Thoughts around using a high discount rate

Higher discount rates may be used to reflect the greater risk averseness adopted by a company/project manager. This may also be used as a screening tool, with lower NPV projects rejected. In O&G, and other fields, higher discount rates should be used in conjunction with other tools to evaluate projects.

At the planning level, the use of higher discount rates has its own limitations due to conflicting interests between the project team (e.g. staying in the job) and management.

• Encourages projects with near term and/or higher levels of early production 
• Implication: capex spent on projects with shorter lives at expense of a developing longer life assets; capex is accelerated
• Capex is low-balled to get projects/wells approved
• Implication: actual costs are inevitably higher leading to under-performance of project; capital not deployed efficiently
• Riskier exploration may be undertaken
• Implication: more optimistic view taken on reserves and costs to push projects forward

The above actually leads to projects that are inherently more risky being undertaken and increases the exposure of the business to risk, countering the original intentional of using a higher discount rate!

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Global upstream review - 2014

Transaction activity declined sharply in 2013

• Record M&A in 2010-12, companies switched focus to developing acquired acreage
• Corporate activity weak – NOCs faced hurdles in NAM, public companies weary of overreaching with strict capital discipline and own paper cheap
• In NAM, prime acreage now leased up; valuations mixed as drilling results and understanding of plays have progressed
• Asian NOCs bidding aggressively on global assets as large corporate opportunities limited or more difficult to transact – have seen spending from this group of buyers up

M&A buyer/seller landscape evolving

• Asian NOCs remain largest buyer group
• Chinese NOCs competing with Asian NOCs who are heavily reliant on import and with mandated overseas growth targets
• Pertamina, PTTEP, CPC and Indian NOCs have focus on Africa
• KNOC has, in contrast, spend USD20bn in past 3 years with poor returns and underperformance
• High debt, looking to downsize portfolio

NAM E&Ps largest sellers of overseas assets

• Retrench to NAM, divest wider international portfolio to focus on core regions, capital discipline
• Financial investors/PE increasing O&G footprint outside of NAM

 
LNG market shifted to emerging basins

• Australia market crowded with competing projects and escalating costs
• East Africa attracting huge Asian NOC investment
• East Med gas in early stages, welcoming experienced LNG players
• Arbitrage opportunity for NAM LNG to APAC/Europe, competing with Middle Eastern basins

 
US conventionals spending falls with shift to liquid plays

• Top performing liquids rich plays have grown market share (Eagle Ford, Bakken); Gas plays (Marcellus) have lost market share
•  PE seeks bargains in nat gas; more efficient tax structures; can wait for gas price to recover

Key themes for 2014

• Majors continue to rationalise portfolios amid shareholder pressure for better returns and weak growth/high capex
• E&Ps - pressure for discipline rather than grow (inorganically); reluctance for large corporate deals unless compelling 
• NAM E&Ps expensive, trades with oil despite gas weighting
• Emergence of Asian private buyers - financial, industrial, OFS and private money looking to diversify into E&P (e.g. Brightoil)

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Repsol hit with further delays offshore Namibia: Welwitschia

• Welwitschia prospect being drilled on PEL0010: Repsol (44%*), Tower (30%), Arcardia (26%)
• Welwitschia-1 spud last month
• Due to issues with wellhead housing, well was plugged and abandoned
• Decision made to drill Welwitschia-1A 50m away, which was spud 1 May 2014
• Welwitschia-1A now at 1,879m but problems with blowout preventer system has halted drilling
• Prospect estimated to have multi-billion bbl potential and is being drilled to test the Maastrichtian and Aptian-Albian reservoir sequences

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Libya update: co-ordinated militia attacks against Islamists

• On 16 May, forces loyal to Colonel Haftar attacked the bases of two Islamist militias in the eastern Libyan city of Benghazi: Ansar al-Sharia and 17 February Martyrs Brigade
• Haftar commands the "national army"
• Aim of attack to remove Islamist militias from Benghazi
• Ansar al-Sharia aims to impose Sharia law in Libya
• Allied with 17 February Martyrs, who report to the Government
• In Western city of Tripoli, militias allied with the Zintan Brigade also moved in support of Haftar's actions and attached the General National Congress ("GNC")
• Colonel Obaidi, the chief of staff of the Libyan Army, has said the army will support the GNC and branded the move by Haftar as a coup attempt
• Increasing number of former Libyan Islamic Fighting Group ("LIFG") have taken up senior Government security positions
• LIFG as similar ideology to Ansar al-Sharia
• Two groups rumoured to be working with the Muslim Brotherhood to takeover the governance of Libya
• Haftar and his affiliates have called for further forces to support his cause, but us unlikely to have the funding and resources to oust the Islamist militants; in Western Libya, the Sintan Brigade is also unlikely to have the resources to capture Tripoli - most likely outcome is protracted fighting and stalemate

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Lekoil acquires 40% WI in Otakikpo Marginal Field

• 20 May 2014: Lekoil announced acquisition of 40% participating and economic interest in Otakikpo, a Nigerian onshore Marginal Field; located within OML11
• Vendor: Green Energy
• Consideration: USD7m upfront, plus USD4m contingent on production and ministerial approval
• Lekoil will also fund work programme for re-entry of existing wells and all costs up to production (estimated c.USD67m); this is recoverable from enhanced share (88%) of production cash flow
• Lekoil expects to bring Otakikpo into production within 12-18 months
• Acquisition and work programme partly funded by placing; 70-80% of the work programme expected to be funded through RBL
• 2C estimate: 36mmbbl + 31 bcf (gross)
• Otakikpo has partial 2D and 3D coverage; 3 wells to date, with h/c encountered in multiple intervals; field is close to existing infrastructure
• Lekoil's other assets are:
• 30% economic interest in OPL310 (17.14% WI) which contains Ogo. Partners are Optimum (30% economic interest, 60% WI), Afren (40% economic interest, 22.86% WI)
• 1% in OPL241
• 77.5% in exploration Blocks 2514A and 2514B, Namibia

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Oryx: Appraisal drilling update for Demir Dagh, Kurdistan

• Oryx holds 65% WI in Hawler licence (Operator), KNOC (15%), KRG (20%)
• On 19 May 2014, announced test results for Demir Dagh-3 ("DD-3") and Demir Dagh-5 ("DD-5") wells
• DD-3: all four tests flowed successfully; crude quality similar to that at DD-2 and -4
• Spudded in November 2013, 3km south-east of DD-2
• Will now be completed as producer with DD-2 and -4
• DD-5: Logging data and drilling fluid losses during drilling, only small amount of hydrocarbons recovered to surface
• First production from Demir Dagh Area expected Q2 2014
• DD-6 plus a further 4 appraisal/development wells to be drilled in 2014 to:
• further increase production capacity
• delineate reservoir
• DD-6 well now spudded
• Oryx also holds a 50% WI in Wasit, Kurdistan
• Wasit is close to the super-giant East Baghdad field
• 5 leads identified with 404mmbbl gross unrisked prospective resources
• Seismic has been planned on the licence in 2014

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Petroceltic successfully completes USD100m placing

• Joint book-runners are Davy, HSBC and Mirabaud
• Proceeds will be used to "provide financial flexibility to pursue growth opportunities across Petroceltic's existing portfolio and also through new ventures"
• Dovenby Capital will be a new strategic shareholder, subscribing to USD50m of the placing
• Dovenby Captial is an investment company led by Dato' Ahmad Fuad, a Malaysian oil and gas industry specialist

Update on assets

• Algeria
• Ain Tsila / Isarene PSC - tender for FEED at end 2013, farm-out to Sonatrach (pre-empted) - post farm-out Petroceltic (38.25%), Sonatrach (43.375%), Enel (18.375%)
• Egypt
• Award of El Qa'a Plain, North Thekahm South Idku ratified
• Commenced drilling on South Dikimis in May 2014; gross mean unrisked prospective of 7.6mmboe
• Kurdistan
• Shakrok-1 TD reached in April 2014; four zones selected for testing - 2 flowed formation water and no hydrocarbons, remaining 2 zones still being tested
• On Dinarta licence, preparation for drilling Shireen-1 well, targeting gross mean unrisked prospective of 706mmbbl
• Petroceltic holds 16% WI in the above two licences, Hess (64%*), KRG (20%)
• Other assets in Bulgaria, Romania and Italy

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