interest up for sale. This process received the approval of the State Government of Gujarat and the GSPC Board of Directors. Under the agreement GSPC was to complete the sale process while Oilex withdrew the EoD and GSPC formally terminated arbitration proceedings lodged with the Singapore International Arbitration Centre (SIAC) and removed the stay order granted in the High Court of Gujarat.

While the process remains underway it has experienced a significant delay caused directly by COVID-19's and its direct affect on GPSC staff and the financial viability of some of the companies which had placed bids on the GSPC sale. GSPC's intent continues to finalise the sale of its Cambay interest and Oilex continues to work towards this end result.

Oilex remains in discussion with a number of companies who have expressed interest in the Cambay PSC and its potential. While Oilex has formally declined the first right of refusal in relation to GSPC's nominated highest bidder, it reserves its first right of refusal in the event the bid should process pass to another bidder.

Oilex has developed a work plan to drill 2 vertical wells to test the EP-IV tight gas accumulation in a pilot programme involving stimulation of the reservoir to determine flow rate potential. A Field Development Plan (FDP) has been approved by the government regulator. This was additionally submitted to the Government as a requirement for the application to secure a 10 year extension to the PSC beyond 2019.

The FDP encompasses a staged approach, initially focussing on the drilling of a small number of new wells to gather key information on reservoir performance. It follows an in-depth review by Baker Hughes GE aimed specifically to identify reasons for the limited success of past drilling and stimulation, and to outline optimal drilling and stimulation methodologies for future work programmes to establish commercial gas production.

The evaluation provides a technical recommendation of the optimal well and stimulation design required to achieve commercial flow rates in the EP-IV reservoir. The results of the evaluation confirm the potential for substantially increased flow rates with the application of the appropriate stimulation technology suite.

The Government of India was very prompt in providing approval to both the FDP and the PSC extension application. The amended Cambay contract, reflecting the new expiry date of September 2029, is now pending finalisation by the Directorate General of Hydrocarbons.

It is intended that this initial pilot programme, subject to securing the necessary funding will be followed by a larger drilling programme, with the aim of aggregating sufficient production volumes to connect to the high-pressure pipelines which offer greater offtake stability and improved gas prices.

Any early production will utilise existing processing and storage facilities upgraded as required to provide a low-cost path to commercialisation. Further work on this work programme will restart once the GPSC sales process is complete.

Oilex is presently in the final stages in obtaining a new environmental clearance from the Ministry of Environment and Forest and Cabinet Committee to supercede the previous clearances already obtained under the previous regulatory requirements. The clearances are necessary to recommence production at Cambay and are in support of the planned drilling programme at Cambay. An Environmental Impact Assessment has been prepared by the Company's independent consultants and is pending submission to the applicable authorities and following public hearings. The public hearings are delayed due to the continued 'lockdown' on account of Covid-19. Following the necessary environmental clearances, production from well C-73 and C-77H are on standby for production commencement.

Cambay Contingent Resources

Resource volumes for the Eocene are unchanged since June 2016 and are summarised in the following table which shows Oilex net working interest. The development plan submitted as part of the application for extension of the PSC term addresses a sub-set of these resources in a staged approach.

During the financial year, the Joint venture received US$0.15 million gross from GSPC against outstanding cash calls for Cambay. At 30 June 2020, gross unpaid cash calls issued to GSPC totalled US$5.67 million.

Bhandut Field, Onshore Gujarat, India

(Oilex - 40%, Operator)

Oilex N.L. Holdings (India) Limited is the Operator of the Bhandut Field Production Sharing Contract (PSC) in the Cambay Basin onshore Gujarat, India and holds a 40% participating interest. The remaining 60% interest is held by Joint Venture partner Gujarat State Petroleum Corporation Limited (GSPC).

The Bhandut Field was initially discovered and developed by ONGC in 1976. The field and the existing production facilities is currently on care and maintenance. A sales process for both Oilex's and GSPC's holding has been underway and is nearing completion. In January 2020, Oilex announced that it had accepted an offer from Kiri and Company Logistics (Kiri) to acquire the Company's participating interest in Bhandut for US$0.14 million in cash. Kiri also has expressed an interest in engaging the services of Oilex's office for ongoing support. All necessary documentation for the sale has been submitted to the Government of India to affect the transfer and completion is anticipated in the fourth quarter of 2020 after some delays related to COVID-19.

During the financial year, the Joint Venture received US$0.02 million gross from GSPC against outstanding cash calls for Bhandut. At 30 June 2020, gross unpaid cash calls issued to GSPC totalled US$0.09 million.

JPDA 06-103, Timor Sea

(Oilex - 10%, Operator)

On 22 October 2018, the Autoridade Nacional de Petoleo e Minerais (ANPM) issued arbitration proceedings against the Joint Venture to recover the claim it imposed upon the Joint Venture following the ANPM's termination of the PSC. Oilex has a 10% participating interest and is acting as the Operator of the Joint Venture in the arbitration proceedings. In August 2019, the Company announced that it had submitted the Respondent's First Memorial to the International Chamber of Commerce in Singapore. This was followed by lodgement of a US$23.3 million counterclaim against the ANPM as damages from the wrongful termination. In early 2020, the arbitration panel dismissed ANPM's application to increase their claim against the joint venture from A$17.0 million to US$22.6 million (plus interest). Also in early 2020, Oilex announced that the arbitration hearing, scheduled to commence on 10 February 2020, was suspended while the parties continue their commercial settlement negotiations. In August 2020, Oilex announced that it had executed a Deed of Settlement and Release with the ANPM to terminate the arbitration proceedings and to settle all claims and counterclaims between the parties. Under the Deed, Oilex has committed to a settlement of US$800,000 payable in the 2021 and 2022 financial years. In addition, the Company has entered into an unsecured loan facility agreement with two of its joint venture partners which further provides the Company with the option, at its sole discretion, to extend the settlement payments into the 2023-24 financial year.

Each Joint Venture party remained jointly and severally liable and had provided parent company guarantees. A notice of default has been issued against Bharat PetroResources JPDA Limited, Videocon JPDA 06-103 Limited and GSPC (JPDA) Limited for their failure to pay the joint venture cash calls.

West Kampar PSC, Central Sumatra, Indonesia

(Oilex - 50%)

The West Kampar PSC is located in central Sumatra adjacent to the most prolific oil producing basin in Indonesia. As initially granted the PSC covered some 4,470 square kilometres. This was reduced to around 900 square kilometres through statutory partial relinquishments over a number of years. In 2007 Oilex farmed into the PSC to earn a 45% Participating Interest (PI). The operator for the joint venture was Indonesian company PT Sumatera Persada Energi (SPE). In the same year, the joint venture successfully drilled an appraisal well on the earlier discovered Pendalian Oilfield confirming oil flow at commercial rates. In 2008 Oilex signed a second farmin agreement to earn an additional 15% in the PSC. Oilex contributed funds to the joint venture account under both farmin arrangements. With increasing concerns related to the operator's performance, Oilex terminated the second farmin in 2009, requesting repayment of the relevant funds. Subsequently Oilex served a default notice on the operator and commenced arbitration against SPE's parent company in the ICC International Court of Arbitration in Singapore. In 2010 the arbitration tribunal ruled in favour of Oilex, instructing SPE's parent company to return funds to Oilex with interest along with arbitration and legal costs. While the arbitration was registered in the Indonesian courts, the enforcement of the tribunal's award in Indonesia proved to be unachievable. Between 2010 and 2016, SPE produced and sold close to 700,000 barrels of oil, with no entitlements returned to Oilex. The operator failed to call any joint venture meetings nor did it provide work program, budgets, data or reports. In late 2016, SPE was declared bankrupt and Oilex submitted its claims as a creditor to the Curator (liquidator). In 2018, the Government of Indonesia (GoI) elected to withdraw the PSC following which Oilex continued to make a number of representations to the GoI in support of its application to be re-awarded the PSC and to restart production from Pendalian and also to re-evaluate the exploration potential of the West Kampar. Oilex also place a bid on the block in a government sponsored bid round which did not see the block offered to any company.

Technical work carried out by Oilex and its advisors estimate that the field can be quickly brought back online at 350 to 400 bopd and that significant additional production potential may be possible from infill drilling and also water injection support. The return to production will require careful execution in the field given that it has been shut in since 2016. The oil occurs in five good quality, stacked reservoirs with some stratigraphic complexity, and the application of 3D seismic data which has been acquired but not interpreted, should provide a significant improvement in the understanding of the reservoir distribution and future development planning. Access to the data is to be negotiated with the seismic company that acquired it. The oil is good quality with no or little gas. It is believed that the previous production costs can be reduced. A number of exploration opportunities are present both close to the Pendalian field and in the more distant parts of the block. These require further evaluation.

Following various meetings and correspondence with the GoI and with the support of our local Indonesian partner, the GoI has advised that our Proposed Direct Bid, through the Joint Study of the West Kampar Region, is declared administratively complete and have recorded it as a proposal for a Direct Offer through a Joint Study as stipulated in ESDM Regulation No. 35 of 2008. The Company continues to engage with the regulator with a view to restoring its interest in West Kampar. This confirmation from the GoI is exclusive to Oilex, and provides a pathway to return of the PSC, with final terms to be negotiated. Oilex will share in any award of the PSC on a 50-50 joint basis with its local Indonesian partner, PT Ephindo.

Cooper Eromanga Basins

Since 2017, and as part of a focussed new business strategy, Oilex has been working to access acreage in the highly productive Cooper Eromanga Basins, focussing on the South Australian parts of the basins. As part of this process Oilex reviewed all available acreage and secured rights to two PELs (112 and 444) and 27 PRL's in the north eastern focus area. Oilex also was the successful bidder for a large adjacent block CO2019-C (PELA677)in a South Australian government bid round. Given the requirement for an upfront cash payment of a significant government environmental/rehabilitation bond, Oilex and its advisors determined that the most profitable approach would involve a spin-out of the highly prospective acreage package. In January 2020 Oilex announced that it had signed an agreement with Doriemus plc for the sale of these interests. However in response to the financial market uncertainties at the time, this process was terminated in April 2020 by Doriemus. In May 2020 Oilex announced that it had signed a conditional binding Heads of Agreement with Armour Energy Limited, and in June Oilex further announced it had entered into a conditional binding Share Purchase Agreement. Subsequent to the reporting period, on 14 September 2020, a further announcement was made outlining amendments to the Share Purchase Agreement whereby the completion date was extended from 15 September 2020 until 15 October 2020 to enable Armour to seek its shareholder approval pursuant to ASX Listing Rule 7, with such shareholder meeting scheduled for September 18 2020, and to allow additional time to satisfy the Conditions Precedent. Armour received approval from shareholders at this meeting.

Under the SPA Armour will acquire 100% of the issued capital of CoEra Limited, a wholly owned subsidiary of Oilex holding the Cooper-Eromanga assets. Armour will assume all costs and liabilities associated with the asset package. As consideration Armour will issue up to 34.5 million Armour shares to Oilex (or its nominees) upon completion of the Proposed Transaction as follows (Consideration Shares):

Tranche 1 24,500,000 fully paid ordinary shares in Armour upon completion; and

Tranche 2 If, at any time within 60 days from completion of the Proposed Transaction, the closing Volume Weighted Price Average of Armour shares trading on the ASX falls below $0.037 then Armour shall be required to issue such additional shares in itself to Oilex, or its nominee to ensure Oilex receives a consideration value of A$905, . Any such Adjustment Shares issued shall:

· not exceed an amount of ten (10) million Armour shares;

· be subject to any required shareholder or regulatory approval.

The issue of the Consideration Shares was approved at an Extraordinary General Meeting held by Armour on 18 September 2020. The Consideration Shares are subject to a 12 month voluntary escrow from completion. In addition, Armour will reimburse Oilex, in cash, for past costs of A$125,000 to be paid within 5 business days of Armour's above shareholder approval. This amount was paid by Armour in late September 2020. Completion of the transaction occurred on 15 October 2020.

Oilex will nominate 10% of the abovementioned Share Consideration to Orthogonal Enterprises Pty Ltd for past and future services rendered in building the Cooper-Eromanga portfolio. Orthogonal is an unrelated party involved in providing technical advice to the oil and gas and coal industries.

United Kingdom Continental Shelf - East Irish Sea

Oilex's new business strategy looking at high potential, well regulated, well understood basins with ready access to data included the UK Continental Shelf with a focus on the Southern Gas Basin and the East Irish Sea. A number of assets and holdings have been reviewed, and discussions held with the holders of those assets.

In the September 2019 quarter, Oilex announced that an exclusivity deal with Koru Energy Limited for a potential 50% equity holding in the "KLW" Gas Discoveries had been allowed to lapse. Oilex had elected to focus on other adjacent and larger projects in the EIS. In December 2019, the Company announced that it had entered into a binding term sheet with Burgate Exploration to acquire a 100% participating interest in the Doyle-Peel licence (P2446) in the East Irish Sea. In addition, the Company entered into an exclusivity agreement for the potential acquisition of a 100% participating interest in the adjacent Castletown licence (P2076).

In March 2020 ,and in response to rapidly changing global events, Oilex announced that it would not be exercising its rights on Castletown allowing the agreement to lapse. At the same time, amendments to the Doyle-Peel licence were announced with the effect that the completion date was extended from 30 June 2020 to 31 December 2020.

The completion of the acquisition is subject to the following conditions precedent by 31 December 2020:

a) the UK Oil and Gas Authority ("OGA") approving the assignment and transfer of the P2446 licence from Burgate to Oilex;

b) the execution of applicable documents necessary to transfer the P2446 licence to Oilex;

c) execution of a royalty agreement in a form acceptable to the parties; and

d) the issue of the share consideration for the acquisition of Doyle-Peel receiving shareholder approval under Listing Rule 7.1 (received on 30 June 2020).

Shareholder approval required for the issue of 42,500,000 consideration shares to Burgate as part of the purchase price was obtained at a General Meeting held on 30 June 2020.

The Doyle-Peel EIS licence is located in a proven gas fairway in the centre of the East Irish Sea Basin in shallow water near existing infrastructure reducing the complexity, risk and cost of any future development. The EIS is a prolific basin which has produced around 8 TCF of gas to date with considerable existing gas production, gathering, processing and transportation infrastructure. The depth to the target reservoirs is less than 2,000 metres thus providing modest drilling costs.

Financial

Treasury policy

The funding requirements of the Group are reviewed on a regular basis by the Group's Chief Financial Officer and reported to the Board to ensure the Group is able to meet its financial obligations as and when they fall due. Internal cash flow models are used to review and to test investment decisions. Until sufficient operating cash flows are generated from its operations, the Group remains reliant on equity or debt funding, as well as assets divestiture or farmouts to fund its expenditure commitments.

Formal control over the Group's activities is maintained through a budget and cash flow monitoring process with annual budgets considered in detail and monitored monthly by the Board and forming the basis of the Company's financial management strategy.

Cash flows are tested under various scenarios to ensure that expenditure commitments are able to be met under all reasonably likely scenarios. Expenditures are also carefully monitored against budget. The Company continues to actively develop funding options in order that it can meet its expenditure commitments and its' planned future discretionary expenditure. During the year several capital raisings were completed to provide for working capital for the company.

A number of debt and equity capital raisings were undertaken during the year to provide working capital for the Company's activities:

September 2019 quarter

- First equity capital raise - placement of 257,329,999 new ordinary shares at an issue price of £0.0013 (A$0.0023) for gross proceeds of £0.34m (A$0.6m)

- Second equity capital raise - placement of 394,736,842 new ordinary shares at an issue price of £0.0019 (A$0.0035) for gross proceeds of £0.75m (A$1.42m).

- Amendment of Series A loan - extended from 26 July 2019 to 1 October 2019 with the issue of 124,060,150 options exerciseable at A$0.00266 on or before 31 December 2019.

- Amendment of Series B loan - extended from 1 October 2019 to 1 April 2020 with the issue of replacement options on commensurate terms.

December 2019 quarter

- Series A loan extension to 15 October 2019 and fully repaid.

- Series B loan options approved by shareholders at the AGM on 27 November 2019.

March 2020 quarter

- Equity capital raise - placement of 277,777,778 new ordinary shares at an issue price of £0.0009 (A$0.0017) for gross proceeds of £0.25 million (A$0.5 million).

- Amendment of Series B loan - extended from 1 April 2020 to 31 July 2020 with the issue of 115,727,273 options at GBP£0.0011 per option and expiry date of 31 July 2020.

- Series C Loan facility of £350,000 with issue of 166,666,667 options at £0.0021 per option with expiry date of 1 August 2020.

- Series D Loan: £225,000 of existing Series C Loan facility rolled into a new £225,000 loan facility (Series D Loan) with the terms and conditions of the remaining £125,000 under the Series C facility remained unchanged. Series D loan repayment date reset from 1 August 2020 to 31 March 2021. In the event GSPC has not transferred its% participating interest in the Cambay PSC by 6 November 2020 to a new joint venture partner, Lombard (the provider of the loan) may elect that the loan is repayable within 14 days. All other terms and conditions remain the same except for the issue of new options reflecting the revised loan repayment date. New options issued - 204,545,455 options over ordinary shares with exercise price of GBP£0.0011 per option and expiry date of 30 June 2021.

June 2020 quarter

- Equity capital raise - placement of 312,500,000 new ordinary shares at an issue price of £0.0008 (A$0.0015) for gross proceeds of £0.25 million (~A$0.5 million).

- Amendment of Series C loan - extended from 1 August 2020 to 31 October 2020 with the issue of 113,636,364 replacement options at £0.0011 per option with expiry date of 29 January 2021 (subject to shareholder approval on or before 30 November 2020).

Corporate

The Company has dual listing on the ASX and on the Alternative Investment Market (AIM) of the London Stock Exchange with approximately 78.90% of the Company's shares held on the Company's UK register.

During the year broker options were not exercised.

As at 30 June 2020 the Company had:

· Available cash resources of $173,816,

· Borrowings at a carrying amount of $769,555 (face value: $804,959). (Reference should also be made to Note 29 - Subsequent Events for further information); and

· Issued capital of 3,648,541,110 fully paid ordinary shares and unlisted options of 188,135,965. 

Executive and Board Changes

During the financial year, the following board changes were made:

· The appointment of Mr Peter Schwarz as an Independent Non-Executive Director effective 4 September 2019 adding depth particularly to the board's technical and business development capability, increasing the industry and market connections in the UK and expanding the number of independent directors,

· The appointment of Mr Mark Bolton as an Executive Director effective from 1 April 2020, continuing his role as Chief Financial Officer and Company Secretary,

· Stepping down by Mr Bradley Lingo from the Board and position of Chairman effective 5 May 2020,

· The appointment of Mr Jonathan Salomon as interim Chairman effective 5 May 2020.

The board would like to acknowledge Mr Lingo's significant contribution to the Company and particularly to the Cooper Eromanga Basin asset delivery.

Risk Management

The full Board undertakes the function of the Audit and Risk Committee and is responsible for the Group's internal financial control system and the Company's risk management framework. Management of business risk, particularly exploration, development and operational risk is essential for success in the oil and gas business. The Group manages risk through a formal risk identification and risk management system.

Health, Safety, Security and Environment

Policy

Oilex is committed to protecting the health and safety of everybody who plays a part in our operations or lives in the communities where we operate. Wherever we operate, we will conduct our business with respect and care for both the local and global, natural and social environment and systematically manage risks to drive sustainable business growth. We will strive to eliminate all injuries, occupational illness, unsafe practises and incidents of environmental harm from our activities. The safety and health of our workforce and our environment stewardship are just as important to our success as operational and financial performance and the reputation of the Company.

Oilex respects the diversity of cultures and customs that it encounters and endeavours to incorporate business practices that accommodate such diversity and that have a beneficial impact through our working involvement with local communities. We strive to make our facilities safer and better places in which to work and our attention to detail and focus on safety, environmental, health and security issues will help to ensure high standards of performance. We are committed to a process of continuous improvement in all we do and to the adoption of international industry standards and codes wherever practicable. Through implementation of these principles, Oilex seeks to earn the public's trust and to be recognised as a responsible corporate citizen.

Qualified Petroleum Reserves and Resources Evaluator Statement

Pursuant to the requirements of Chapter 5 of the ASX Listing Rules, the information in this report relating to petroleum reserves and resources is based on and fairly represents information and supporting documentation prepared by or under the supervision of Mr Jonathan Salomon, Managing Director employed by Oilex Ltd. Mr Salomon has over 34 years' experience in petroleum geology and is a member of the American Association of Petroleum Geologists, and the Society of Petroleum Engineers. Mr Salomon meets the requirements of a qualified petroleum reserve and resource evaluator under Chapter 5 of the ASX Listing Rules and consents to the inclusion of this information in this report in the form and context in which it appears. Mr Salomon also meets the requirements of a qualified person under the AIM Note for Mining, Oil and Gas Companies and consents to the inclusion of this information in this report in the form and context in which it appears.

(1)   During the September 2019 quarter, the Company reached a settlement with GSPC which, upon completion, will resolve the ongoing Cambay Production Sharing Contract (PSC) dispute. Pursuant to the settlement, GSPC has commenced a sale process of its interest in Cambay.

(2) A Sale process of Oilex's equity is currently underway.

(3) PSC terminated 15 July 2015.