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Q1 2017 Operations Update

13 Apr 2017

 

Victoria Oil & Gas Plc, a Cameroon energy utility, is pleased to provide an update on the Group's operations for the three months ended 31 March 2017. During the quarter, production increased, the Company made encouraging progress drilling two new Logbaba wells and our asset portfolio has significantly developed.

Highlights

Increased production

  • 10.7% increase in average gas production from Logbaba to 14.57mmscf/d (Q1 2016: 13.16mmscf/d)
  • Gross Logbaba gas sales increased to 1,153mmscf for the quarter (Q1 2016: 1,131mmscf)

Drilling new wells

  • Significant progress made on drilling two Logbaba wells:
    • Well La-108 has encountered a gross pay of 125m of high permeability, high porosity gas bearing sands which the board of VOG (“Board”) believes should result in a significant increase in Proven reserves
    • Well La-107 has been drilled and 9⅝” casing set to 1,618m
    • A well control incident on La-108 was safely managed and a side track to re-drill the 8½” lower 950m section of the Logbaba formation is underway.
    • Wells completion expected in Q3
    • Testing of both wells is expected in late Q2 and a high-pressure gas flowline to the existing gas processing plant to utilise gas produced during flow tests and enable early production is being installed

Developing new assets

  • Farm-out agreement with EurOil Limited (“EurOil”), a Bowleven Plc subsidiary, under which a VOG subsidiary  will acquire on completion an 80% working interest in the 2,237 sq.km Bomono license, adjacent to Gaz du Cameroun’s (“GDC”) Logbaba field.  This transaction is subject to Government approval
  • Seismic interpretation on Matanda field (75% participating interest) shows considerable gas in place potential and several drilling targets

Financial highlights

  • Q1 (unaudited) financial highlights:
    • $8.1 million net revenue (Q4 2016: $4.6million)
    • $10.5 million cash position at quarter end ($15.8 million as at 31 December 2016)
    • $10.7 million net debt position at quarter end ($1.3 million net cash as at 31 December 2016)
    • Current cash position $14.1 million

Note: Net cash is defined as cash equivalents less borrowings, where cash equivalents exceed borrowings

Ahmet Dik, Chief Executive Officer of VOG, commented:

“We have significant momentum in the business following a very busy and productive quarter. Gas sales increased and record sales were achieved in March. The drilling of planned production wells La-107 and La-108 continued and the Board believes the discovery of 125m of gas sands in the Logbaba formation of La-108 is very encouraging. The Board believes that these sands will contribute additional Proven reserves and be at least as productive as well La-105.  

Our asset base has been transformed over the last twelve months with the signature of an agreement to acquire an 80% working interest in the Bomono licence, whilst very encouraging results from our initial Matanda evaluation enhance the possibility of early identification of drilling targets and updated gas inventory estimates. The additional acreage at Matanda and Bomono will allow VOG to help realise its plan for major gas production to meet the large unsatisfied energy demand in Cameroon.”

Operational update

The quarterly, gross and net gas and condensate consumptions for the Logbaba Project are as follows; amounts in bold are gas and condensate sales attributable to VOG*:

 

 

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

Gas sales (mmscf)

 

 

 

 

 

Thermal

340

204

292

175

290

174

214

181

250

Retail power

12

7

16

10

31

18

27

24

37

Grid power

801

481

346

208

309

186

910

791

844

Total (mmscf)

1,153

692

654

392

630

378

1,151

996

1,131

Average gas production (mmscf/d)

14.57

7.64

7.14

13.04

13.16

Condensate sold (bbl.)

8,816

5,290

7011

4,207

6,786

4,072

12,457

10,826

13,591

* After reaching a cost recovery milestone on the Logbaba Gas and Condensate Project during Q2 2016, VOG receives 60% of revenues from Logbaba in accordance with its participating interest.  The sales metrics are presented here firstly on a gross basis, with attributable gas sales shown in bold italics in the right hand columns. Prior to Q2 2016 gross and attributable sales were the same. Going forward the Group will report on an attributable basis.

Customers and Pipeline

March 2017 saw record monthly gas sales for GDC at 411mmscf, 2% higher than its previous record in March 2016.  Q1 2017 thermal gas sales increased on Q4 2016 by 16% and by 36% compared to the same quarter last year.  Phases II & III of the Bonaberi pipeline extension programme were completed by the end of 2016 and six new customers are now online and consuming gas. Total pipeline laid in Douala now totals 50km. GDC have commissioned pipeline up to Pressure Reducing Metering Systems on two additional customers and is waiting on those customers to complete their own gas burner connections or complete high demand production cycles before they start consuming gas. 

Grid power sales for the quarter were higher than Q4 2016 with ENEO consuming above its take or pay levels for the period.  The dry season has continued into Q2 2017 so consumption is expected to remain at these levels.

The ENEO contract is a two-year gas supply agreement which expires on 22nd April 2017. Negotiations are well advanced with ENEO and Altaaqa and the Board expects a renewal of the contracts for the supply of gas to the Logbaba and Bassa power stations in Douala.

Logbaba Drilling Programme

Drilling operations on wells La-107 and La-108 in the Logbaba Gas Field commenced on 1 November 2016. These wells are intended to be production wells, completed in the Upper Cretaceous (Campanian and Santonian) Logbaba Formation, which is a thick sequence of interbedded sands and shales found at depths between 1,700m and 3,200m below the surface.

Gas-bearing sands identified

Significant gas-bearing sands have been identified in the La-108 8½” hole section using Logging While Drilling (LWD) equipment and by monitoring formation gases encountered whilst drilling. Approximately 125m of gross gas-bearing sands were encountered between the top of the Logbaba Formation at 1,670m TVD and at 2,702m TVD. The La-108 well, once completed, is expected to contribute to an increase in Proven (1P) reserves. For comparison, the main production well at Logbaba, La-105 encountered 84m of gross gas bearing sands when drilled in 2010.

La-107 is a twin of the Serepca La-104 well drilled in 1957 into an area that has proven gas in the Logbaba field and is intended to develop some of the Proven (1P) reserves. La-108 is a step out well into to an area of the Logbaba Field that is considered part of the Probable (2P) reserves and was intended to promote some of the Probable Logbaba reserves into the Proven Reserve category.

At the end of Q4, La-108 had been drilled and cased to 1,173m where the 13⅜” casing was set. The 12¼” hole section on well La-107 had been drilled to current depth of 1,618m.

In this quarter, the 9⅝” casing has been run and cemented in La-107 in preparation to drill the 8½” hole section through the Logbaba gas-bearing reservoir sections. The 9⅝” casing run into La-107 included a DDV (Downhole Deployment Valve), which was successfully set with the casing to assist in the MPD (Managed Pressure Drilling) technology that has been employed during the drilling of the over-pressured Logbaba Formation. This is the first time that a DDV has been successfully deployed in sub-Saharan Africa. 

Sidetrack drilling and drilling outlook

After setting the 9⅝” casing in La-107 the rig was skidded to the La-108 well and the La-108 12¼” hole section was drilled to its target depth of 1,953m MD (measured depth). The 9⅝” casing, including the installation of a DDV as per La-107, was run and cemented in La-108.  MPD equipment was rigged up and the La-108 8½” hole section was drilled through the Logbaba Formation to a depth of 3,076m MD (2,702m Total Vertical Depth (TVD)). At that point, a mechanical problem with the drill string led to a gas kick and the well control incident. While the well was being brought under control, the drill pipe became stuck in the well and the drill team was unable to retrieve it.

In late March, a cement plug was placed in the 8½” hole and preparations made to sidetrack the well to re-drill the Logbaba Formation and complete La-108. The side track drilling to a target depth of 3,563m MD (3,200 m TVD) is ongoing.

The well control and pipe issues, coupled with the side track have resulted in a schedule slippage of some five weeks and an estimated budget increase of approximately $8 million, taking the expected cost to complete both wells to approximately $56 million. Planned completion of the wells is now mid Q3, but it is expected that the wells will be under test before this. GDC’s share of well costs will be covered by cash generation and existing cash and credit facilities.

Q1 Unaudited Financial Highlights

Net revenue for the quarter was $8.1 million (Q4 2016: $4.6million) and cash position at quarter end was $10.5 million ($15.8 million as at 31 December 2016).  The net debt position of the Group at the end of the quarter was $10.7m and the Group has remaining credit on its Cameroonian debt facility of $5.5m. As of 10 April 2017, the Group had $14.1 million cash position.

Process Plant Expansion

The gas processing plant expansion, aimed at increasing the plant's capacity from 20mmscf/d to 30mmscf/d, is progressing with the preliminary engineering phase underway. A 300-metre long, high pressure gas flowline is being installed from the new wells to the gas processing plant to utilise gas produced during flow tests and enable early production from wells La-107 and La-108. In addition, gas plant improvements such as installation of a heat exchanger and high and low pressure liquid separators are also being installed in anticipation of new production from La-107 and La-108.

Matanda Exploration Update (75% working interest and operator)

Following assignment of the Matanda licence from Glencore, which materially increased the Company’s acreage position, work is ongoing to evaluate the gas potential of the block. The primary objective of this work is to identify prospects with a high chance of success which can be brought rapidly into production following drilling to meet growing gas demand. This work is benefiting from the proximity of the Bomono license and the experience of operating the Logbaba field; allowing a full integrated analysis to be conducted for the whole Douala area.

Whilst the analysis is at an early stage, we are encouraged by the indications of exciting onshore prospects in the Northern area of the license, near the boundary with Bomono, in structures like the Moambe discovery. Similarly, there appears to be significant onshore potential on the trend between the North Matanda discovery and the producing Logbaba field.

The evaluation is expected to yield an updated prospect inventory by Q3, from which drilling plans can be made. This will provide the opportunity to target the most attractive and lowest cost opportunities for early drilling with the aim of bringing further wells on production in 2018-2019.

Bomono Project (80% working interest)

The Company announced on 6th March that it had entered into a Farm-Out Agreement with EurOil in relation to the Bomono production sharing contract (“PSC”), subject to a number of conditions precedent, which will result in a VOG subsidiary having an 80% working interest in the 2,237 sq. km. licence.  The agreement is in line with VOG’s objective to consolidate GDC’s advantage as a fully integrated gas utility by securing additional sources of gas. The intention is for gas produced from the Bomono PSC to be fed into GDC’s pipeline network.  GDC’s current pipeline infrastucture is only 9.5km away from the drilled wells. The initial plan is that gas currently suspended at Moambe can be brought onstream and that further drilling be considered in the future.

At the start of 2016, Bowleven completed extended well flow tests on the Moambe well that exceeded 7mmscf/d. The Moambe and Zingana exploration wells drilled at Bomono were then suspended as future producers. As previously announced by Bowleven, the detailed prospect inventory prepared indicates there is 146bcf and 263bcf of mean un-risked gas initially in place (“GIIP”) in the Tertiary and deeper Cretaceous reservoir intervals respectively.

Following the execution of the agreement, Bowleven announced significant board changes following a General Meeting of the Company.  VOG is continuing its good relationship with the board of Bowleven and progressing the project as intended.