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Interim Financial Report for the six months ended 30 November 2012

28 Feb 2013


Victoria Oil and Gas plc (“VOG” or the “Company”), the AIM quoted emerging markets natural gas utility and production company with assets in Africa and the Former Soviet Union, is pleased to the announce its unaudited interim results for the six months ended 30 November 2012.



Events for the period ending 30 November 2012:

  • Completion of Phase 1 pipeline
  • Commencement of continuous gas and condensate production
  • Sale of first shipments of condensate to the Sonara refinery at Limbe in Cameroon
  • Sales of $1.7 million achieved during the period including gas sales at $16 per million British thermal units and condensate sales at an average price of $111.50 per barrel
  • Production levels as at 30 November 2012 reached weighted average production of 1.4 mmscf/d with 6 customers connected
  • Secured 25 thermal gas sales agreements plus 7 letters of intent for power
  • Completion of Independent Reserves Report confirms security of supply
  • 1P (Proven) Reserves of 39.1 bcf of gas
  • 1C (Contingent) Resources of 32.7 bcf  of gas
  • Completion of Gas Market Study strongly endorses VOG’s business strategy
  • Completion of Environmental Report
  • Identification of a total of 60 prospective customers for thermal and or power applications

Events post period end:

  • Phase 2 pipeline construction commenced
  • 15 customers taking gas with weighted average production levels of 2.8 mmscf/d in a standard operating week
  • Secured the Dangote gas sales agreement in February 2013
  • Identified a further 20 prospective customers for thermal and or power applications, a total of 80 potential industrial customers

Forward looking statements:

  • Completion of Phase 2 pipeline expected in Q3 2013
  • First power installations expected in early Q3 2013
  • 31 December 2013 targeted production of 12 mmscf/d, comprising 6.5 mmscf/d thermal and 5.5 mmscf/d power

West Medvezhye

  • Early production scheme approved by the Russian Ministry of Natural Resources in August 2012
  • Drilling design project expected to be completed in Q2 2013
  • Two-well drilling campaign planned for Winter 2013/2014
  • Renaissance Capital engaged to review strategic options concerning our interest in the project including divestiture


  • Strategic corporate overview completed resulting in board agreement for VOG to focus on African production growth
  • John Scott appointed as CEO to drive uplift of production levels and cash flow
  • £5.2 million raised during the period via an equity placing and SEDA drawdown. Proceeds were used for working capital, to complete the Phase 1 pipeline operations and commence customer conversions for thermal connections at Logbaba
  • Post the financial period, VOG successfully raised £23.4 million via a placing of shares principally to institutional investors, the proceeds of which will be used to fund the build-out phase of the Logbaba project and deliver long-term corporate objectives 
  • Commitment from Societe Generale for a $15 million reserve based lending facility
  • New board and senior management appointments expected in 2013 to provide supplementary independence as well as technical, commercial and financial expertise



Dear Shareholder,

I am pleased to write to you announcing our unaudited results for the six months to 30 November 2012 and update you on corporate and operational developments beyond the financial period.

Logbaba, Cameroon

There were some significant operational successes at our 95 per cent. owned and operated Logbaba gas and condensate project during the financial period to 30 November 2012. The first milestone on 9 July 2012 was the news that continuous production had commenced. For the first time, customers were taking sufficient amounts of gas for the Logbaba project to enter full cycle operations of production, processing, transmission and sales. The Company’s wholly owned subsidiary, Rodeo Development Limited (“RDL”) had commissioned its first three customers and announced initial combined daily demand of 0.7 million standard cubic feet per day (“mmscf/d”). This level of production allowed RDL to operate the plant safely and to specification on a continuous basis thereby becoming a revenue generator. Notably, this was also the first commercial production of domestic natural gas in Cameroon.

During the period, RDL also completed and commissioned the entire section of the Phase 1 pipeline to, and around, central Douala. A total of 13.2km of pipeline was installed, thus providing the Company with access to its first large industrial energy consumers.

Engineering, sales and marketing efforts gathered momentum throughout the financial period as customer conversion needs were better understood. By the end of the financial period, RDL had successfully secured a total of 25 thermal Gas Sales Agreements (“GSAs”) and had six of these customers connected to the pipeline with a combined weighted average gas demand of 1.4 mmscf/d. There were a further nine contracted industrial customers which had conversion projects underway to take gas, and a total of 60 identified prospects (including existing contracted customers) for thermal heat and/or power within a 10km radius of central Douala. During a visit to Douala in December 2012, I observed first hand the considerable progress that the RDL team had made. I am incredibly proud of our in-country team and thank them for their hard work and commitment to deliver this exciting project.

Following installation of a tanker-loading facility in August 2012, RDL transported six tanker loads of condensate, totalling 1,268 barrels, from Logbaba to the Sonara refinery in Limbe, Cameroon. Sales were secured at a price of dated Brent minus $1.50/bbl, achieving an average sales price for the period of $111.5 per barrel. Our expectation is that sales of condensate will be sold at a premium to the dated Brent benchmark as volumes rise in the future and regular deliveries are completed. Total sales for the period were $1.7 million including gas sales at $16 per million British thermal units, the equivalent of approximately. $96 per barrel of oil on the same unit of energy basis.

The Company has made very satisfactory progress since the end of the financial period. We now have identified a total of over 80 suitable industrial targets for thermal and/or power operations (including existing contracted customers), 26 contracted customers with thermal GSAs and 15 customers taking gas for their thermal needs. Our customers and prospects are from a broad spectrum of industries and range from multi-nationals to sizeable local Cameroonian industries.

The latest distinguished multi-national that came online for thermal gas is Diageo - Guinness Cameroun. The Managing Director, Mr Baker Magunda, recently said, "This new gas equipment will secure our plant through the supply of a constant and consistent energy that enables us to achieve our business ambitions more efficiently and sustainably. I am truly delighted by that service". I am also pleased to announce that the latest GSA signed is with Dangote, the largest company by market capitalisation on the Nigerian Stock Exchange, which is building a new clinker factory in Douala, expected to come online in Q1 2014. We envisage that the Logbaba project will have a significant impact on Douala’s industry in terms of reliability of energy supply and improved competitiveness.

Current weighted average production is 2.8 mmscf/d for a standard operating week. This equates to gross annualised sales of approximately $18 million. The production target for December 2013 envisages production of 12 mmscf/d. This comprises 6.5 mmscf/d of thermal gas sales and 5.5 mmscf/d of sales for power generation, equating to gross annualised sales of approximately $70 million.

In the short-term, we are progressing on-going discussions with other Phase 1 customers with thermal gas demand of approximately 1 mmscf/d, including several live conversion projects. Having learned valuable lessons from our experience to date, we anticipate future conversion projects requiring a maximum period of two months to conclude.

The principal capital items in the budget for 2013 include construction of Phase 2 of the pipeline and the installation of 40 megawatts (“MW”) of power. I am pleased to announce that civil works for Phase 2 pipeline operations have commenced and all materials required for the pipeline have been ordered. The first 0.8km has arrived and is currently being installed. The remaining 8.2km of pipeline is in transit and will arrive in the country in several stages but the entire material requirement is expected to be delivered by the end of Q1 2013.

There are several initiatives in place which are intended to improve the efficiency of pipeline construction for Phase 2 compared with that achieved for Phase 1. RDL has purchased more welding machines and scanners, and there are plans to purchase a second horizontal Ditch Witch drilling machine to improve installation rates. In addition to this, we are now able to increase the lengths of shots undertaken with the existing Ditch Witch following some modifications made to the drill equipment. The open-trench scope of supply under Phase 2 operations has been redefined to better align the contractor’s performance to improve rates of installations. Finally, our installation team has increased competency from direct in-country experience gained during the Phase 1 pipeline construction.

It is anticipated that the Phase 2 pipeline will be completed in Q3 2013. The increase in thermal gas sales is expected to come from customers located on the pipeline expansion route. In total, we expect in excess of 25 thermal customers to be connected to the pipeline and consuming gas by the end of 2013.

Concerning power, we have a target in place of 40 MW to be installed by December 2013 in order to deliver our gas-to-power target of 5.5 mmscf/d. Our plan is to provide this electrical output through a combination of rental, second-hand and new generation equipment.

Until the recent fundraising, available working capital had been limited so investment in generators through cash or asset-based financing was not an option for the Company. We currently have seven letters of intent for power and options over the rental and purchase of equipment. We expect to progress the letters of intent to full contracts assuming the appropriate shareholder approvals are obtained at the general meeting of the Company to be held on 1 March 2013 (“General Meeting”) in connection with the recent fundraising announced earlier this month. We anticipate being in a position to place orders for the first power installations in March 2013 which would lead to first gas-to-power operations in early Q3 2013. New generation equipment will take about nine months to procure and install, so first power will be a combination of rental and second-hand units which will gradually be replaced by permanent units.

RDL has identified an increasing number of opportunities for thermal and gas-to-power supply to industries across the Wourri River, to the west of Central Douala, and from other locations which will require extension of the Phase 2 pipeline in the port area. Our engineers have started evaluating pipeline installation options to service the 20 industrial prospects identified in these areas.

The last three years have been very challenging but VOG has progressed to become the first onshore gas producing company in Cameroon. There is a significant gas discovery under the city of Douala and we have commenced gas delivery to a market with a rapidly increasing demand for energy.

I am very excited about the future months and years for the Logbaba project. Assuming the appropriate shareholder approvals are obtained at the General Meeting, we now have sufficient funds to forge ahead with the capital expenditure needed to build Logbaba into a thriving business with utility-led returns generating significant sales and material cash flow. The thermal business is growing robustly and the power business is about to take-off.

West Medvezhye, Russia 

Our 100 per cent. owned West Medvezhye (“West Med”) block lies adjacent to the Yamal Peninsula in north west Siberia. It is one of the most prolific oil and gas producing regions in the world and neighbours the giant Medvezhye and Urengoy fields. West Med covers 1,224km2, and has a discovery well, Well-103, with “C1 plus C2” reserves of 14.4 million barrels of oil equivalent (“boe”) under the Russian resource classification system. In addition, the West Med acreage is assessed to have best estimate prospective resources of 1.4 billion boe comprising 670 million barrels of oil and 730 million boe of gas and condensate.

In August 2012, the Company received approval from the Russian Ministry of Natural Resources for its development plan for an early production scheme for Well-103 and the surrounding area. Based on our recent geotechnical work and a seismic attribute analysis from wells in the adjacent acreage carried out by Mineral LLC, the Company believes that Well-103 was drilled on the edge of a significant structure. The next drilling campaign, if in line with management expectations, would be expected to lead to a significant reserve upgrade in the Upper Jurassic as well as the Lower Cretaceous Achimov layers.

Our updated work programme was presented to the Yamal District regional petroleum authorities in Salekhard on 20 February 2013. The Company reported that the drilling design project, awarded to CJSC “TyumenNIPIneft” in 2012 is anticipated to complete in Q2 this year. As a consequence, the work programme currently envisages that the next drill campaign, comprising a two well drilling programme, will commence in the winter of 2013/2014. These 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 LLC.

The Company, as recently announced, has signed an engagement letter with Renaissance Capital to explore all strategic options concerning our interest in the project.

The Company believes that there is considerable value in West Med with highly prospective acreage. This value has been augmented by recent significant mooted tax concessions on minerals extraction tax and export duties. This is expected to be ratified by the Russian government at the end of Q2 2013 which will significantly enhance the value of the asset and interest of other oil and gas companies to invest in the region.


The Company has now invested over $100 million of shareholders’ funds into the Logbaba project and this funding has been secured in highly challenging capital markets.

During the period under review, the Company raised approximately £5.2 million for working capital, to complete the Phase 1 pipeline operations and commence customer conversions for thermal connections at Logbaba.

In addition, in August 2012, we announced that we had mandated a top-tier bank to arrange a $30 million senior-secured credit facility to advance operations for the build-out phase of the Logbaba project. To facilitate this senior secured borrowing facility and, at the request of the lender, the Company undertook:

  • An updated reserves report completed by ERC Equipoise Limited
  • An independent gas market study to, inter alia, project the gas demand potential for thermal gas and on-site gas fired power generation to year-end 2017 completed by Challenge Energy Limited
  • An assessment, action plan and consultation process of the Logbaba project against the Equator Principals Framework and IFC Performance Standards and Environmental Health and Safety Guidelines completed by Environ
  • A review of the Company’s insurance arrangements; and
  • A review of the credit off-take quality of RDL’s existing and potential customers

This work culminated in a commitment from Societe Generale, announced on 30 January 2013, for an initial $15 million under a reserve based lending facility for a term of three years, subject to completion and signing of the loan documentation. Following completion of its due diligence process, the remaining $15 million is now being syndicated to a number of third parties.

In February 2013, the Company announced it had raised a further £23.4 million before expenses, of which £15.3 million is conditional on shareholder approval to update the Directors’ authorities to allot shares. We have spoken to a number of shareholders and are conscious of the frustration some feel as a consequence of this fundraise but this placing allows us to get on with the job of building out our Cameroon business without chronic cash shortages.

Subject to such shareholder approval being obtained at the General Meeting, the Company will now be well capitalised to complete the pipeline and procure and install the first 40 MW of power into Logbaba by December 2013. Our capital plans for this year envisage a total of $40 million of additional invested capital into Logbaba, which is expected to be financed from a combination of funds from the current placing, debt and cash flow from operations. The remainder of funds raised will be used to strengthen the balance sheet including settlement of outstanding trade and financial creditors.

The Company is entering a new period of growth with a strengthened board, focusing on West and Central Africa, and streamlining of its interests in Russia. With this in mind, I am delighted to welcome aboard John Scott, ex-CFO of Indus Gas Plc, a successful gas business in India and one of the largest companies by market capitalisation on AIM. He has helped steer Indus Gas through a period of tremendous growth in shareholder value and has excellent operational and corporate experience in Africa and Russia. We believe John is the right man to lead VOG through to the next stage of its transition to a successful mid-cap oil and gas company over the next few years. 

We also have some management changes in Cameroon. I would personally like to thank Jonathan Scott-Barrett, who is retiring as Managing Director of RDL, for his three years service to the Company. Jonathan has spent the last two years in Cameroon working tirelessly to implement the first stages of the Logbaba project. Jonathan has done a tremendous job and we wish him well in his retirement.

Jonathan’s replacement as the new Country Manager of Cameroon is Bruce Lumley. Bruce is a graduate of the WA School of Mines in Kalgoorlie and has 30 years experience within natural resource industries. He has significant experience in Africa, including having worked for the past four years in West Africa as senior manager of the Nordgold African Operations. Bruce specialises in business optimisation and change management of operations and will be a welcome addition to RDL.

We are actively looking to further strengthen the team at VOG board and management level with experienced oil and gas professionals and senior executives. I am excited about our future. We are well capitalised and have tremendous cash flow growth potential going forward. I believe VOG will look a very different company in 12 months with utility led returns in Africa and a successful model that can be replicated in analogous regions in the future.


Kevin Foo