5 May 2010 07:00
Victoria Oil & Gas Plc
('VOG' or 'the Company')
(AIM: VOG)
Chairman's Letter to Shareholders
The following letter to shareholders in the Company has been released today.
Dear Shareholder,
Once again, it is my pleasure to review your Company's activity over the last few months. It has been a period with some major challenges but has resulted in the delivery of two excellent gas and gas condensate production wells in Cameroon that will underpin VOG's cash flow for several years.
Logbaba, Cameroon
Without doubt, the events and activities at Logbaba over the last six months have been the most important in VOG's history.
We have faced and overcome some incredible challenges involving technical, operational and financing issues that at times have threatened the very existence of our Company. It is worth bearing in mind that one year ago, Logbaba was just a site in a region where no onshore drilling has taken place since the early 50's, with no available infrastructure. Then, our budget to drill and complete the two wells was approximately $24 million and we anticipated that this would be done by the end of 2009. In fact, the total cost of the two wells and support in Cameroon has been about $49 million and only recently have we completed the second well.
What caused this? When wells are more complex and difficult to control than predicted, and there is a chronic lack of oil and gas infrastructure in the country, at daily costs in excess of $200,000, cost overruns rack up fast. This was compounded by drilling progress being far slower than expected due to the need for heavier mud weights. The learning curve of operating an onshore rig in Cameroon for the Company and its contractors was steep and expensive. However we have operated for more than 300,000 man-hours safely and without a lost time incident. We have completed two development wells and both wells have exceeded our expectations and resulted in very significant gas and condensate discoveries.
We are almost at home base. What has been achieved is a tribute to our management and technical teams' determination to make VOG into a successful E&P company.
Let's talk about some details. Well La-105 was completed at the beginning of the year and put on test while our second well, La-106, was being drilled. What we wanted to see was confirmation that the well could yield at least enough gas to satisfy the demand of the first industrial customers in the city of Douala. The industrial market in Douala currently consumes the equivalent of 15 million standard cubic feet per day (MMscf/d) in high-cost liquid fuels and we have commercial agreements in place to service around half of this market at a price of US$16 per thousand standard cubic feet (mcf) of gas.
The testing programme, therefore, was simple: to open up the gas-bearing horizons in turn from the deepest to the shallowest until we were comfortable that a minimum production level of 8 MMscf/d of gas could be sustained. The test commenced at a depth of 8,500 feet in zones that had never been tested before and over two weeks we added production horizons up to a depth of 7,005 feet (the Logbaba D Sands). Far from being marginal, as we had expected, these lower zones flowed at rates in excess of 55 MMscf/d of natural gas and 1,000 barrels of condensate (together the equivalent of approximately 10,000 barrels of oil). In fact, flows at the beginning of the test were considerably larger with theoretical Absolute Open Flow (AOF) capacity of 90 Mmcf/d measured.
Furthermore, due to the encouraging initial results, we devoted significant additional rig-time and expenditure to subsurface data acquisition to better evaluate the reservoir rock and fluid properties. This and the application of the latest technology are enabling VOG to realise the true reservoir and well potential at Logbaba.
Based on these tests, we know that La-105 will satisfy the initial demand from our industrial customers. Furthermore, significantly more production capacity remains down-hole with the potential for hydraulic fracturing to increase the yield from the lower sands, while the main productive sands (the Logbaba A - C sands) will not need to be opened for some time.
Meanwhile, the drilling of La-106 was completed on 17th April to a total depth (TD) of 10,509 feet. Its target had been revised following the passive seismic survey results and the well was eventually drilled deeper than planned because of the presence of sands at lower levels. We have delineated in excess of 300 feet of gross pay in multiple gas bearing sands.
Installation of the well completion equipment is underway and the testing will commence after the rig has been demobilised. The results of testing will be released when available and presented to RPS Energy, our independent reserve auditors, who should produce a full reserve report for both wells by July 2010. This has been a very successful campaign and we are expecting a substantial increase in Reserves and Resources from previously published figures of about 100 Bcf of Proven plus Probable gas and condensate equivalent.
It is, of course, very exciting to see the potential of the subsurface surpassing our expectations, but don't forget that Logbaba is a unique project for a company of VOG's size as it also gives the opportunity to own the infrastructure to deliver the gas to the customer. Although not being particularly challenging in engineering terms, the downstream part of the project is a hugely significant step for us and Cameroon. Around 85% of the consumers, with whom we have signed initial commercial agreements, lie within a 10 kilometre radius of our well site. The course of the pipeline route is being chosen to minimise its impact on communities and the environment; which has the added advantage of enabling us to install it in approximately 2-3 months using a smaller construction team.
At present, very few gas pipelines exist in sub-Saharan Africa and so the massive potential of this cheap and clean energy source is being lost. The Government of Cameroon, however, is leading the way in prioritising the exploitation of its natural gas resources for industrial and power use, and, as the only onshore gas discovery in the country, Logbaba is at the forefront of this initiative. For VOG, the construction of basic processing and transmission facilities to provide clean gas to local factories will mark the transition of your company from an explorer into a producer. When we are able to meet our minimum target of selling 8MMscf/d at $16/mcf, which I would add is over three times the price of US Natural Gas at present; this will provide significant cash flows.
Conceptual engineering for the gas production facilities and pipeline at Logbaba is complete and this has confirmed our expectations as to the feasibility of the project. We anticipate first gas delivery to customers in Q4 2010. The original budget for the gas plant and pipeline was $25-30 million to be financed by project or debt finance. Most importantly, our engineers have been looking at all possible ways to reduce this cost and I am delighted to tell you that some major breakthroughs have been made. These have resulted from considerable "out of the box" thinking and we believe that we can install and commission a fully functional gas plant and pipeline to meet current and reasonable future demands for much less than the original budget. Detailed engineering and costing will confirm the design and figures and the amount of debt finance required will therefore be considerably reduced.
We are very pleased with the support for the project from the various state bodies and in particular SNH, the state oil company and having submitted the application for our exploitation licence, we expect this to be granted in the third quarter 2010.
Once the project is generating cash flow, larger facilities producing more gas can be constructed. I personally expect that the demand for our gas for not only industrial customers but also for power generation and compressed natural gas will vastly exceed historical projections.
West Medvezhye, Russia
In Russia, exploration activity has continued at our West Medvezhye gas and condensate field (West Med). Our aim is to collect as much information on unexplored areas of the massive field as possible to ensure that future wells will successfully supplement our existing discovery at Well-103. A large section in the north-eastern section of the licence has been selected as this is the area where Gazprom's super-giant Medvezhye field thrusts into our block and therefore the potential for stratigraphic trapping is the highest. Two surveys have been commissioned to analyse this area: passive seismic spectroscopy; and surface gas tomography. Both are simple and efficient methods of using natural data sources to indicate the presence of subsurface hydrocarbons and both have provided effective data on West Med in the past. Additional survey profiles were selected in the Western area of the Block to evaluate the potential of some already mapped anomalies.
If conditions remain favourable, the surveys should be completed by the end of May and we would hope to have the results available in the second half of this year. Depending on the results, it could then be feasible to nominate target locations for new exploration drilling and acquire new 2D seismic data over a specific prospect prior to drilling. Our licence requirement is to drill two new wells by the end of 2012 and so it is important for us to use the time that we have available wisely, given the high demands that exploration in the far north places on our human and financial resources.
The importance of this year's work at West Med to the future of VOG should not be underestimated. Logbaba represents the gateway to cash flow, but West Med is still a company-maker. We also need to spend money on this property to meet the licence conditions.
Falcon Petroleum Limited
As we make the transition into a producer, maintaining upside potential beyond Cameroon and the FSU is very important. With this in mind, we are pleased to extend our option over the shares of Falcon Petroleum. Falcon has the rights to over 45,000 square kilometres of exploration acreage in Ethiopia and Mali, where major producers are already active. Falcon represents a low-cost entry into two exciting hydrocarbon regions and after an independent assessment of the asset potential and its value, we will be looking to press ahead with an acquisition later this year.
Company Financing
Many shareholders, including myself, have concerns about dilution and in the last year the Company has issued about 926 million shares to raise about $53 million. Shareholders have a valid and important point and there is no doubt that this dilution has helped cause a rather unsatisfactory share price performance.
I mentioned the costs and time delays of Logbaba above and as these unfolded the Board and its advisors looked very seriously at all of the financing options available to us. In simple terms we were in a situation that demanded continuation of the project at all costs and consequently several equity issues were needed to ensure that the two wells were drilled at Logbaba and momentum was maintained. Stopping a $200,000 per day drilling locomotive was neither sensible nor possible and we had to ride the beast to the line.
Because of excellent management and the determination of all of us to succeed, we have now delivered safely two production wells at Logbaba. These wells will underpin VOG's cash flow for several years.
Luck had nothing to do with this success and whilst issuing new VOG shares at a price much below fair value was very painful, to do nothing or delay a decision would have been worse. Fortunately the high daily costs of drilling the wells are now behind us.
Yes, we will issue new shares for cash in the future as such capital is the lifeblood of all growing companies. We have some very attractive projects and until cash flow from Logbaba can cover our development costs we will pursue all financing options to avoid dilution. I want to assure shareholders that new share issues will only be approved by the Board if necessary to maintain schedule and when all other options have been eliminated.
General Meeting
With the above in mind, we are seeking your approval to refresh the authorities granted at the last Annual General Meeting to allot new equity securities in the Company. This approval will give us the vital ability to continue to undertake transactions, such as new acquisitions, which would provide value accretion and not dilution. We also have obligations under the Bramlin deal to allot shares on issue of the exploitation licence.
It is this goal of further growth that has led your Board of Directors to call a General Meeting on Wednesday 12th May 2010 at 11.00 am and a formal notice has been posted to shareholders and is available from the Company's website at www.victoriaoilandgas.com.
I should like to thank all shareholders for their patience and support and I believe that we shall see some considerable demonstration of our success in the next months.
Yours sincerely
Kevin Foo
Chairman
A copy of this letter is available on the Company's website at www.victoriaoilandgas.com
For further information, please contact:
Victoria Oil & Gas Plc
Tel: +44 (0) 20 7921 8820
Jonathan Scott-Barrett / Kevin Foo
Strand Hanson Limited
Tel: +44 (0) 20 7409 3494
Simon Raggett / Angela Peace
Fox-Davies Capital
Tel: +44 (0) 20 7936 5220
Daniel Fox-Davies / Oliver Stansfield
Conduit PR
Tel: +44 (0) 20 7429 6601
Jonathan Charles / Ed Portman