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Results for year ended 31 May 2012

25 Oct 2012


Results for year ended 31 May 2012


Chairman's Statement

There have been a number of very positive developments on our projects in 2012, most notably the commencement of continuous production at the Logbaba Field, Cameroon ("Logbaba") in July 2012. We are very proud of what we have achieved over the course of three years. We landed the first onshore rig for over fifty years in country and successfully completed two wells.  Today we have a cornerstone project with robust and increasing domestic demand for our gas and the supply capability to meet it. These key elements have been independently verified as part of due diligence requirements for a debt financing package that is close to being finalised. Our key priority remains to ramp up gas off-take volumes through conversions of existing contracted customers, in order to strengthen the financial position of the Company and attain positive cash flow for the Group.

Review of the Markets

Throughout 2012, the global economy has continued to slow with a mixture of an austerity constrained Euro-zone and lower growth in emerging economies and China in particular. The US has shown some green shoots of recovery having performed better than other major developed economies, but further rounds of quantitative easing, high levels of unemployment and forthcoming cuts to the federal budget indicate that confidence will be fragile in the global economy in 2013.

Despite this, Africa has become a "hot address" for investors this year with a considerable amount of corporate activity in both East and West Africa. However, many junior exploration companies continue to see depressed share prices as investors' price in funding difficulties in the absence of cash flow from production. I believe that during these challenging economic times, the now-producing Logbaba Project is an exceptional project, as it is local conditions rather than global factors that will ensure its success and in turn the performance of this Company.

Logbaba, Cameroon

RDL 95% operated interest

I am very satisfied with the progress achieved by the Group throughout the financial period and to date. In this financial climate, it was essential for us to move from an exploration and development company into one with continuous production and cash flow. We have now achieved this and, in doing so, have distinguished ourselves from the majority of our peers which are solely reliant on the equity capital markets for funding.

Production and cash flow from our flagship Logbaba project are set to ramp up significantly over the coming months as contracted customers continue to come on line. This will provide a solid platform for growth and the foundations upon which I believe we can progress this Company into a mid-market integrated E&P company.  On a broad scale, one of Africa's most critical problems is provision of reliable energy. We believe that we have established a strategically important solution for the provision of locally sourced energy. Furthermore, we believe that this model, and our expertise, can be exported to many other countries within Africa, potentially forming a significant part of our future business strategy.

Operational progress at Logbaba was maintained at a steady rate throughout the financial year, with completion of all of the key downstream elements of the project. This included the re-opening and commissioning of wells La-105 and La-106, installation of the production facilities and the completion and commissioning of 13.2km of pipeline to and around central Douala. We have installed nine pressure reduction and metering stations ("PRMS") at our customers' premises. The PRMS units reduce the gas pressure in accordance with the customer's acceptance requirements and measure the volume of gas transmitted. This data is then fed back to our control room at the production plant. We have since ordered an additional 20 PRMS units which are expected to arrive in country before the end of November 2012. These units have been produced to individual customer requirements and reflect our platform for continued production growth over the coming months.

Completion of the downstream works culminated in our announcement of continuous production operations in July 2012, by which time our first three customers had completed their own conversion requirements downstream of their PRMS unit and were able to accept gas. We currently have 4 customers connected, with an aggregate peak off-take of in excess of 1 million standard cubic feet per day ("mmscf/d") and average daily volumes (7 day week) of 0.7 mmscf/d.

Since July 2012, customer conversions have not advanced at a rate I would have hoped for or expected, but I would like to reassure you that this does not unduly concern me or impact on the long-term fundamentals of this project.

Under the terms of our gas sales agreements, the customer's responsibility is to complete all works required downstream of the PRMS unit. This involves a cost to them on average of $50,000-$100,000 including project management costs, engineering design and installation of a dual fuel gas burner and a gas spur line from the boiler to the PRMS unit. The payback for all signed customers is estimated to be less than 6 months. The challenges that we have encountered include the following factors:

Ø Not all customers have the skills required to undertake pipe work, burner and boiler specification, construction work and project management.

Ø Some customers employed local contractors who were not sufficiently qualified to undertake the works and as a result failed the inspection and integrity tests set by Bureau Veritas, our pipe work inspectors. As a company, we have a commercial interest, and a duty of care, to ensure all works are performed in a safe and robust manner and we have therefore become much more involved in contractor qualification and selection.

Ø While customer awareness for the project is high, there has been a degree of hesitation in converting to a new energy source and paying for the alteration work.

Ø Contracting burner commissioning agents from one of three principal manufacturers in a timely fashion has proved challenging. These companies had a limited presence in Cameroon and we are working hard to rectify this.

Throughout this process, however, we have gained valuable experience with respect to customer conversion requirements and in-country contractor competencies, and we are now taking a greater role in assisting clients to connect to our gas network. There have been two instances where we have completed the prerequisite works for our customers and now that we have continuous production operations and satisfied customers, there is a backlog of additional customers waiting to be connected to the grid. I am confident that we will have a minimum of 15 customers taking in excess of 3 mmscf/d of thermal gas by the end of 2012.

Our gas sales and marketing team have identified over 60 suitable thermal and/or power customers in the region. To date, we have signed 19 gas sales agreements ("GSAs") for the provision of thermal gas and the team is very much focussed on finalising contracts in the Phase 1 pipeline area to maximise revenue opportunities until we are in a financial position to embark on Phases 2 and 3 of the pipeline construction.

We also have a highly prospective market for the direct supply of power. The lack of a reliable power supply in Douala is a major concern cited by industries in the region, as it limits expansion plans and causes major operational and production issues including wastage, equipment damage and cost overruns. The Company has an established independent distribution network (with Phase 1 of the pipeline completed) that will allow us to deliver a 'total energy solution' to industrial customers to fulfil all their heat and power requirements. 

While the gas to power market represents a larger and more lucrative opportunity over the medium term, the Company has only recently engaged in contractual discussions with customers regarding the provision of power, as the capital cost to the customer is higher, relative to thermal conversion costs.  Each solution must also be individually tailored to a customer's needs and generic solutions cannot be pre-ordered. With the Company having had continuous production operations for approximately four months, our customers are now able to witness a reliable gas distribution network in place, which we anticipate will help facilitate their investment decision on committing to a gas generator through our proposed payment structure.

We have recently sent 13 power offers to customers, of which 6 have been converted to Letters of Intent ("LOI"s), and we expect the first contract to be signed in November 2012. With this first power coming on line, together with the thermal gas demand outlined above, the Company anticipates year-end production of 5 mmscf/d.

I am very optimistic about the remainder of 2012 and our Company's prospects into 2013. Logbaba is a fantastic project to be involved with. We are in a privileged position to have a project which is neither demand nor supply constrained for the foreseeable future. Both of these statements have recently been independently verified through third party competent person's reports produced by Challenge Energy Limited ("Challenge") and ERC Equipoise Limited ("ERCE").

A Gas Market Study, undertaken by Challenge, a leading advisory consultancy group to the oil and gas industry, highlights a very positive assessment of the Logbaba project, concluding: "VOG's strategy to displace refined products consumed by industrial customers for thermal heat generation and substituting grid power in the major industrial centre of Douala is robust and reasonable with few material risks."

In October 2012, we announced an independent reserves estimate completed by ERCE on the Company's proved reserves. This was commissioned by the Company in relation to a debt funding proposal that we are advancing. ERCE concluded a 50% increase in total 1P Reserves and 1C Contingent Resource gas volumes with 1P ("Proven") Reserves of 39.1 billion cubic feet ("bcf"), plus 32.7 bcf of 1C Contingent Resources leading to a total potential 71.8 bcf of producible gas (gross), plus 1.14 million barrels ("mmbbls") of condensate. This endorses our supply capability for the foreseeable future.

I look forward to the coming months and years with genuine optimism. We have made great progress on the Logbaba project during the financial period and beyond. We are working extremely hard to meet our publicly stated targets and are confident that these targets will be achieved.

West Medvezhye

100% operated interest

Progress at West Medvezhye ("West Med") during the financial period and to date has been very pleasing and we have made two very notable advancements on the project.

I have always maintained that West Med has the potential to become a company-maker. Whilst we have a fairly modest discovery to date of 14.4 mmbbls of oil, there is very exciting geological potential on the block and this was confirmed by an independent geological modelling study and resource audit carried out by Mineral LLC ("Mineral"). Following completion of their report in August 2011, the Company announced an increase in best estimate unrisked prospective resources in excess of 300 million barrels of oil equivalent ("boe") to over 1.4 billion boe.

The second notable achievement was the approval of the development plan for an early production scheme by the Ministry of Natural Resources in August 2012 for Well-103 and the surrounding area. We are making good progress at West Med with a well defined project and scope of works for the next 3 years.

We have commenced building a winter road in preparation for construction of a drilling pad planned for Q1 2013. We will then look to qualify and finalise a selection of contractors for the next drilling programme over the coming months, as well as contractors to perform the logging and well-test operations. The Company will then commence drilling during the winter of 2013/2014 in targeted locations which have been defined by the Mineral study in the Well-103 area.

Based on our recent geotechnical work, the Company believes that Well-103 was drilled on the edge of a significant structure. Our next drilling campaign, if in line with management expectations, could lead to a very significant reserve upgrade for the Company in the Upper Jurassic as well as the Lower Cretaceous Achimov layers.

In light of the enhanced prospectivity of the asset, we would have liked to finance this drilling programme ourselves. However, the Company is planning to farm-out a portion of its interest in West Med to preserve capital and forge ahead on the infrastructure roll-out and customer expansion at Logbaba. We have begun this process with some selected screening of potential candidates and anticipate concluding a farm-out process by Q4 2013. We do not intend to use cash flow from Logbaba to fund exploration in West Med.

I often feel that West Med is overlooked to some degree by investors in our overall asset portfolio but its significance should not be forgotten. Our first production from West Med is currently estimated to begin in 2016 and should provide a strong platform for production growth and cash flow over the medium term.

Management Changes

VOG has strengthened its senior management this year with the addition of a new Director of Projects, Neil Kendrick, a professionally qualified Mechanical Engineer and Project Manager who has held a number of senior management and executive level positions over the past 25 years with both publicly and privately held companies in the oil and gas sector. As Director of Projects, Neil is responsible for all aspects of project delivery and is currently concentrating on leading the customer conversion effort in Logbaba and growing the business in Cameroon.

Under the leadership of Jonathan Scott Barrett, Managing Director of RDL, the Company has expanded its sales and marketing team in Douala with the addition of dedicated professionals to help lead the effort in country. The team has done an excellent job having signed up 25 customers to date, including power LOIs, and have identified a total of over 60 existing customers and prospects.

Philip Rand stepped down as Non-Executive Director this year to pursue another opportunity that requires a greater degree of international travel and a full-time commitment. We are grateful for Philip's service to the Company over a number of years and wish him well in his future endeavour.

Going forward, we are also looking to strengthen the Board with the expected addition of one or two directors in the near future, including an active search for a CEO to lead the Company into its next growth phase. 


The Board seeks to maximise shareholder returns when considering financial solutions for its ongoing capital requirements. The Company constantly reviews asset and corporate investment opportunities that will increase our exploration and production portfolio which may require additional funding in the future. During the financial period the Company successfully raised £10.1 million in equity to continue to fund the development of its projects in Cameroon and Russia and for the Group's working capital requirements. In addition, the Company drew down $5.2 million under a short-term unsecured $8 million loan note facility. By the end of the period, VOG has invested a total of $103.7 million in Logbaba and $41.6 million in West Med.

Subsequent to the financial year end, the Company raised a further £3.15 million in equity. These additional funds were drawn as a bridge to positive cash flow from operations at Logbaba. The Company expects to reach positive cash flow for the Group going forward before the end of the year.

In addition, the Company is currently negotiating a large senior secured revolving credit facility with a top-tier financial institution to fund its on-going capital requirements at Logbaba and to support the Group's working capital. VOG's strategy for the next 12-18 months is to complete Phases 2 and 3 of the pipeline for Logbaba and achieve sales volumes of 20 mmscf/d. The Company also hopes to announce within this time frame a farm-out of West Med to cover the next drilling programme anticipated in the winter of 2013/2014.

As anticipated in last year's accounts, RSM Production Corporation ("RSM") has initiated arbitration proceedings in relation to the forfeiture of their interest in Logbaba. Since the initial Request for Arbitration was made by RSM there have been significant delays in the selection of the arbitrators and finalisation of the terms of reference, which were only agreed in final form between the parties on 19 October 2012 and are expected to be signed shortly. We will vigorously defend the claims and our UK and US lawyers view is that the forfeiture should be upheld. The arbitration is currently expected to take place in June of next year.

I would like to thank all VOG employees, my fellow Directors and contractors who have participated in our progress this year. We have had some really notable achievements and I look forward to carrying on our work together to continue to optimise our asset base going forward. I would also like to thank all our shareholders for your continued support of the Company. I believe the next 12 months will bring some very exciting news flow and developments and I sincerely hope you will continue to support us as we make this happen.


Kevin Foo




Operations Review

Logbaba, Cameroon

95% interest


Downstream Operational Achievements

The financial year ended 31 May 2012 marked a period of tremendous operational progress on the ground. You will recall that the Company was awarded its Exploitation Authorisation for Logbaba via Presidential Decree in April 2011 just before the last financial year end. This enabled the Company to embark on the downstream elements of the project which consisted of:

Ø Re-opening wells La-105 and La-106;

Ø Trenching, jointing, installation and commissioning of the gas pipeline network;

Ø Installation and commissioning of the process plant; and

Ø Installation of pressure reduction, metering stations and boiler conversions on customer premises.

In June 2011, pipeline and civil contractors were mobilised, excavation works commenced on our site for the processing facilities, and work began on the production trees and baseline caliper logs to prepare the wells for commissioning.

The works progressed satisfactorily over the next few months despite very tough and almost unprecedented weather conditions with 1,600mm of rain in July and 900mm of rain in August. By September 2011, the production tree assembly work for the wells had been completed and we had installed the first 1.2km section of pipeline. At the site, 36 of the foundation piles were completed to a depth of 10 metres. Meanwhile, our gas plant contractor, Expro, had completed testing of the majority of the equipment at their base including process plant vessels, flow lines and ancillary equipment. Specifications and sizing of PRMS units for the first 20 customers had also been completed and the first 9 units were being shipped into country.

After the end of the rainy reason, work continued at a more rapid pace and by December 2011, VOG had fully installed and commissioned the process plant, commissioned the wells and completed the first 4.5km of pipeline. This enabled the Company to deliver first gas to a customer on the Magzi estate by the end of December 2011, during the commissioning process. This was a very creditable achievement for a Company of our size and the result of hundreds of thousands of VOG employee and contractor

man hours.

To satisfy the minimum throughput conditions of the processing plant, sized at 20 mmscf/d for each of two production trains, and to operate safely and commercially on a continuous basis, VOG required a minimum daily average throughput of 0.5 mmscf/d. While total gas thermal and power demand at the Magzi estate is anticipated to be in excess of 5 mmscf/d over the next 2 years, sufficient customers were neither converted nor ready at this time to take gas so the Company put the process plant into standby mode after commissioning.

VOG continued the pipeline expansion northward to the city of Douala and completed the Phase 1 pipeline area of 13.2km in May 2012. In July 2012, the Company announced that the first 3 customers had completed their gas conversion requirements and were taking gas with an average daily demand of 0.7 mmscf/d.

Recently, the Company received the results of an independent gas market study carried out by Challenge. This was commissioned at the request of a financial institution as part of a financing package that is currently under negotiation. This report was a tremendous endorsement of management's projections and strategy and outlined a very robust demand curve for gas and gas-fired power. Challenge also referred to successful analogues in Tanzania and Kenya and concluded that the Company is competitively well placed vis-a-vis other gas exploration and appraisal activity in Cameroon.

As of today's date, we have 4 customers taking gas with a combined demand in excess of 1 mmscf/d and by December 2012, we are forecasting a year-end production rate of 5 mmscf/d. This will include the first gas to power units in country.

We have also completed installation of the tanker loading facility which was installed at the Logbaba production plant for export of condensate. Tankers with a 36,000 litre capacity export condensate to the Limbe refinery located 60km away. To date, we have exported 5 tanker loads to the refinery.

Subsurface and Geology

The Company holds a 95% working interest and is operator in the Logbaba Block. The Company's internal reserves and resources estimates at Logbaba were reconfirmed in 2012 by Blackwatch Petroleum Services Limited, ("Blackwatch"), the Company's retained consultants. The Proved and Probable (2P) gas reserves in the Logbaba field are contained in Campanian and Santonian age sands of the Logbaba Formation. All six of the wells drilled to date in the Logbaba block have encountered significant gas intervals and all of the five wells that were tested flowed gas to surface (Elf did not test the fourth well when it encountered further gas as it was targeting oil).

There is considerable resource potential in the remaining areas of the Logbaba Block which are thought to share the same geology. This potential has been in part confirmed by results of our passive seismic survey which provided the first new geophysical information to be acquired over Logbaba since the discovery was made in the 1950s. These survey findings are in line with our geological understanding of the Logbaba reservoir sands and correlate well with data from the four old wells and the newly drilled wells, La-105 and La-106. Of particular interest, the results highlight a major potential hydrocarbon accumulation around two kilometres from the new wells surface location. This exploration prospect, which lies entirely within the Company's licence block, could be substantially larger than the existing discovery and has not been seen in any previous subsurface studies, due to the lack of geophysical data.

Separately, as part of ongoing discussions with a financial institution regarding a senior secured debt facility, VOG was requested to carry out an independent CPR of the Company's proved reserves. The Company contracted ERCE and in October 2012, the Company announced that ERCE had calculated 1P reserve volumes of 39.2 bcf of gas and 0.62 mmbbls of condensate and 1C resources of 32.7 bcf of gas and 0.52 mmbbls of condensate. ERCE employed standard petroleum evaluation techniques, following the guidelines outlined in the 2007 Petroleum Resources Management System. The Logbaba Formation is divided into Upper and Lower sections, and ERCE has assigned most of the proved reserves to the Upper Logbaba formation. ERCE has assigned the additional recoverable volumes it has calculated for the Lower Logbaba as 1C Contingent Resources pending the outcome of a satisfactory remediation and testing programme which demonstrates that improved flow rates can be achieved from the Lower Logbaba. 

Despite a reduction in the currently bookable 1P Reserves, ERCE's independent assessment represents a 50% increase in aggregated 1P Reserves and 1C Contingent Resource gas volumes compared to the Company's internal estimate, which comprises Technical 1P Reserves of 46.7 bcf in the Upper and Lower Logbaba, but carries no 1C Contingent Resources.

West Medvezhye, Russia

100% interest

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

Operational progress during the financial year was excellent. Following a seismic reprocessing and geological modelling study commissioned in February 2011, the Company reported in September 2011, that independent reserve auditors, Mineral had confirmed a 300 million boe increase in gross prospective resources to 1.4 billion boe, comprising 670 mmbbls of oil and 730 million boe of gas and condensate.

Mineral is a leading consultant in Russia for this specialised geological work and has an excellent proven track record in Siberia where our West Med block is located. We believe its updated assessment of over 1.4 billion boe is of major significance and demonstrates the very high exploration potential of our West Med block.

This programme was presented to the Yamal District regional petroleum authorities in Salekhard in February 2012 and a work programme including a two well drilling campaign was approved by the authorities. The wells are set to target the Jurassic discovery horizons successfully encountered by Well-103 and also new hydrocarbon potential horizons in the Lower Cretaceous Achimov layers identified by Mineral as highly prospective.

The drilling design contract for these planned wells was awarded to CJSC "TjumenNIPIneft" in March 2012. The scope of work includes detailed well design as well as studies of the terrain, soil mechanics, access and ecological issues.

During the period, work continued on conceptual screening and development studies to monetise West Med's large prospective resources and to exploit the Well-103 discovery to generate cash flow. In January 2012, VOG contracted LLC Nefteproject, based in Tyumen, Russia, to develop a project plan for an early production scheme for the discovery area around Well-103. This project was completed and agreed by the Company in April 2012. Further to submission of the report to the Russian Ministry of Natural Resources, the project plan was approved in August 2012. The scheme established costs and schedules for oil, gas and condensate production facilities and supporting infrastructure. The gathering and distribution network design and engineering will be phased with facilities design, starting with fast track development of the Well-103 discovery.

Work has continued on the drilling design project but the current estimate for completion of this project, which includes public consultations and permitting approvals, is not anticipated until February 2013. This will not give the Company sufficient time to mobilise drilling operations in the coming winter period. As a result, the Company now anticipates postponing its two well drilling programme until the winter of 2013/2014.

Notwithstanding this, the Company will continue to advance the West Med early production project over the coming 6-12 months. Works outstanding prior to the next drilling campaign include:

Ø Completion of the drilling design project estimated in Q1 2013;

Ø Completion of a winter road and a drill pad in Q1 2013;

Ø Screening, qualification and final selection of contractors including drilling companies, well logging and facilities companies; and

Ø Acquisition of all necessary consents and permits for drilling.

Based on this preliminary assessment work on the Well-103 discovery, the Company is currently planning for first oil sales via an early production scheme in 2016. Following the Company's decision to farm-out a portion of its interest in West Medvezhye, a data room has been prepared and initial potential candidates have been screened in anticipation of concluding a farm-out by Q4 2013.

Radwan Hadi

Chief Operating Officer

(Radwan Hadi is also a Director of Blackwatch)

Neil Kendrick

Director of Projects


Results for year ended 31 May 2012301.4 KB