28 Oct 2011 07:00
Victoria Oil & Gas Plc
('Victoria' or 'the Company')
(AIM: VOG)
Results for year ended 31 May 2011
Chairman's Statement
This has been a most significant year for Victoria Oil & Gas with considerable value added to our assets and extensive work completed at site on our principal projects. At our flagship Logbaba gas and condensate project in Douala, Cameroon we expect to commence production this year. At West Medvezhye, prospective resources are now in excess of 1.4 billion barrels of oil equivalent ("boe"), exceeding the previous estimates by approximately 300 million boe, and including increased oil prospectivity to 670 million bbls. Across the Company, we have increased net reserves by 40% to 52 millionboe and net resources by 30% to 1,594 million boe. Shareholders have always supported these investments and it is now the Company's responsibility to return added value to shareholders.
Review of the Markets
The financial markets remained extremely volatile throughout the period and fears over economic stability have increased further this year. The Eurozone debt crisis, global cut backs and austerity measures have dominated the headlines with gloomy predictions of economic growth in theWest for the foreseeable future. Inaddition, civil unrest in the Arab world and the tsunami in Japan have only served to increase the volatility in the energy markets.
Access to capital markets in this economic climate has been challenging for smaller AIM-listed E&P companies. In this context, I am very pleased that Victoria has been able to continue exploration and development operations apace, securing additional finance of approximately $34 million in the financial period and reducing our Group losses by $1.4 million to $4.7 million.
Logbaba, Cameroon (VOG 95% owned and operated)
The Logbaba gas and condensate project in Cameroon is now approaching its initial production phase with first gas sales anticipated by the end of this year. Logbaba represents a rare opportunity in Africa with ownership and control of afully integrated gas supply chain. The Company owns and controls its own gas distribution network, which is currently nearing the end of construction, with marketing and sales of its share of gas to industrial end users located on our doorstep in Douala, the economic capital of Cameroon. Victoria first entered Cameroon less than three years ago and to drill and complete two successful wells, secure a market for our gas and build a gas plant and pipeline network to our customers, all in a built up area of Douala is truly outstanding progress.
Industry in Douala is severely constrained by high energy costs and unreliable delivery. Victoria has a captive market that is eager to take Logbabagas because it provides direct savings on energy costs, cleaner, more reliable energy and fixed prices for five years.
Logbaba gas is expected to attract new industrial entrants to the region and encourage capital expansion from existing customers with certainty of supply at a lower cost base. Importantly for Victoria, the terms of our gas sales agreements also mean we are not exposed to gas price fluctuations.
Since the award of the Exploitation Licence signed by President Paul Biya in April 2011 we have made good progress, notwithstanding a particularly rainy wet season. When the licence was granted, the key downstream elements that remained to be completed were:
> re-opening and commissioning of the wells;
> trenching, jointing, installation and commissioning of the gas pipeline network;
> installation and commissioning of the process plant; and
> installation of pressure reduction and metering stations, steel work and boiler conversions on
customer premises.
This is a great deal of work and our staff and contractorshave set to the task of completing these project requirements with commitment and enthusiasm. We have an excellent HSE record with one lost time incident and no serious injury with over eighteen thousand man days completed. The assembly of production trees for the wells is now complete. We have two wells completed as producerswhich are capable of delivering gas in excess of initial customer demand estimates. Wire line operations including caliper surveys and production logs have been completed.
A substantial part of the gas pipeline network is now complete. The entire section of pipeline to first customers on the Magzi Industrial Estate is anticipated to be installed within one month, after which the whole network will be pneumatically tested again for leaks as part of the commissioning process. Gas sales to Magzi customers will commence while the remainder of the pipeline network continues under construction.
Our gas sales and marketing team continue to sign up industrial customers, including multinational firms, with 13 gas sales agreements currently in place. I have every confidence we can double this figure as we continue with our pipeline network expansion beyond Magzi and pass by other customers' doorsteps. The Company anticipates we will have signed in excess of 40 customers within a couple of years of commencing operations and our next drilling programme will be required in order to meet anticipated market demand.
The existing gross proved and probable reserves of 212 billion cubic feet at Logbaba are sufficient to satisfy an average production of 30 million standard cubic feet a day for the next 20 years. Whilethese production levels provide very attractive economic rates of return, the Company has more work to do to fully characterise the Logbaba reservoir. With prospective resources in excess of 1 trillion cubic feet, the Company has considerable upside if we can develop these resources into quantifiable reserves. I am confident that the market is there to utilise these incremental gas reserves were the Company to achieve this.
I should like to highlight to shareholders what our gas marketing objectives are over the next three to five years. In the short term, we are concentrating on customers where there is the opportunity for substitution of heavy fuel oil and other liquid fuels with gas used to generate heat for industry's process requirements. At the same time, we have initiated discussions with industrial customers and other large power consumers to use Logbabagas as the prime source of supply for their electrical power requirements through onsite gas generatorsets. The Company also intends to offer aggregated power solutions, without reliance on the grid, to groups of customers located in the same area such as the Magzi Industrial Estate, thereby offering improved efficiencies and economies of scale.
Cameroon is challenged by power shortages, with frequent blackouts and brownouts hampering the prospect of foreign investment and expansion from existing industries. Once we have demonstrated continuity of supply, this represents a very large potential market for the Company. Finally, the government has stated plans to treble the existing grid power supply by the year 2020. Victoria is extremely well placed to provide gas to large thermal power projects currently being planned in Douala for generation capacity into the grid.
In summary, the engineering and civils progress have been satisfactory despite an exceptional rainy season and I am pleased to say that we remain on track to deliver on our stated targets of first production in Q4 2011. I am very positive about the coming year and look forward to updating you on market developments and real deliverables as we set about bringing this project to its fruition.
West Medvezhye, Russia (100% owned)
Whilst the Logbaba project is understandably the focus of attention from investors, we have made great strides in Russia this year. West Medvezhye ("West Med"), strategically located in the Nenetsk region of Siberia with a licence area covering 1,224km2, represents an asset with major hydrocarbon potential which could propel the Company onto a new playing field. It lies just west of the super giant Medvezhye field where over 70 trillion cubic feet of dry gas has been produced. VOG's wholly- owned subsidiary, ZAO SeverGas-Invest, holds a 20-year licence to develop the huge resource potential.
During the past twelve months, our technical team has commenced conceptual screening and appraisal studies to optimise development of our prospective resource base and develop our discovery, Well 103, with an early production scheme to bring forward initial cash flows. This work is ongoing and I am encouraged that preliminary assessment work on the Well 103 discovery indicates that we can plan for first oil sales in 2015.
In March 2011, the Company commissioned a seismic reprocessingand geological modelling study to be carried out on West Med by an independent Russian geoscience consulting institute, Mineral LLC ("Mineral"). Further to the previous assessment carriedout by DeGolyer and MacNaughton in 2006, they were asked to incorporate our new well data, passive seismic and gas tomography results with our existing conventional 2D seismic.
In September this year, we were very pleased to report that Mineral has estimated West Med prospective resources to be in excess of 1.4 billion boe, exceeding the previous assessment by approximately 300 million boe, and including increased oil prospectivity to approximately 670 million barrels of oil. These results are very encouraging indeed. Our team is continuing to investigate the results of the Mineral study, together with the geochemical and passive seismic results, and we expect to submit an application to the Russian authorities requesting approval of our proposed drilling locations for two wells in 2012 very shortly.
Outlook and Other Projects
The traditional sector "packaging" and structural approach offered by companies is, post the financial crisis, being replaced by companies offering cash flow, superior growth potential and diversification of risk.
Following our recent placing for £9.5 million in September 2011, the Company is now well capitalised for an exciting year ahead with cash flows being generated from Logbaba and development plans firming up at West Med.
Victoria now has total recoverable proved and probable reserves of 52 million boe and significant potential, with prospective resources in excess of 1.5 billion boe.
Victoria constantly reviews opportunities to increase the Company's asset base where we see economic value and synergies with our existing assets or technical and management competencies. We have reviewed a number of targets during the financial period and we have a number of existing business development opportunities both at the asset and corporate level that are currently being appraised by our management team. The Board remains committed to building Victoria into a medium sized, profitable, resource focused company within three years. We believe economies of scale through organic growth and via selected acquisitions where we can demonstrate real added value will facilitate greater returns to shareholders.
The Company is also assessing a number of opportunities in Cameroon where we can leverage our existing relationships and benefit from our existing infrastructure and capabilities. Cameroon is blessed with an abundance of natural resources and we are examining asset opportunities outside the traditional exploration and production sphere where our gas reserves can be a catalyst for other industrial opportunities.
I would like to thank all employees, contractors and advisers of the Company and my fellow Directors for the excellent progress to which everyone has contributed this year. Equally, I would like to thank all Company shareholders for continuing to support Victoria in these challenging markets. I hope you can begin to see the rewards of your confidence very soon.
Kevin Foo
Chairman
Chief Operating Officer's Review
With commissioning of production facilities and our pipeline to customers at the Logbaba gas and condensate field ("Logbaba") expected by year end in Cameroon and the positive appraisal of more than 1.4 billion barrels of oil equivalent of prospective resources at our West Medvezhye asset in Siberia, Victoria Oil & Gas is emerging as a true exploration and production company with a balanced asset portfolio and real growth potential.
Logbaba, Cameroon
Logbaba is located in the city of Douala, onshore Cameroon. The Company increased its participation in Logbaba to 95% in July 2011 and is operator in the block. The field was discovered in the 1950s by Elf SEREPCA with four wells that encountered gas and condensate in multiple reservoir layers. No gas-water contacts were detected in any of the sands encountered. The gas-bearing reservoir sands are of Campanian and Santonian age of the Logbaba Formation, which primarily comprises shale with interbedded sand and siltstones.
The beginning of the financial period witnessed the completion and testing of two new wells, La-105 and La-106, drilled by the Company at Logbaba. Our first well, La-105, flowed at rates between 11-56 million standard cubic feet per day ("mmscf/d") of natural gas and 210-1,000 barrels per day of condensate with flowing wellhead pressures varied between 2,750-4,552psi. The tests covered horizons of the Lower Logbaba formation, which had not been tested before, and the Upper Logbaba D sands. The Upper Logbaba A through C sands, although indicated as the best quality hydrocarbon- bearing sands encountered in the well logs, were not tested as the wells indicated more than sufficient production capacity to meet initial gas demand. The Upper Logbaba A-C sands will be perforated and added to the completion interval when required for production. The gas is sweet with a high calorific value and the condensate has an API gravity of 47 degrees.
La-106 successfully reached a total measured depth of 10,509 feet in April 2010. The well was drilled deeper than planned due to the better than expected sand quality found in the Lower Logbaba sections. Multiple gas-bearing sands were encountered between 5,482 feet and 10,400 feet, which can be correlated to the wells drilled in the 1950s.
La-106 flowed at rates of up to 22mmscf/d, (ca. 3,600boepd), at different choke sizes up to 36/64 inch and wellhead flowing pressures up to 3,078psi.
The Company's reserves and resources estimates at Logbaba were updated in 2010 by Blackwatch Petroleum Services Limited ("Blackwatch"), which acts as consultant to the Company. The Proved and Probable (2P) gas reserves in the Logbaba field are contained in Campanian and Santonian age sands of the Logbaba Formation. All six of the wells drilled to date in Logbaba have encountered significant gas intervals and all of the five wells that were tested flowed gas to surface (Elf did not test their final well when they encountered gas while looking for oil).
There is considerable potential in the remaining areas of the Logbaba Block which are thought to share the same geology. This potential has been in part confirmed by the results of the passive seismic survey which provided the first new geophysical information to be acquired over Logbaba since the discovery was made. These survey findings are in line with the geological understanding of the Logbaba reservoir sands and correlate well with data from the four old wells and the newly drilled wells, La-105 and La-106. Of particular interest, the results highlight a major potential hydrocarbon accumulation around 2km from the new wells' surface location. This prospect, which lies entirely within Victoria's licence block, appears to be substantially larger than the existing discovery and has not been seen in any previous subsurface studies, due to the lack of geophysical data.
The Company has focused its attention in 2011 on surface production facilities construction and pipeline installation. Civil works commenced on site during the final quarter of 2010 in preparation for the equipment installation this year.
The Company received official confirmation that a Decree, awarding the Exploitation Licence for Logbaba, was signed by President Paul Biya, of the Republic of Cameroon, in April 2011. Further to the award, the wells were prepared for tie-in and the installation and commissioning of the process plant commenced. Currently, a total of 12 vessels of 15 that make up the process plant have now been positioned on site, including de-sanders, coolers, separators, heat exchangers, and the condensate storage and fire water tank.
Expro, our gas plant contractor, tests the process plant vessels, flow lines and equipment at their base in Douala and delivers them on skid mounted units as the concrete pads on site are completed. Expro have also installed and completed a substantial amount of the pipework, manifolds and control equipment on site.
Trenching, jointing and installation of the gas pipeline network are in progress. Of a total pipeline distance of 4.5km to our first customers in Central Douala, 3.0km of pipeline has been installed, backfilled and successfully pneumatically tested, with a further 1.2km of pipeline jointed and awaiting installation.
Specifications for pressure reduction and metering stations have been prepared for more than 20 of our existing and potential customers and the first units for our Magzi customers have been ordered.
In summary, Logbaba has outstanding potential with a strong reserves base, good production potential and a large market within a small radius. Logbaba is poised to place VOG in the forefront of onshore gas producers in West Africa.
West Medvezhye, Russia
VOG's wholly owned subsidiary, ZAO SeverGas-Invest ("SGI"), holds a 20-year Exploitation Licence for West Medvezhye, ("West Med"), covering 1,224km2. West Med is located in one of the most prolific oil and gas producing areas of the world and is adjacent to Gazprom's giant Medvezhye field that has already produced over 70 trillion cubic feet of gas.
The block is located in the Yamal Peninsula in the Nenets region of Siberia and was independently assessed in 2006 by DeGolyer and MacNaughton ("D&M") to have total prospective resources of approximately 1.1 billion boe. In total, D&M identified 25 leads and prospects and the Company's first discovery in West Med, Well 103, was based on a prospect defined by D&M. The discovery has C1 and C2 reserves, independently assessed, under the Russian classification convention of 14.4 million boe as approved by the Russian Ministry of Natural Resources.
During 2010, the second phase of passive seismic and gas tomography surveys were recorded and interpreted throughout the year, identifying direct hydrocarbon indications in six areas, covering a total of 79 km2, according to VOG management and GDR estimates.
Further to these encouraging results, the Company commissioned a seismic reprocessing and geological modeling study to be carried out on West Med by an independent Russian geoscience consulting institute, Mineral LLC ("Mineral"), incorporating the new data sets with the existing conventional 2D seismic. Mineral has prepared structure maps and seismic attributes maps for all of the prospective formations in the West Med block.
These results are being integrated with the Company's passive seismic, gas tomography and geochemical studies to define/rank leads and prospects and to further assess the 103 discovery. The relevant technical details are currently under review by the technical team within the Company and Blackwatch.
On the basis of their assessment received at the end of August 2011, Mineral has independently estimated West Med prospective resources to be in excess of 1.4 billion boe, exceeding D&M's previous estimate by approximately 300 million boe, and including increased oil prospectivity to approximately 670 million barrels of oil in the Lower Cretaceous Neocomian- Achimov and Jurassic formations. Further to the Company's review and assessment of Mineral's report we will submit an application in November 2011 to the Russian authorities requesting approval of our proposed drilling locations.
Studies have commenced on well design and engineering for the next phase of appraisal and development drilling planned for Q4 2012. The Company is in discussions with international and Russian service companies and has compiled initial budgetary estimates for the wells and drill pads. Future development wells are planned to be drilled in clusters of three to ten to significantly reduce location preparation and access cost. This will have a marked impact on development economics.
Conceptual design work has commenced to establish costs and schedules for oil, gas and condensate production facilities and supporting infrastructure. The gathering and distribution network design and engineering will be phased with facilities design, starting with fast track development of the Well 103 discovery.
There exist several routes for the commercialisation of West Med hydrocarbons. The neighbouring town of Nadym is located 44km away with access by all-weather road. The Chircha railroad station is located within the southwest boundary of the licence and the river port and loading terminal of Old Nadym are located 22km away. In addition, one of Gazprom's principal gas transmission pipelines in the area runs along the eastern border of the licence.
Initial studies have highlighted that an early production scheme of the Well 103 discovery could involve the sale of small volumes of crude into the local market with prices of US$60 per barrel achievable. This would be followed by full scale oil and gas development for export as the export market is well established in this part of Siberia.
The results of our preliminary development assessment work on the Well 103 discovery indicate achieving first oil sales in 2015, subject to further refinement and screening.
Radwan Hadi
Chief Operating Officer
(Radwan Hadi is also a Director of Blackwatch)
Consolidated Income Statement
for the year ended 31 May 2011
2011 | 2010 | ||
$000 | $000 | ||
Administrative expenses |
(5,099) |
(5,796) | |
Other gains and (losses) | 765 | (133) | |
Operating loss | (4,334) | (5,929) | |
Interest received | 52 | 71 | |
Finance revenue | - | 617 | |
Finance costs | (415) | (866) | |
Loss before taxation | (4,697) | (6,107) | |
Income tax expense | - | - | |
Loss after taxation for the financial year | (4,697) | (6,107) | |
Cents |
Cents | ||
Loss per share - basic |
(0.26) |
(0.63) | |
Loss per share - diluted | (0.26) | (0.63) | |
Consolidated Statement of Comprehensive Income
for the year ended 31 May 2011
| 2011 | 2010 | |
| $000 | $000 | |
Loss for the year |
(4,697) |
(6,107) | |
Exchange differences on translation of foreign operations | 2,404 | 70 | |
Total comprehensive income for the year | (2,293) | (6,037) | |
Consolidated Balance Sheet
as at 31 May 2011
| 2011 | 2010 | |||
| $000 | $000 | |||
Assets: | |||||
Non current assets | |||||
Exploration and evaluation assets | 130,899 | 115,917 | |||
Property, plant and equipment | 7,807 | 221 | |||
Trade and other receivables | 27,640 | 19,916 | |||
166,346 | 136,054 | ||||
Current assets | |||||
Trade and other receivables | 3,125 | 1,776 | |||
Cash and cash equivalents | 8,425 | 6,034 | |||
11,550 | 7,810 | ||||
Held for sale assets | 1,000 | 1,829 | |||
12,550 | 9,639 | ||||
Total assets | 178,896 | 145,693 | |||
Liabilities: | |||||
Current liabilities | |||||
Trade and other payables | (14,079) | (17,595) | |||
Borrowings | (1,101) | (1,854) | |||
(15,180) | (19,449) | ||||
Net current liabilities | (2,630) | (9,810) | |||
Non current liabilities | |||||
Convertible loan - debt portion | (884) | (529) | |||
Derivative financial instruments | (28) | (24) | |||
Deferred tax liabilities | (6,599) | (6,599) | |||
Provisions | (12,765) | (7,406) | |||
(20,276) | (14,558) | ||||
Net assets | 143,440 | 111,686 | |||
Equity: | |||||
Called-up share capital | 17,178 | 11,648 | |||
Share premium | 183,867 | 155,636 | |||
ESOP Trust reserve | (587) | (293) | |||
Translation reserve | (8,300) | (10,704) | |||
Other reserve | 4,408 | 3,828 | |||
Retained earnings - deficit | (53,126) | (48,429) | |||
Total equity | 143,440 | 111,686 | |||
Consolidated Statement of Changes in Equity
for the year ended 31 May 2011
Called-up share capital $000 |
Share premium $000 |
ESOP Trust reserve $000 |
Retained deficit $000 |
Translation reserve $000 |
Other reserve $000 |
Total $000 | |
At 31 May 2009 |
4,289 |
114,620 |
(124) |
(42,322) |
(10,774) |
2,882 |
68,571 |
Shares issued | 7,359 | 44,930 | (169) | - | - | (655) | 51,465 |
Share issue costs | - | (3,914) | - | - | - | - | (3,914) |
Recognition of share-basedpayments |
- |
- |
- |
- |
- |
1,601 |
1,601 |
Total comprehensive incomefor the year |
- |
- |
- |
(6,107) |
70 |
- |
(6,037) |
At 31 May 2010 | 11,648 | 155,636 | (293) | (48,429) | (10,704) | 3,828 | 111,686 |
Shares issued | 5,530 | 30,667 | (370) | - | - | - | 35,827 |
Share issue costs | - | (2,436) | - | - | - | - | (2,436) |
Shares granted to ESOP members | - | - | 76 | - | - | - | 76 |
Recognition of share-basedpayments |
- |
- |
- |
- |
- |
580 |
580 |
Total comprehensive incomefor the year |
- |
- |
- |
(4,697) |
2,404 |
- |
(2,293) |
At 31 May 2011 | 17,178 | 183,867 | (587) | (53,126) | (8,300) | 4,408 | 143,440 |
Share premium reserve
The share premium reserve comprises of the excess of monies received in respect of share capital over the nominal value of shares issued, less share and debenture issue costs.
ESOP Trust reserve
The ESOP Trust reserve comprises of shares in the Company held by Victoria Oil & Gas ESOP Trust.
Retained deficit
Retained deficit comprises accumulated losses in the current year and prior years.
Translation reserve
The translation reserve represents exchange differences arising on the retranslation of monetary items which form part of the Company's net investment in a foreign operation.
Other reserve
The other reserve includes the share-based payment reserve, and an amount of $2.9 million which relates to the settlement of an embedded derivative following the early redemption of an associated convertible loan note.
Consolidated Cash Flow Statement
for the year ended 31 May 2011
2011 | 2010 | |
$000 | $000 | |
Cash flow from operating activities Loss for the year |
(4,697) |
(6,107) |
Finance costs recognised in Income Statement | 415 | 866 |
Investment revenue recognised in profit or loss Release of share-based payment reserve | (52) - | - (655) |
Depreciation and amortisation of non current assets | 16 | 207 |
Fair value gain on embedded derivatives | - | (617) |
Net foreign exchange gain | (765) | (568) |
(5,083) | (6,874) | |
Movements in working capital | ||
Increase in trade and other receivables | (9,368) | (17,365) |
(Decrease) / Increase in available for sale assets and inventories | 829 | (1,829) |
Increase in trade and other payables and provisions | 2,565 | 17,523 |
Net cash used in operating activities | (11,057) | (8,545) |
Cash flows from investing activities Payments for intangible fixed assets |
(8,721) |
(35,212) |
Payments for property, plant and equipment | (7,602) | (310) |
Interest received | 52 | - |
Net cash used in investing activities | (16,271) | (35,522) |
Cash flow from financing activities Proceeds from issue of equity shares |
31,596 |
51,624 |
Payment of equity issue costs | (1,856) | (2,193) |
Net cash generated from financing activities | 29,740 | 49,431 |
Net increase in cash and cash equivalents |
2,412 |
5,364 |
Cash and cash equivalents beginning of the year |
6,034 |
711 |
Effects of exchange rate changes on the balance ofcash held in foreign currencies | (21) | (41) |
Cash and cash equivalents end of the year | 8,425 | 6,034 |
Notes
1. Publication of non statutory accounts
The financial information set out in this preliminary announcement does not constitute statutory accounts.
The balance sheet at 31 May 2011 and income statement, cash flow statement and associated notes for the year then ended have been extracted from the Group's 2011 statutory financial statements upon which the auditors' opinion is unqualified.
2. Annual Report
The Annual Report and Accounts and the Notice of the Annual General Meeting for the year ended 31 May 2011 will be available on the Company's website at www.victoriaoilandgas.com.These documents will also be posted to those shareholders that requested it on 4 November 2011. The Annual General Meeting of the Company will be held at 1st floor Meeting Room, Hatfield House, 52-54 Stamford Street, London SE1 9LX, on 30 November 2011 at 11.00 a.m.
For further information, please contact:
Victoria Oil & Gas Plc
Tel: +44 (0) 20 7921 8820
Kevin Foo / Martin Devine
Strand Hanson Limited
Tel: +44 (0) 20 7409 3494
Simon Raggett / Angela Peace
Macquarie Capital
Tel: +44 (0) 20 3037 2000
Jeffrey Auld / Simon Law
Fox-Davies Capital
Tel: +44 (0) 20 3463 5000
Daniel Fox-Davies / Richard Hail
Tavistock Communications
Tel: +44 (0) 20 7920 3150
Ed Portman / Paul Youens