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Chairman's Letter to Shareholders

22 Jul 2010

The following letter to shareholders in the Company has been released today. 

Dear Shareholder,

It is my pleasure to review your Company's activity over the last quarter.

Highlights
  • Second well, La-106 is flowing gas from the Lower Logbaba sand intervals. Well currently being flared to clean-up ahead of testing
  • First gas on schedule to customers in December 2010
  • Significant reduction in anticipated capital expenditure for achieving first gas from US$30 million to US$7 million
  • Gas processing plant contract awarded, with pipeline contract to be awarded shortly
  • Updated gas marketing study indicates significantly higher demand - binding contracts being signed.
  • Logbaba Exploitation Licence pending with full support of Cameroon State Oil Company (SNH)
  • Reserves upgrade by independent engineers expected in Q3 2010
  • Initial findings of Gas Tomography Survey in West Medvezhye indicate three new structures
 Logbaba Project, Cameroon

In my last quarterly update, I commented that the events and activities at Logbaba, during the preceding six months, had been the most challenging and important in the Company's history. We can now reflect on the fact that VOG has successfully drilled and completed two gas wells, La-105 and La-106 resulting in substantial gas and condensate discoveries. These were the first wells drilled onshore in Cameroon for over fifty years and we are very proud of this achievement.

For our next objective to deliver first gas by the end of the year, the key tasks are:

  • Complete testing of well La-106 and confirm expected flow rates of gas and condensate
  • Obtain remaining government and local authority consents and approvals
  • Procure, install and commission the production facilities and pipeline to deliver gas
  • Complete marketing of gas and finalise purchase and sale contracts

Testing of La-106

Shareholders may remember that the perforated interval tested in La-105 flowed at rates of 55 million standard cubic feet per day (MMscf/d) and 1,000 barrels of condensate per day which was beyond our expectations and well above our anticipated initial daily customer demand of 8.5 MMscf/d.

On our second well, La-106, drilling operations were concluded and the rig was released on May 11th 2010. However, we experienced severe delays in the transportation and delivery of specialist high temperature equipment and explosives to perforate the well. Eventually, La-106 was perforated in the bottom intervals of the Lower Logbaba Sands at the end of June.

La-106 has been flowing gas as part of well clean-up operations since early July. However we will require additional high temperature equipment and firing heads to allow us to complete the perforations ahead of flow testing. We expect this equipment to be delivered within the next four weeks.

The quality of the sands found in the Lower Logbaba formation in La-106 is much better than expected. The sands to be tested are over 600 metres deeper than any other productive sands flow tested in Logbaba and we expect the testing to prove up some of the deeper potential that exists in the field. Once we have completed testing on La-106, we anticipate updating the market with a significant increase in reserves and resources which will be independently assessed by external engineers.

With two production wells now completed and the potential of the subsurface exceeding our expectations, this has been a very successful campaign to date. 

Our field development programme is unchanged. We intend to open up the gas bearing horizons from the deepest to the shallowest until we have reached production levels that will satisfy customer demands. La-106 will be used initially as a backup producer during times of maintenance and reservoir management on La-105. The remaining untested prospective sands in both La-106 and La-105 will be kept un-perforated until such time as we have depleted the lower horizons.

Production Facilities and Capital Expenditure

Over the last six months, conceptual engineering, front end engineering design and tenders have been approved and completed. GBM Ltd, a resources consultancy company specialising in project planning, procurement, and construction management has been appointed as project manager by VOG.

In my last update, I mentioned that we had been looking at ways to reduce costs to first gas. The original estimate for the gas plant, pipeline and civils requirement was approximately US$30 million. I am pleased to report that our engineering team have now reduced the estimate of getting first gas to customers to US$7m. The gas processing plant contract has been awarded to Expro International Group. Contract awards for the trenching, laying, welding and commissioning of the pipeline are anticipated by the end of July. The schedule for delivery of first gas to customers remains December 2010. 

Approximately 80% of our customers are within a 10km radius of central Douala. In 2011, the pipeline will be extended to the South East, South West and West of Doula beyond the Wouri River. The pipeline has been sized to handle the substantial anticipated future demand.

The pipeline route has been carefully chosen to avoid all private land, therefore minimising the impact on local landowners.

Sales & Marketing

It is important to recognise that VOG has first mover advantage in the Cameroon and Central African gas market and as we will be initially the only suppliers of gas to the Douala market and we shall own and control our own pipeline, important strategic advantages are being established.



Industry in Douala is handicapped by high energy costs with unreliable delivery and the prospect of clean natural gas at a fixed price is a very attractive proposition. Businesses also suffer from frequent disruption to electricity supply, which can be over 100 hours a year.



For some businesses, particularly those in the food processing and textiles industries, these power interruptions cause considerable waste. Consequently, some customers have requested quotes for both thermal heating and for gas fired power generators. This could more than treble current industrial demand within 12-18 months. Our own internal estimates show a total market demand rising to greater than 100 MMscf/d over the next five years.

Our sales team in Douala have made excellent progress in recent months visiting all 17 companies who had previously signed letters of intent or contracts and identifying several new customers. It is hoped that all formal gas sales agreements will be signed by the end of September 2010. As of 20th July, we had finalised exclusive gas supply agreements with our first two customers for thermal gas. The contract price remains at US$16 per million British thermal units (MMbtu), fixed for the first five years.

Regulatory Consents and Approvals

At the end of May, a significant milestone was achieved when Societe Nationale des Hydrocarbures (SNH), the oil and gas authority of the Government of Cameroon, and the Ministry of Mines and Energy (MME) gave full endorsement for the Company to proceed with the Logbaba project.

Approval from the MME is a pre-requisite for the award of an Exploitation License. This is excellent news and demonstrates the positive working relationship we have fostered with SNH and the MME, who have been present on site since the start of drilling. VOG has the full support from the Government to press ahead with our desired development plan. Two further applications will be submitted in July, which provide authorisation for the internal transportation of hydrocarbons and the pipeline route.

We have already completed an Environmental & Social Impact Assessment (ESIA) for the drilling of wells La-105 and La-106 which has been approved by the Ministry of Environment and Protection of Nature. The second ESIA concerns the civils construction and production operations at the Logbaba site as well as the pipeline system delivering gas to customers. The terms of reference for this second ESIA have been approved and we anticipate approval of this ESIA from the Ministry of Environment and Protection of Nature.

In summary, the Company expects to have all necessary consents and approvals by the end of September and most importantly, we have already been given the green light by the Government to carry out all works.

West Medvezhye Project, Russia

In our last update to you on West Medvezhye (West Med), we outlined our objective to collect as much data on unexplored areas of the massive block as possible to ensure that future wells will be successful and complement our existing discovery at Well-103. A large area in the north-eastern section of the license was selected where Gazprom's super-giant Medvezhye field thrusts into our block. We commissioned passive seismic IPDS (Infrasonic Passive Differentiated Spectroscopy) and surface gas tomography to appraise this area as well as other parts of the West Med Block. We have now completed the required exploration work programme for 2010 and processing and interpretation of that data is underway for both surveys. Initial findings of the gas tomography survey indicate three new structures. Subject to full interpretation of these surveys, we will be in a position to target new locations for exploration drilling.  It is our intention to acquire new 2D seismic data over any targeted prospects prior to drilling. Our license requirement remains to drill two new wells by the end of 2012 and we are on schedule with our exploration and appraisal commitments.

Whilst the majority of VOG's resources are currently devoted to bringing first gas revenues on schedule from Logbaba, our technical team has been utilising this time to acquire data and to carry out integrated multi-discipline studies in West Med. These studies are a part of VOG's balanced exploration and production strategy to firm-up the exploration, appraisal and development plans of West Med to start after completion of the first phase of the Logbaba Development. West Med has prospective resources of over a billion barrels of oil equivalent and VOG has a 100% interest.

Falcon Petroleum Limited

We have extended our option over the shares of Falcon Petroleum (Falcon). Falcon has a 50% interest in the PSA for Block 17 in Mali and 90% of the PSA over Blocks Ab1, Ab4 and Ab7 in the Blue Nile Basin in Ethiopia.

Total acreage covers over 45,000km2 in areas where major producers are already active. Falcon represents a low-cost entry into two exciting hydrocarbon regions and we have been appraising existing data and acquiring new data to allow us to make an investment decision with regard to our option rights.

Company Financing

We have successfully reduced our capital requirement to get to first gas at Logbaba from US$30 million to approximately US$7 million. We have other outstanding commitments from drilling operations but financially we are nearly there and by the end of the year we will have two production wells that will underpin VOG's cash flow for several years.

There is growing demand for our gas, all production facilities and consents are on schedule and the gas bearing prospectivity of our horizons has exceeded our expectations. Most importantly, we continue to believe we can bring this project on stream by the end of the year with a substantially reduced capital requirement. We have a critical first mover advantage for onshore gas sales in Cameroon that is very valuable.

The Board is working in your interest to optimise the future cash flows of our assets and your future returns and together with its advisers continues to appraise all financing options available to the Company including project finance, mezzanine finance and equity finance.

I thank all shareholders for their patience and support and look forward to updating you on our future progress in the coming months and hope that you will all participate in our future successes come year end.

Yours sincerely

Kevin Foo

Chairman

A copy of this letter is available on the Company's website at www.victoriaoilandgas.com 

 

For further information, please contact:

Victoria Oil & Gas Plc

Tel:  +44 (0) 20 7921 8820 

Jonathan Scott-Barrett / Kevin Foo 

 

Strand Hanson Limited 

Tel:  +44 (0) 20 7409 3494 

Simon Raggett / Angela Peace

 

Fox-Davies Capital

Tel:  +44 (0) 20 7936 5236 

Phil Davies / David Porter

 

Conduit PR 

Tel:  +44 (0) 20 7429 6611 

Jonathan Charles / Ed Portman