Annual Report & Accounts 2013

 

CHIEF EXECUTIVE’S REVIEW

“The year was one of significant operational activity, with development and production maintenance investments”




Following a year of fundamental change for Petroceltic in 2012 brought about by the merger with Melrose Resources plc, 2013 was a year of integration and delivery and the creation of a business organisation capable of sustained long-term growth. In particular, our acreage in Kurdistan has the potential to achieve material resource additions during 2014, new licence additions in Egypt will extend our already successful business there and we have secured additional high quality exploration acreage in Greece and Italy.

Production and reserves+-

We produced 25,200 boepd during the year, in line with market guidance. The year was one of significant operational activity, with development and production maintenance investments exceeding $94m between Egypt and Bulgaria. We achieved this despite an unscheduled shut-in of our South Batra plant in Egypt for a few weeks in April, during a period of general political and social turbulence in the country. This also caused minor delays to the completion of our LPG plant expansion and compression projects at West Dikirnis and West Khilala, both of which have now been completed. Production for the first quarter of 2014 averaged 26,000 boepd.

Our year end 2013 booked 2P reserves stood at 361MMboe of which 83% related to Algeria and the remainder to Egypt and Bulgaria. These amounts reflected a reduction of some 4MMboe in Egypt, which was primarily related to updated performance data from the South Khilala and West Dikirnis fields. These changes will, however, have a relatively modest value impact since they affect the medium to long term production profile, have a negligible impact on our net entitlement reserves. In Algeria, we have made a revision of 4MMboe to reflect our current view of the most likely development schedule and in Bulgaria, the reserves are materially unchanged with an increase in the Galata field offset by a modest downgrade in Kaliakra.

Algeria – major progress on key development project+-

During 2013, Petroceltic made significant progress towards the development of the strategically important Ain Tsila gas condensate field.

An experienced project team has been established under the leadership of Geoff Stevenson, who was previously responsible for the development of the nearby Ohanet field for BHP Billiton. In parallel, the joint operating organisation which will undertake the execution of the development has been formed with secondees from Sonatrach, Petroceltic and Enel. The invitation to tender for the Front End Engineering and Design (FEED) studies was issued by year end and commercial work on the detailed Gas Sales Agreement is near completion. The FEED study will be a critical input in the finalisation of both the detailed project costs and schedule and, while no formal decisions have been taken to date, first gas now appears more likely to occur in 2018 than the previous estimate of late 2017. Consequently, reserves now reflect this more conservative first gas timing assumption, resulting in a forecast loss of a year’s production at the very end of the 30 year development concession.

The Group also agreed a farm-out of a further 18.375% interest in the field following pre-emption by Sonatrach for a minimum consideration of $160m, and received $26.9m in contingent consideration from Enel, representing the final amount due under the previous farm-out to them. These portfolio management transactions have been a critical part of our overall funding plan for the project.

Egypt – operating effectively through a period of national change+-

2013 was a year of major political and social change in Egypt. However, the oil and gas industry remains central to the economy and Petroceltic continued to demonstrate its ability to operate effectively in the changing environment with government, regulators and local communities. In particular, our team’s strong relationship and regular dialogue with EGPC and EGAS ensured that we managed to secure regular payments for production, as well as two part cargoes, thereby achieving an overall 25% reduction in amounts outstanding during the year. Our production performance continued to be strong, and we were able to support occasional requests from the government to supply additional gas to support increased domestic demand. We also completed a number of important facilities investments which will enhance the value of future production by enabling incremental liquids recovery. As a long-term participant in the country, we took advantage of a period of slightly reduced competition for new acreage to increase our core acreage position by over 300% and build an inventory of new exploration leads and prospects to maintain and expand our business in Egypt for many years to come.

Bulgaria – maximising the value of our infrastructure+-

Petroceltic’s Bulgaria business is centred around the Galata field and its associated infrastructure and discoveries, and our strategy is to maintain and extend the life of this important national asset by bringing existing discoveries on stream and exploring for new reserves in the region. We invested over $40m relating to development in Bulgaria in 2013, with the majority of this capital focused on the sub-sea tie-back of the Kaliakra-1 discovery well, which commenced production in September, and some advance pipe lay work in preparation for the Kavarna East development in 2015. We also drilled the Kamchia exploration well, but this was unfortunately unsuccessful, and we are actively reassessing the exploration potential in the Galata concession in preparation for potential future drilling activity.

Romania – first steps in an emerging exploration province+-

Recent discoveries offshore Romania have materially increased the level of Black Sea exploration activity and proven the existence of a high quality gas province. Petroceltic’s acreage is situated close to a number of these discoveries and contains multiple exploration plays and targets. The region remains comparatively underexplored and consequently each well provides significant new information to enable more accurate ranking and risking of prospects for future activity.

Petroceltic’s licences, EX-27 Muridava and EX-28 Est Cobalcescu, are located in shallow water and were covered with high quality 3D seismic data in 2012. Since then, activity has focused on prospect selection and well planning, permitting and preparatory works, culminating in the drilling of the South Cobalcescu-1 well in late 2013. While this well encountered both gas shows and good quality reservoir, these were not in commercial quantities and the well has thus been abandoned. Despite this, we continue to believe that this acreage has significant exploration upside and we look forward to the remainder of the programme in 2014/15.

Kurdistan – material prospects in a dynamic region+-

Petroceltic has been active in Kurdistan since 2011 and has worked closely with the operator, Hess, to undertake a comprehensive survey and analysis and ranking of prospects on the Shakrok and Dinarta blocks to support the drilling of two exploration wells during the initial three year licence period. Activities in 2013 were principally focussed on rig contracting, permitting, civil engineering and well site preparation works ahead of the spudding of the Shakrok-1 well in August and in preparation for the spudding of the Shireen well on the Dinarta block this year. Both wells are located close to analogous discoveries in adjacent acreage and have multiple exploration targets in a series of stacked reservoir units in the Jurassic and Triassic formations. More broadly, Kurdistan itself is continuing the transition from being an exploration province to creating the infrastructure and commercial arrangements necessary to commercialise the recent material oil and gas discoveries within the region.

On 7 April, the Group announced that the Shakrok-1 well had reached its total depth of 3,538 metres and that a total of 4 Jurassic zones had been selected for testing. To date, two drill stem tests (DSTs) have been undertaken on the Butmah formation with neither flowing hydrocarbons, two further DST’s are planned on the overlying  Adaiyah and Mus intervals with results anticipated in late May.

The Shireen-1 well will spud in late May and has an anticipated drilling duration of approximately 150 days. The forecast drilling duration of this well extends beyond the end of the first exploration sub-period of the Dinarta PSC. Consequently the operator is taking steps to ensure that the joint venture retains its option to progress to the next phase of the licence in an orderly manner.

Italy and Greece – exciting longer term prospects+-

In addition to maintaining a clear focus on current activities, we are also looking forward to our pipeline of high impact exploration activities in 2015 and beyond. In Italy, we continue to work with Eni as operator of the onshore Carpignano Sesia prospect to address local stakeholder concerns with a view to potentially commencing drilling activities in 2015; Petroceltic intends to farm-down a portion of its interest in advance of drilling. Petroceltic also has a highly prospective portfolio offshore Italy, most notably including the Elsa discovery. This year has seen continued progress in preparations for the re-launching of Elsa-2 well project and we are now embarking on a series of consultative discussions with the government and local stakeholders to ensure their views on the project are taken into account.

In Greece, a consortium including Petroceltic successfully applied for the Patraikos block, offshore western Greece, an underexplored area which has a proven petroleum system. The lease agreement for this block was signed on 14 May 2014 following the award by the Greek Ministry of Environment, Energy and Climate Change. During the initial three year concession period, the consortium will undertake seismic acquisition and other geological studies aimed at high grading existing leads and prospects for possible future drilling.

Health, Safety, Environmental and Social (HSES) – always a priority+-

We continually strive to operate safely and to maintain effective policies and procedures that protect our staff, contractors, partners and the communities where we work. We worked particularly hard during 2013 to create a new HSES Management System appropriate for our enlarged business, and expanded our team through the appointment of Stuart Harrower as our Group HSES Manager. Unfortunately, however, the number of lost workday incidents increased during the year. While none of the injuries sustained were of a serious nature, we have taken steps to reinforce our policies and procedures, encourage safe working practices and improve future performance. We have also introduced more detailed reporting of lower level and potential incidents to deepen our understanding of this vital area. During the year we also launched a significant new community development initiative in the village closest to our South Batra plant in the Nile Delta and are providing support to a local school and a community centre containing a medical and dental clinic, weaving facilities, nursery and mosque, in addition to our ongoing educational projects elsewhere in Egypt and Bulgaria.

Investor relations – please keep in touch+-

Petroceltic places a high priority on effective investor relations and on regular contact with both retail and institutional owners and potential holders. We made over 25 separate announcements during 2013, attended 17 investor conferences across seven cities and carried out over 100 meetings with existing or prospective investors. We have also appointed a new Investor Relations Officer, Sarah Sweeney. In recognition of the broader scale of the business, we actively sought to extend the level of research analyst coverage and consequently now have over 10 analysts regularly writing research on Petroceltic, with more initiations expected over the coming months. If you have any queries for us, please call or email IR@petroceltic.com.

Looking ahead+-

Our industry has gone through significant changes in recent years, and there have been few material discoveries by independent oil and gas companies during the period. Despite this, I believe that the oil and gas business and Petroceltic in particular, has the potential to deliver very significant returns to shareholders. If 2013 was a year of integration and the creation of a new Petroceltic business, then 2014 is a year when the potential of a number of our most important exploration prospects will be tested through the drill bit. I look forward to keeping shareholders updated on our progress over the remainder of the year.

Brian O'Cathain
Chief Executive