Rockpool Acqui Regulatory News (ROC)

23 Aug 2006 07:01

Roc Oil Company Limited23 August 2006 Roc Oil Company LimitedLevel 141 Market StSydney NSW 2000 Date of lodgement: 23-Aug-2006Title: Open Briefing. Roc Oil. Changes to Reserves & Production Record of interview: corporatefile.com.auRoc Oil Company Limited ("ROC") has been very active this year and the share price has increased by around 60% since this time last year. Can you briefly recap your achievements so far? CEO John DoranWe've had a very successful year so far - and we'll be working hard to ensurethat it continues. I wouldn't be surprised if this extraordinary 1H 2006 hasn't left someshareholders wondering how to rank all the different activities. Specific 1H 2006 activities include an oversubscribed placement in the UK;completion of the Cliff Head development in the Perth Basin offshore WesternAustralia, within 14 months of the Final Investment Decision, which was asignificant tick on our operator's report card; commencement of non-operatedproduction in offshore Mauritania with further non-operated North Seadevelopment projects set to join ROC's growing club of producing assets in 1H2007; the discovery of the ROC-operated Wei 6-12 South oil field in the BeibuGulf, offshore China and the A$350 million acquisition of the Zhao Dongproducing fields in the Bohai Basin, offshore China. Unfortunately, there is neither the time nor space to cover all the events in a single Open Briefing(R) so it might be best to concentrate on changes to ROC's production and reserve profiles and how these activities impact on ROC both now and in the future. OFFSHORE CHINA corporatefile.com.auROC recently announced that it had completed the purchase of a 24.5% operatedinterest in the Zhao Dong Block ("the Block") in the Bohai Bay, offshore Chinafor a cash consideration of US$260 million. What impact will the transactionhave on your net proved, probable and possible reserves? CEO John DoranIn round figures, proved and probable ("2P") reserves have doubled to about 30million barrels of oil ("MMBO"). We don't carry possible reserves because welook on that category as representing unbooked upside. corporatefile.com.auWhat impact will it have on net production? Can you also talk about the expectedproduction profile over time at Zhao Dong? CEO John DoranProduction shot up by more than 150%, and it is now in excess of 12,000 barrelsof oil per day ("BOPD"). In terms of oil production by non-diversified,publicly-listed Australian explorers, ROC ranks fourth after Woodside PetroleumLtd, Santos Ltd, and Oil Search Ltd. In China, ROC is the third largest foreignoperator of gross oil production after Conoco Phillips, Inc and Kerr-McGeeCorporation/Anadarko Petroleum Corporation. That's a reasonable step up comparedto six months ago when ROC's production was less than 50 BOPD. corporatefile.com.auWhat does this deal say about ROC's strategic direction? CEO John DoranThe deal reflects a well established strategy. We like diversity and we like tostay within our core areas. This deal diversifies ROC's production base byproviding a third production leg in a core area where we previously didn't haveany production. To be able to do this in China was particularly satisfying.We've been dealing with Chinese energy companies since 1998 and not only did theprice-reward equation appeal, but it also represented a good strategic fit. corporatefile.com.auWhy would Apache sell its 24.5% stake? CEO John DoranThat's really a question for Apache. However, with company-wide proved reservesof approximately two billion barrels of oil equivalent, Zhao Dong, with its 15million barrels of proved and probable reserves net to Apache, may not have beenat the centre of that company's radar screen. In addition, Zhao Dong wasApache's only asset in China which contrasts with their recent growth activitieswhich have focused on the Gulf of Mexico and Argentina. corporatefile.com.auHow does this deal compare with other oil and gas asset acquisitions either inChina or elsewhere in the world? What valuation metrics did you consider beforeagreeing to the acquisition? CEO John DoranThere are very few comparable deals in the public domain in China. A purchaseprice of US$17.33/BBL for proved and probable reserves compares well with recentacquisition costs in other parts of the world, such as the North Sea and partsof West Africa. However, all these valuation metrics suffer from at least twodrawbacks: firstly, they don't take into account the fact that different fiscalregimes provide different net-backs to industry investors; and secondly, theyignore the upside potential. The fiscal regime that applies to Zhao Dong is attractive to ROC for a number ofspecific reasons and we think that there may be upside potential to be realisedin the block. Those two points allowed us to pay a fair price for the 2Preserves and little or nothing for the upside - and considering that thispostulated upside is yet to be realised that seems to have been a fair pricealso. corporatefile.com.auYou plan to develop a third field (C4) at Zhao Dong in 2007 which extends beyondthe permit boundary. What development concept do you envisage? Do you expect anyproblematic issues with unitisation? CEO John DoranUnitisation details were agreed with the adjoining block co-venturers earlierthis year, so there's no issue on that front. Coincidentally, there are quite afew similarities between the C4 development and the Cliff Head development,which ROC just completed. Both are unmanned platforms in shallow water, remotelycontrolled and linked by pipelines and umbilicals to treatment facilities,although in C4's case those facilities will be on an offshore platform, notonshore. In addition, the oils are not entirely dissimilar and there will alsobe an important water-injection component to the C4 development, just like CliffHead. corporatefile.com.auROC is taking a significant debt position and will finance the acquisition via a12 month loan provided by the Commonwealth Bank of Australia ("CBA"). How doesthis fit with ROC's conservative financial strategy? CEO John DoranThe debt is well serviced by ROC's increasingly diversified production, so inthat sense we remain relatively conservative. CBA was very good to deal with:decisive; constructive; and quick. The provision of a 12-month loan provides ROCwith plenty of time to consider how best to restructure its finances in thelonger term. There's no pressure in that respect. Whatever details we decideupon, the loan will be recast as a longer term corporate facility securedagainst the Company's other diverse assets, including currently producing fieldsand fields under development. corporatefile.com.auWhat are ROC's hedging plans? What upside exposure to the oil price will thatgive shareholders? CEO John DoranROC's hedging programme has been detailed in recent announcements. In summary,the hedging programme is designed to expose shareholders to the benefits ofincreases in the oil price while, at the same time, placing a modest financialsafety net under the Company in case oil prices tumble. In general terms, about23% of the Company's forecast total production to June 2011 is hedged via oilprice swaps at a weighted average price of US$68.40/BBL. The rest of theproduction is exposed to upward oil price movement. Some of the downsideexposure not covered by the swaps is limited further by put options that coveran additional 4% of our forecast production for the period to 2011. We have inplace two lines of put options which provide downside price protection atUS$67.00/BBL and US$50.00/BBL, but they do not limit exposure to price upsidebecause if the price is above the put strike price we'll simply allow the putoptions to lapse. corporatefile.com.auHow do the PSC terms for Zhao Dong compare with those of other oil projects inChina? CEO John DoranAs far as we can tell, they are comparable, at least in a broad sense. In China,the Government is entitled to take up to 51% equity in development projects andif it's a commercial development you always expect them to do that. Once thatGovernment bite is behind you the actual contract terms are relativelyattractive. corporatefile.com.auWhat about sovereign risk? CEO John DoranMaybe we've been lucky since we started working with Chinese companies eightyears ago. That is not a statement you can make with regard to some other partsof the world international oil business. Lots of people say that the Chinese aretough to deal with and they certainly negotiate to their full advantage, butwhat you don't hear so much about is that they are also very fair - at leastthat's ROC's experience to date. Dealing with China National Offshore OilCorporation is like dealing with a western company, arguably better than dealingwith many western companies. We haven't had as much experience dealing withPetroChina, the parent company of which bears comparison in many respects to anyof the majors, but the contact we've had so far has been very positive and we'veappreciated the welcoming attitude they've taken with regard to ROC coming intoZhao Dong Production Sharing Contract. corporatefile.com.auROC also recently announced the Wei 6-12 South discovery in the Beibu Gulf,offshore China. To what extent did this discovery - and its possible developmentwith ROC as operator - influence you to acquire the Zhao Dong Block? CEO John DoranThe timing was very relevant. If the Beibu Gulf well had been dry, I suspect ROCwould not have had the same appetite for Zhao Dong. However, the Beibu well wasnot dry and once it came in as a significant discovery we were able to apply aneconomy of scale to the Zhao Dong purchase that is very exciting. In order tosecure Zhao Dong not only did ROC have to demonstrate its capabilities as anoperator offshore China - which our work in the Beibu Gulf did very well - butwe also had to demonstrate that we had the capacity to operate an offshoredevelopment and Cliff Head provided the evidence that we could deliver the goodsin that respect. corporatefile.com.auCan you give an update on what you've achieved with the appraisal program at theWei 6-12 South discovery? When do you expect to indicate the size of thediscovery and potential production rates? CEO John DoranThere's a lot of information being analysed as we speak. The discovery andappraisal of Wei 6-12S-1 was a fast track process. However, it will still besome months before we have a good handle on the size of the discovery. Untilthen we're not going to waste time with premature speculation about recoverablereserves. We've given the market guidance as to the amount of oil that may bein-place, many tens of millions of barrels. By that we mean that the in-placeoil in the Wei 6-12 South structure - including parts of it that are yet to bedrilled - and the neighbouring Wei 6-12 Field which we discovered in 2002, willrange from say, 60 MMBO to towards 100 MMBO. If - and it is an "if" because thereview is ongoing - the in-place oil proves to be in this range then we wouldexpect the fields to be commercial and would want to develop them as quickly aspossible. corporatefile.com.auIn addition to the Wei 6-12 South discovery, what previous discoveries could ROCpotentially develop in the Beibu Gulf? CEO John DoranIf you've been a dogged reader of ROC's Stock Exchange releases over the lastfour years you would find a very consistent theme with regard to our JointVenture's operations in the Beibu Gulf: give us one commercial discovery, asingle pearl, and we will likely string a few more together that would otherwisebe uncommercial. There are several known accumulations in the southern part ofthe permit area which will merit a fresh look if the recent discovery gets thegreen light for development. corporatefile.com.auIs the acquisition of the Block an isolated opportunity in China or do youexpect other asset deals or exploration success in China? CEO John DoranWhat's important at the moment is to bed down the Zhao Dong acquisition. Thereare other opportunities, but we have no intention of over-stretching to reachthem. If they fit, fine. If they don't, that's OK too because we have plenty onour plate at the moment. The problem with most other opportunities is that theyusually come to the market via industry auctions and we do our best to avoidthose situations. The uniqueness and beauty of the Zhao Dong purchase was thatwe were able to bypass the standard industry bidding process. OFFSHORE MAURITANIA corporatefile.com.auWith Chinguetti production performing lower than expectations, do you believethe field's reserves will be downgraded? CEO John DoranAbsolutely. In a nutshell - production risk has replaced development risk,which is usually the case with new deep water fields. There's a lot of information available. That may sound as if it's a good thing -and it is in many ways - but it actually makes reserve recalculations morecomplex and very time consuming. It is certainly frustrating for all parties -market investors and participants alike - that there's no up to date guidancefor Chinguetti reserves and a market vacuum has been created. The irony is thatmost observers apparently expect a reserve downgrade. The Chinguetti Field, which started production in late February 2006, onlysustained a target production rate in excess of 70,000 BOPD for a short periodbefore declining to 40,000 BOPD by mid-May. The decline was due to differentfactors in each of the six producing wells - gas production, early water arrivaland/or limited productivity depending on the nature of the particular well andthe way it was completed in the reservoir. On a more positive note, since earlyJune the rate of production decline has slowed and the production capacity hasbeen maintained generally between 32,000 to 38,000 BOPD. While the early decline was significantly faster than predicted and the morerecent stabilisation of production is encouraging, the overall assessment of theimpact on recoverable reserves - when completed - is expected to benegative although the in-place oil estimate may remain close to originalforecasts. The Operator, Woodside, is reviewing the performance data in order to explainthe decline with one of the potential key factors being a lesscontinuous reservoir sand system than had been previously assessed.The Operator has advised the Joint Venture that it is not in a position toprovide updated reserves at this time. ROC relies on the Operator's assessmentand with a 3.25% equity in the field there isn't much point in ROC undertaking afull independent assessment at this time. However, based on the production andreservoir performance to date, ROC would not be surprised if Chinguetti's 123MMBO 2P reserves were reduced by 25 to 50%. This view still assumes that PhaseTwo of the Development Plan - which involved the drilling of infill wells andwas integral to the original reserve estimate and production forecasts - isimplemented and is successful. OFFSHORE WESTERN AUSTRALIA corporatefile.com.auHow has Cliff Head been performing? CEO John DoranSo far, so good - but it's still early days. If it were not for downstreamconstraints the field could certainly be delivering at its nameplate capacitylevel of 15,000 BOPD - and that would be with one well, albeit one of the moremodest producers, yet to come on stream. Recent production has generally rangedbetween 8,000 BOPD and 12,000 BOPD. Prior to first oil we said that the fieldwould exceed 10,000 BOPD so that's an important box ticked. corporatefile.com.auYou've mentioned that Chinguetti has moved from development risk to productionrisk - what production risks have you identified for Cliff Head? CEO John DoranThe journey the oil makes from the downhole pumps in the offshore wells to theKwinana refinery south of Perth requires a number of critical mechanicalcomponents to work well. The mechanical and system challenges we've experiencedto date have been generally minor and manageable. If - and it's a big "if' because production from Cliff Head has just begun -present production trends continue we'll be tempted to view that the mainproduction risk for the field lies not in the rocks themselves, but in thehardware and the systems that move the oil from reservoir to refinery. If thisproves to be the case, it will be a pleasant surprise because thepre-development view of the reservoir potential at Cliff Head was fairly subduedand we constructed our economics accordingly. But, there again, maybe we andMother Nature are just going through a little honeymoon period at Cliff Head.Time will tell. corporatefile.com.auIf you had one other area to highlight with regard to ROC's activities whichwould it be? CEO John DoranIn a word: Angola. ROC is becoming a lot more balanced and diversified with regard to production,as we bed down the Zhao Dong acquisition and advance the potential developmentof our new field in the Beibu Gulf. However, we also have to maintain ourexploration momentum - and onshore Angola will play a big part in that process. ROC's planned Angolan drilling programme will kick-off towards the end of this year or as early as possible in 2007. The precise timing will depend on which drilling rig we contract. We plan to drill two or three back-to-back wells basedon seismic we acquired in 2005 and we hope to follow them with a further three or four wells subject to the number and nature of the prospects revealed by our current 2006 seismic. Whatever the details of our drilling plans, the rocks in Angola are every bit as prospective now as they were in January 2006 when they were subject to a lot more investor focus in the context of ROC's A$76 million placement to UK institutions. All that has happened in the meantime is that success on two separate fronts offshore China has moved the market spotlight from exploration in Angola to production and potential development in China. That's just a perception shift reflecting the most recent events. There's just as much reason to be excited about what ROC is doing onshore Angola now as there was six months ago. corporatefile.com.auThank you John.--------------------------------------------------------------------------------For further information on ROC please visit www.rocoil.com.au or call John Doranon (02) 8356 2000. To read other Open Briefings, or to receive future Open Briefings by email,please visit www.corporatefile.com.au DISCLAIMER: Corporate File Pty Ltd has taken reasonable care in publishing theinformation contained in this Open Briefing. It is information given in asummary form and does not purport to be complete. The information contained isnot intended to be used as the basis for making any investment decision and youare solely responsible for any use you choose to make of the information. Westrongly advise that you seek independent professional advice before making anyinvestment decisions. 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