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Chairman’s Letter to Shareholders

16 Aug 2012

Chairman’s Letter to Shareholders


Logbaba Highlights:

  • Continuous production operations at Logbaba of 1.0 mmscf/d
  • Focus on installations and new customers around the existing Phase 1 pipeline before completing Phases 2 and 3
  • 17 thermal Gas Sales Agreements (‘GSAs’) signed
  • 13 on-site Power Generation Proposals offered totalling 29MW (5.5mmscf/d)
  • Two Letters of Intent (‘LOIs’) signed for power generation for 2012
  • Total gas production forecasts revised to reach 5.0 mmscf/d by the end of 2012
  • Logbaba operations expected to be cash flow positive in October 2012
  • VOG Group expected to be cash flow positive in November 2012

West Medvezhye Highlights:

  • Early Production Scheme at West Medvezhye approved by Ministry of Natural Resources
  • Award of the drilling design project to CJSC Tyumennipineft
  • Two well drilling programme to be postponed until Q4 2013
  • Farmout partner being sought to facilitate a free carry for VOG through the next drilling programme

Corporate Highlights:

  • Large senior secured revolving credit facility mandated to top-tier investment bank
  • Financial close expected in the fourth quarter of 2012


Dear Shareholder,

It is my pleasure to provide you with an update of your Company’s progress since VOG became the first onshore gas and condensate producer in Cameroon supplying the industrial market in the city of Douala.

Logbaba, Cameroon (95% working interest)

Since commissioning the initial 4km section of pipeline and making our first delivery of gas to the first customer located on the Magzi Industrial Estate in December 2011, momentum has continued to build and the Logbaba Project is now substantially de-risked. We now have continuous production operations, delivering gas in full compliance with specification and a considerable period of production ramp-up to look forward to.

On 9 July 2012, further to the completion of our Phase 1 pipeline to and around central Douala, we announced that, continuous production had commenced. Three thermal customers were connected, with a combined demand of 0.7 million standard cubic feet per day (mmscf/d), satisfying the minimum throughput conditions of the gas production facilities. This was a milestone for the Company and notably, the first ever commercial application of indigenous gas for the Republic of Cameroon.

We currently have four thermal customers connected with current production of 1.0 mmscf/d. I am also pleased to announce we have recently signed another two thermal GSAs bringing the current total to seventeen customers. The Company anticipates aggregate thermal gas sales of approximately 2.5 mmscf/d by December 2012.

We have gained valuable experience in respect of customer conversion requirements and in-country contractor competencies. One has to remember that this is a new energy source in Cameroon. This has led to some implementation issues as no one has ever used natural gas as a fuel source in the country prior to our project and therefore our process has incurred some delays, but we are confident that these issues have now been resolved.

The client’s contractual responsibility is downstream of the Pressure Reduction Metering Station (PRMS) but we have a commercial (gas supply) interest and a duty of care to ensure this is done in a safe and robust manner. We have been confronted with supply chain problems and a lack of local knowledge by local contractors on how to undertake pipe work, burner and boiler specification, construction work and project management. This is understandable as most local companies have an organisational structure that is set up to manage their existing operation and not necessarily to undertake new design and construction work.

Consequently we have taken a greater role in assisting clients to connect to our gas which has cost the Company time and money. Notwithstanding this, supplying gas and installing equipment “From Well Head to Burner Tip” is, we feel, a unique achievement.

The Company has taken the decision to re-schedule the pipeline expansion to the west and east of central Douala until sufficient funding from a bank or financial institution is in place to fund the development and to minimise further equity funding.

This quarter, we have focussed on both thermal and local on-site power generation around the existing Phase 1 pipeline. I am pleased to say that initial power discussions with customers around the pipeline have been very well received. We have delivered 13 Power Proposals to customers detailing pricing and solutions for optimised delivery of power. These offers constitute a total of 29MW which is equivalent to 5.5 mmscf/d of gas at the peak. Last week, two proposals progressed to signed Letters of Intent (‘LOI’s), one of which was with Biopharma (see Note) and we anticipate many more in the coming weeks. In total, we anticipate total production of 2.5 mmscf/d of gas for on-site power generation by the end of the year.

We are offering customers two distinct alternatives:

a)     Gas supply for their own localised generators at $16 per mmbtu

b)    A complete power solution whereby RDL will own the plant, sell power and provide Operations and Maintenance contracts to the customer.

With regard to the second option, pricing will be individually tailored to each customer depending upon their specific requirements but will remain competitive with our thermal gas supply pricing. For certain customers, who need power more urgently, we will provide temporary rental units for a short duration. We are ready to do this to showcase the solution, which we believe will lead to longer term benefits for the Logbaba Project. In all power scenarios, we are requiring ‘take or pay’ provisions to ensure the plant cost is recouped. Some of our largest customers, including a large cement plant, are requesting and have been offered, five year plus take or pay contracts.

I have mentioned in previous letters that existing power solutions in Cameroon severely hamper local industry. It is without a doubt the most important issue both economically and politically in-country. RDL is in the enviable position of being able to market and offer total energy solutions to our customers. In time, as this embryonic gas market develops, our individual thermal and power solutions will migrate to Combined Heat and Power (CHP) technical solutions which will offer up to 80% conversion efficiency representing increased and substantial savings for the customer.  Indeed, we are already in discussion with a client within the Phase 1 pipeline area for a CHP solution and we look forward to demonstrating the increased commercial advantages this technology has to offer.

Following our re-appraisal, the Company now anticipates the following aggregate demand profile by month up to the end of the calendar year.

Schedule 1 – Aggregate Month End Gas Demand Forecast until December 2012 (mmscf/d)












The Company is therefore revising its year-end sales target to 5.0 mmscf/d from the previous target of 8.0 mmscf/d. This is principally aimed at preserving capital but the decision to re-schedule the pipeline expansion provides more time to get customers converted to be able to take gas, which our recent experience shows is necessary. This change also reflects conversion bottlenecks of customers’ facilities which we have experienced rather than demand constraints. You will note a significant increase in the last quarter of the year due to the lead time for procuring, installing and commissioning gas fired generators which will begin to come on line in October this year.

We have recently hired new sales people in-country that are focussed wholly on marketing and sales of gas as we recognised that our existing resources were being used on customer conversions and existing account and relationship management. This new team is working well, evidenced by the number of Power Proposals offered and two new thermal GSAs. Notably, we have now identified a total of 44.5 mmscf/d of peak gas requirement including thermal and power. It is up to us to turn these significant power leads into contracts but I am quite confident that our sales numbers will increase rapidly over the course of the year.

I am very optimistic about the future of the Logbaba Project and it remains a project that I am proud to be involved with. This year has provided us with some challenges as well as excitement as we, our customers and the host government dealt with the application of a new energy source and the resultant technical, permitting, social and economic challenges.

We are confident that given the existing line of enquiries of more than 40 mmscfd and our development pipeline, we will be at or near our production forecast of 20 mmscf/d by the end of 2013 and at 5 mmscf/d by the end of this year. I also anticipate the project will be generating positive cash flow for the Group by November this year.

West Medvezhye, Russia (100% working interest)

The West Medvezhye (‘West Med’) block is located near the Yamal Peninsula, North West Siberia, in one of the most prolific gas producing areas in the world, adjacent to the giant Medvezhye and Urengoy fields. The Company holds an exploitation licence for West Medvezhye covering 1,224 km2, and has a discovery well, Well 103, with ‘C1 plus C2’ reserves of 14.4 million billion barrels of oil equivalent (‘boe’) under the Russian classification system.

Over the course of the last three years, we have been pursuing an integrated exploration and appraisal work programme incorporating seismic and advanced direct hydrocarbon technologies. As a result, last year we were able to announce an increase in best estimate prospective resources from 1.1 billion boe to 1.4 billion boe from the work carried out by Mineral LLC, (‘Mineral’,) independent reserve auditors.

Following these positive results, in February 2012, the Company presented its drilling candidate locations for the next five well locations to the Russian Yamal district authorities. The drilling design contract for these planned wells was awarded to CJSC “TjumenNIPIneft” in March 2012. The wells will target the Jurassic discovery horizons successfully encountered by Well 103 and also new hydrocarbon potential horizons in the Achimov layers identified as part of the study carried out by Mineral. The scope of work includes detailed well design as well as studies of the terrain, soil mechanics, access and ecological issues.  

In January 2012, VOG contracted an experienced local company, LLC Nefteproject, based in Tyumen, to develop a project plan for an early production scheme for the West Med discovery area. This project was completed and the findings were reviewed and discussed in a workshop by VOG’s technical / commercial team at the contractor’s offices in Tyumen. The scheme was agreed by the Company in April 2012 and the final report was submitted to the Russian Ministry of Natural Resources in May 2012. This report for the development of an Early Production Scheme was approved by the Russian Ministry earlier this month.

In April 2012, our technical and commercial teams held meetings in Tyumen and Novy Urengoy with drilling contractors, service and equipment providers for the planned wells, and with trading companies to explore various marketing and export options. These meetings were very positive and the Company is now working on finalising contractors for its early production scheme.

The current estimate for completion of the drilling design project which includes public consultations and permitting consents is not estimated to be complete until February 2013. This will not give the Company sufficient time to mobilise drilling operations in the coming winter period. Therefore, the Company now anticipates postponing its two well drilling programme until the winter of 2013/2014.

To preserve the cash generated from Logbaba, we plan to farm down a portion of our interest in West Medvezhye to facilitate a free carry for the next drilling programme. There has been some exciting progress at West Medvezhye this year but market conditions to date have not enabled us to secure fair value for the asset for a corporate deal. We will carry on pursuing strategic options to monetise this asset which has significant potential.  


Corporate, London

We have witnessed a very difficult and volatile period for the markets in recent months, the worst I have seen in my career. I understand and share your frustration with our share price but I believe that we have passed the inflection point and with continuous production from Logbaba and positive cash flow expected in November this year,  we can now see the huge upside that this Company offers.

In the second quarter, the Company raised £3.15 million via a placing and drew down an extra $1.2 million of loan finance under the $8 million loan facility with YA Global Master SPV Limited.

To preserve capital, the Company has re-scheduled pipeline construction of Phases 2 and 3 and has set about a strategy of implementing gas and power delivery around the existing Phase 1 pipeline only. The Company has made every effort to keep further equity dilution to a minimum while bringing the project to a self sustaining level where future expansion can be financed by debt and cash flow from operations.

On 31 July 2012, the Company signed a mandate letter with a top tier bank for a large senior secured revolving credit facility. We are also working with a US fund as an alternative strategy to deliver a similar facility. Financial close is expected in the prior to year-end 2012. This facility will allow us to complete all our expansion plans and accelerate the implementation of our power strategy.

I am confident our Company’s maturity level and investment profile will be significantly enhanced by the end of the year. The markets will eventually improve but in the meantime, we will continue to market the VOG story and look to raise awareness with institutions and funds about the value proposition and exciting outlook both in Cameroon and Russia.

I look forward to updating you in due course and continue to thank you for your shareholder support.


Kevin Foo


For further information, please contact:

Victoria Oil & Gas Plc -                                            Tel:  +44 (0) 20 7921 8820 

Kevin Foo / Martin Devine

Macquarie Capital (Europe) Limited -                       Tel: +44 (0) 20 3037 2000

Jeffrey Auld / Steve Baldwin / Nicholas Harland

Fox-Davies Capital -                                                Tel:  +44 (0) 20 3463 5010

Daniel Fox-Davies/ Richard Hail

Strand Hanson Limited -                                          Tel:  +44 (0) 20 7409 3494 

Simon Raggett / Angela Hallett

Tavistock Communications -                                    Tel:  +44 (0) 20 7920 3150

Ed Portman/ Simon Hudson


The new LOIs for power do not have a confidentiality clause as per the terms and conditions of our GSAs and Biopharma have given us permission to release their name. We are working with our existing GSA customers to seek permission to disclose their names. We will do this when all existing customers have agreed to be identified.

Background Information on Victoria Oil & Gas Plc:

Victoria Oil & Gas Plc is an independent oil and gas exploration and production company with projects in Africa and the FSU. The Company's principal assets are the Logbaba gas and condensate project in Cameroon and the West Medvezhye project in Siberia, Russia. Logbaba is located in Douala, the economic capital of Cameroon. The field was discovered in the 1950s when all four exploration wells drilled at the time encountered gas. The Company drilled two successful development wells in 2009/10 and was awarded an Exploitation Licence in April 2011.

The Logbaba proved and probable reserves of 212 billion cubic feet (‘Bcf’) are sufficient to supply an average of 30 mmscf/d for the next 20 years to industrial customers. Under current management projections, the Company forecasts industrial gas demand to rise to 44 mmscf/d by the end of 2014. In the longer term, as further reserves may be proven, gas may also be supplied to large gas fired power stations connected to the grid, with either VOG investing in an independent power producer joint venture or selling the gas to third parties. The Company has signed a multitude of gas sales agreements with industrial customers to serve their energy requirements and anticipates in excess of 40 customers over the medium term.

West Medvezhye is situated in the prolific Yamal-Nenetsk hydrocarbon region in Siberia. An independent audit, carried out by Mineral LLC in 2011, estimated prospective resources for the area of over 1.4 billion barrels of oil equivalent (‘boe’). The Company also has a discovery well, 103, with C1 and C2 reserves, independently assessed under the Russian classification convention of 14.4 million boe as approved by the Russian Ministry of Natural Resources.

Development studies are in progress to commercialise the Well-103 discovery and prospective resources and a detailed well design study for the upcoming drilling campaign has commenced.

Chairman’s Letter to Shareholders145.54 KB