Development Plans for Remediation Facility, Mexico

Northcote Energy Ltd / Index: AIM / Epic: NCT / ISIN: VGG6622A1057 / Sector: Oil & Gas

29 July 2015

Northcote Energy Ltd ('Northcote' or 'the Company')

Development Plans for Remediation Facility in Tabasco Mexico

Northcote is pleased to announce that, alongside its Joint Venture partner Gaia Ecologica S.A. DE C.V ('Gaia Ecologica'), it has formed the joint venture entity, Mayan Drilling Fluids SAPI de CV ('the JVCo') through which the development of the Tabasco remediation facility ('the Facility') will be undertaken. This agreement follows the successful purchase of the 22 acre property, which will host the joint ventures first facility in the State of Tabasco, Mexico. The Facility will recycle oil cuttings and provide other oil field services to both onshore and offshore wells.

Highlights

· Formation of JVCo and the commencement of operations in Tabasco is in line with the Company's strategy to invest in cash generative opportunities in the Mexican energy sector

· Gaia has a long track record of providing services in Mexico to the oil & gas industry sector, including oil field waste remediation, making it the ideal partner due to its ability to manage operations from the initial build and commissioning through to full scale operations

· Phase 1 will see the JVCo build and commission the Facility within 6 months, at an estimated cost of less than $1million

· The Facility will be capable of operating 24/7, handling in excess of 700 tonnes per day, with the potential to expand significantly as demand increases over time

· The JVCo partners contemplate that the Facility will operate a pricing model in line with similar plants in South Texas where prices can range from $60 to $100 per ton of waste processed, demonstrating significant revenue potential

· Northcote is the funding partner, owning 51% equity in the JVCO, and Gaia is the operating partner, owning the remaining 49%

· Northcote will fund 100% of the up-front expenditures associated with the implementation of Mayan's business plan and shall be entitled to 85% of distributable cash flow until pay-out plus a 9.0% internal rate of return on its investment

o Following pay-out profits shall be distributed based on the relative ownership.

· Juan Osmon, President of Gaia, will serve as President of Mayan Drilling Fluids with Randall Connally serving as Northcote's representative on the board

Northcote Managing Director Randall J. Connally said, "We are very excited to be pushing forward with implementation of this business opportunity. In this environment of low oil prices I really like the fact that this plant will serve to increase and diversify Northcote's revenue not only because the revenue is not directly linked to oil price but also because the platform can remediate waste from a wide range of sources not just oil and gas. Additionally, we are pleased to play a role in maintaining a clean environment for the Mexican people and the JVCo provides Northcote's shareholders with exposure to a platform that is strong today and has excellent upside potential to scale-up as drilling activity in Mexico increases over time."

Northcote Vice-President, Mexico, Abraham Achar said, "The formation of the JVCo signals the start of an exciting period of development for Northcote. We expect cash flows to be achievable as soon as six months after the commencement of work at the site, on which we will provide updates as soon as practicable. I am confident that this Facility is well situated to benefit from the re-opening of Mexico's oil and gas sector and based on my experience on the ground, will focus on securing further opportunities with similar attributes."

About the Facility

Focused on minimising upfront cash requirements, and to ensure that the Facility fits industry demand for its services, the JVCo has a development plan that will mean the site should start generating cash flow immediately upon commissioning. The Facility is designed to be easily scalable should Tabasco county see the increase in drilling activity that is anticipated by management. Furthermore the products and services offered by the Facility can be expanded to include handling waste from off-shore drilling platforms and eventually be expanded to recycle the hydrocarbons and water recovered in the remediation process to manufacture drilling fluids and drilling muds.

Mayan Drilling Fluids will be engaged in environmental remediation services, which will include, but not be limited to, the remediation of oil based mud drill cuttings. The Facility's initial capacity will be in excess of 700 tons per day with the potential to expand as demand increases over time. The pricing model being implemented by Mayan Drilling Fluids contemplates pricing in-line with similar plants in South Texas where prices range from $60 to $100 per ton.

Geographically the Facility's location in the city of Comalcalco is in the heart of on-shore oil and gas activity between the city of Villahermosa, Mexico and the nearby port facility. It is anticipated that the location will give Mayan Drilling Fluids a competitive advantage by reducing the distance that oil and gas operators will need to transport their waste for remediation. Longer term the proximity to the port facility will allow for potential addition of barge service to treat cuttings from offshore platforms in the shallow water Gulf of Mexico and the Company contemplated recycling oil for use in manufacture of oil based drilling mud.

Additionally, the Facility's location allows for efficient use of capital as Mayan Drilling Fluids will not have to own large acreage to hold remediated rock and dirt. Output not sold to support major road and construction projects is expected to be sold as fill for quarries in the vicinity in line with the government's specifications. The JVCo is on track to secure all necessary permits during the construction phase.

About the JV

Mayan Drilling Fluids SAPI de CV has been established for the purposes of developing a remediation facility in the state of Tabasco, Mexico. Northcote is the funding partner and holds 51% of the JVCo and Gaia holds the remaining 49% as the operating partner. Gaia has been involved in the remediation business including as an owner of a facility in the State of Tamaulipas that treat contaminated dirt and waste water using processes similar to those contemplated in the joint venture facility in Tobasco. Juan Osmon, President of Gaia with over 17 years' experience in the oil and gas industry in Mexico, will serve as President of Mayan Drilling Fluids. Randall Connally and Juan Osmon will jointly serve on the Board of Directors.

The estimated capital cost of Phase 1 of the project is estimated at US$1 million. Northcote is the funding partner and is responsible to finance the JVCo, as funding partner Northcote will earn a 9% annual return on its financing of the JVCo that will be repaid out of distributable cash flows and the JVCo will distribute 85% of free cash to Northcote until this funding, inclusive of the 9% return, has been re-payed. Thereafter it will be split according to equity ownership. 

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For further information visit www.northcoteenergy.com or contact the following:

Notes:

Northcote Energy Limited is an entrepreneurial energy company with diverse interests. The Company combines a portfolio of US exploration and production assets in Louisiana and Oklahoma with the development of new business opportunities in the US and also in Mexico, such as its participation agreement with MX Oil PLC and agreement with Gaia Ecologica as well as Indonesia via a strategic relationship with CEB Resources.