Saudi Arabia - joining the dots
A series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy
AIM - Assets In Market
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Iran negotiations - is the end nigh?
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Yemen: The Islamic Chessboard?
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Acquisition Criteria
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Valuation Series
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Thursday, 19 November 2015
CNOOCNexen on the prowl
Monday, 16 November 2015
Premier Oil exits Norway
Premier Oil Norwegian operation Source: Premier Oil |
Wednesday, 4 November 2015
Petroamerica’s call for cash
A sign of the times, another independent raises funding as the low oil price environment continues to hit small producers hard. On 27th October 2015, Petroamerica became the next in line to ask for cash, raising USD20 million in debentures. The expensive cost of the debt at 13.5% reflects the high risk which investors are attributing to the sector, and also that of Petroamerica. The USD20 million will consist of two USD10 million tranches, with the first expected to close on or around 16 November 2015, and the second six months later.
This fund raise comes shortly after the acquisition of PetroNova and raises the question of whether Petroamerica acquired more than it could take on. A review of the PetroNova asset base suggests that the acquisition appears sensible – the CPO-7 and CPO-13 blocks provide existing production with commitment wells not required to be drilled until July 2016 and July 2017 respectively, the Tinigua block has attractive fiscal terms (0% X-factor) although a commitment well is also required by July 2016 and Petroamerica’s Put-2 position is consolidated to 100%.
Petroamerica - PetroNova combined portfolio Source: Petroamerica |
In hindsight, it can be seen that Petroamerica’s woes stem from pre-PetroNova. At the end of 2014, the company had seven exploration wells and seismic commitments and balance sheet cash of USD73 million, out of which the redemption of a c.USD40 million debenture would be required (essentially leaving the company with c.USD33 million to fund its activities). The exploration portfolio is clearly one for a USD100/bbl oil price environment where production cash flows would have funded drilling. However, at current low oil prices, Petroamerica has been loss making – balance sheet cash as at the end of June 2015 was USD23 million; netbacks fell to USD9.1/bbl for the six months ended 30 June 2015 compared with USD54.2/bbl for the same period last year. The company has spent minimal capex in 2015 to date, conserving precious cash and only spending what it needs to maintain or manage production at its producing assets (Los Ocarros and Sur Oriente).
Some of the exploration commitment deadlines have now passed without being met (no drilling has been reported to date), yet no licences appear to have been relinquished. It is expected that Petroamerica are negotiating hard with the ANH to extend these deadlines; most likely, other cash-strapped Colombian E&Ps are doing the same. Petroamerica should be able to keep the lights on for now with the new USD20 million funding going towards satisfying the commitments. However, unless Petroamerica makes a significant discovery which it can bring onstream quickly, it will be stuck between a rock and a hard place as it continues to battle a declining production base, dwindling cash flows and a shrinking cash balance. It would not be a surprise if the company brings in partners to help with some of its commitments or raises more financing. In the meantime, Petroamerica’s case is not unique and there remains a long line of E&Ps that need more cash.
Saturday, 22 August 2015
Petroceltic: A review of Worldview's concerns
Brian O'Cathain, CEO of Petroceltic |
Worldview believe the assets are not being managed properly and that the Ain Tsila development in Algeria could be brought onstream at a third of the cost and much more quickly. In this post, we review the key arguments that Worldview have come out with and provide our view on each of these.
Production decline in Egypt
Worldview notes that 2015 production guidance for Egypt of 16.5 - 18.5mboepd represents a 18-27% drop vs. 2014 levels and views such significant drop to be caused by poor management of the wells. Worldview believe they could boost production by a third within months.
We say: The Egyptian assets are mature and production has been steadily declining for the past four years at a rate of c.16% p.a. from 38mboepd in 2010 to 19mboepd in 2014. Unfortunately since the production guidance given in January 2015, reservoir issues have led to a further decline in production and guidance was revised down at the July AGM to 12-13mboepd. The infill programme is now on hold to allow detailed reservoir studies to be carried out. We also agree with Petroceltic's position that attempts to significant boost production as per Worldview risks damaging the reservoir and wells.
Capex being spent in the wrong places
Worldview say that development capex of USD59mm in 2015 on the Egyptian and Bulgarian assets "do not make sense" given the assets are mature and in decline.
In Egypt, Petroceletic notes that the capex is to be used for production optimisation, whilst in Bulgaria, this is required for a tie-back well given the compartmentalisation of the reservoir leading to lack of communication between pools.
We say: Given the halt of the infill drilling programme, capex in Egypt may come in below guidance at the end of the year. Nevertheless, given declining production, the spend is necessary to maintain production levels and to halt decline through infill drilling and optimisation. Similarly for Bulgaria, this capex appears to be rather essential as opposed to nice to spend.
Unnecessary exploration spend
USD35mm has been budgeted for exploration in 2015 with the bulk going towards Egypt. The company aims to rejuvenate its Egyptian portfolio through the drill-bit and had acquired four new licences between 2013-15. Worldview notes that a better strategy might be to acquire low-risk acreage with proven and undeveloped reserves.
The exploration licences cover onshore (South Idku), deepwater (North Thekah and North Port Fouad) and Gulf of Suez (El Qa'a Plain) acreage.
- South Idku is viewed as low risk with geological similarities to Petroceltic's existing acreage with 400-1,900bcf of prospective resources
- The offshore licences are believed to be an extension of the proven Levantine play where >40tcf has been discovered although water depths reach up to 4km
- The Gulf of Suez block is in an oil-prone area
- Petroceltic: 16 employees/well
- Apache: 9.5 employees/well
- TransGlobe: 6.7 employees/well
- Interest rate above Libor + 8%
- Granting of security over the company's assets or subsidiaries
- giving rights over equity securities
- including any structured elements such as contingent coupon
Thursday, 18 June 2015
Why Kenyan crude will be exported and not domestically refined
Mombasa refinery Source: http://mygov.go.ke/national-treasury-sets-aside-funds-to-buy-essar-stake-in-refinery/ |
Kenya currently has no crude oil production and relies solely on imports to feed the domestic refinery in Mombasa. Aside from feedstock for the refinery, there is no other demand for crude oil in Kenya.
In 2012, domestic consumption of refined products was 73mbbl/d – this was satisfied by 20mbbl/d of domestic production from the refinery and 53mbbl/d of imports. The shortfall in domestic production has been met by imports for many years and this has steadily grown from 22mbbl/d in 2005 along with the increasing demand for refined products. The shortfall suggests that there is scope to increase throughput of the refinery and reduce the level of imports.
Kenya Refined Products Production and Consumption Source: Kenya National Bureau of Statistics, Kenya Petroleum Refineries Limited, OGInsights |
The refinery has a design capacity of 80mbbl/d, but has continually operated at c.40% of capacity. This low utilisation is due to a number of reasons including regular utility supply outages, limitation on size of cargoes it can accommodate, low profitability (some batches of processing are loss making), limitation on product slate and general inefficiency of the refinery. The refinery has a reformer and a catalytic hydro-treater, but no upgrading units; the refinery’s two complexes were commissioned in 1963 and 1974 with minimal investment since. The profitability of the refinery was further hit in 2013 when the incoming government removed the price protection previously provided to the refinery, making it uncompetitive relative to refined product imports.
The refinery’s current configuration is designed to handle heavy crude grades from the Middle East. In 2012, a refinery upgrade project was considered by the then owners (50% Essar Energy, 50% Government of Kenya). The plans included changing the configuration to handle lighter crudes and would incorporate the ability to process Lokichar crude. However, the $1.5bn cost of the upgrade was deemed to be too expensive and uneconomic; as a result the upgrade was abandoned, following which, Essar Energy decided to exit the joint venture. In December 2014, Essar Energy sold its 50% interest in the refinery to the Government of Kenya.
The refinery has been mothballed since mid-2013 and now acts as a storage facility for imported refined products. All demand for refined products are now met by imports. There are currently no plans to restart the refinery, and without further investment, it is unlikely the refinery would be able to operate profitably. Until there is a plan and willing financing to upgrade the refinery, the destination for Lokichar crude is most likely to be the export market - in its current state, the refinery configuration is not designed to process Lokichar crude.
In a scenario where the refinery was upgraded and being wholly fed by Lokichar crude, then feedstock requirements could reach c.100mbbl/d by 2020 in order to fully meet forecast domestic demand for refined products (96mbbl/d estimate by Kenya Petroleum Refineries Limited). However, this scenario is deemed to be highly unlikely in the foreseeable future.
Wednesday, 17 June 2015
Colombia calling: Petroamerica acquires PetroNova
Cartagena, Colombia Source: http://www.backtrackers.nl/colombia/ |
The Colombian E&P landscape is characterised by a few IOCs with 100mmbbl+ of reserves (e.g. Repsol, Chevron, Occidental) and a large number of independent E&Ps. The smaller end of the scale is dominated by many small players with more than 25 companies with less than 2.5mmboe of reserves.
Thursday, 11 June 2015
The Apache Egypt treasure map
Source: Houston Geological Society, HGS |
Source: OGInsights |
Source: OGInsights |
Source: Apache Egypt EIA https://www.miga.org/documents/Apache_Egypt_2004_Egyptian_Oil_and_Gas_Activities_EIA.pdf |