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Oilex Ltd Annual Report - Business Review

01/10/2019 8:21am

UK Regulatory (RNS & others)


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RNS Number : 2950O

Oilex Ltd

01 October 2019

For a printer friendly copy of this announcement, please click on the link below to open a PDF version

http://www.rns-pdf.londonstockexchange.com/rns/2950O_1-2019-10-1.pdf

External Impact on the Petroleum Industry

This last year has seen both oil and regional gas prices holding relatively firm globally, providing some buoyancy to the oil and gas sector. In particular strong interest in the sector has is evident from the UK investment community.

The Indian economy remains strong with the Modi government returned to office in a general national election. The Prime Minister India has led and initiative to reduce its dependence on petroleum imports as energy security remains a major concern. The country continues to experience strong positive economic growth.

Figure 1: Bhandut Production Facility

Oilex Strategy

During 2018-2019, Oilex continued to focus on its core project, Cambay, in India while also evaluating potentially value accretive new business opportunities elsewhere, ranging from discovered undeveloped resources with exploration upside to existing discoveries and production. Post-the reporting period the Company announced entries to both the Cooper-Eromanga Basins in Australia and the East Irish Sea in the UK. Both these entries follow a well-defined strategy focusing on proven super-basins with world class source rocks, well defined fairways, undeveloped discoveries, progressive regulators, open access to data, existing infrastructure and demonstrable upside potential for junior companies.

Introduction

Oilex's Cambay Project is located onshore in the state of Gujarat in the heart of one of India's most prolific hydrocarbon and leading industrialised provinces. The project is ideally located near a major industrial corridor and approximately 20 km from the existing national gas pipeline grid. It is well-positioned to commercialise production in the fast-growing, demand-driven domestic energy market.

The area has a long history of hydrocarbon production from a number of vertically stacked reservoir sections. Oilex continues to focus on a tight siltstone Eocene aged reservoir which has potential for Multi-TCF gas resources within the license area of the Cambay Production Sharing Contract (PSC). A secondary conventional reservoir is present in the Oligocene section.

Development of the potential gas resources in the Cambay PSC has been held up during the year because of a dispute with the second partner in the project, Gujarat State Petroleum Corporation (GSPC). In May of 2018, Oilex announced that it had issued an Event of Default Notice (EOD) to GSPC for failure to pay US$3,054,832 of its participating interest share of expenses. In July 2018, the Company announced that it had issued a notice to require GSPC to withdraw (EoW) from the PSC and to transfer its participating interest to Oilex following the procedures defined by the Joint Operating Agreement as GSPC had not remedied the EoD within the prescribed allowed time. Oilex's action were driven by its desire to return to a drilling programme in the PSC with a pilot test to drill and flow test the identified gas resource.

In August 2018, in response to the EoD and EoW, GSPC served notice of an exparte Order from the High Court of Gujarat directing Oilex not to take any coercive steps against GSPC to transfer its participating interest. A number of hearings in the High Court took place until 5 November when Oilex announced the final decision of the court which further delayed the implementation of the EoD and EoW under the conditions that GSPC deposited a sum of approximately US$1.1 million, a bank guarantee for approximately US$3 million with the court, and commenced arbitration proceedings. On the 19 November, Oilex announced that GSPC had complied with the above requirements.

In the period from December of 2018 and through the first half of 2019, Oilex met with GSPC on many occasions seeking a commercial settlement to forestall arbitration proceedings and as a pre-cursor to restarting activities in the field. However, despite Oilex submitting a number of proposals, no agreement could be reached. On 9 September 2019, Oilex announced that an agreement with GSPC had been reached noting that the Indian government regulator DGH was also a signatory to the agreement. Under this agreement, GSPC must use its best endeavours to complete a sales of its 55% interest in the Cambay PSC within 90 days, Oilex to lift the EoD and EoW, GSPC is to discharge the SIAC arbitration proceedings, lift the stay order and recover its funds lodged with the High Court. Both parties are required to support the necessary actions to achieve these outcomes.

Oilex has been in discussion with a number of Indian based companies who have expressed interest in the Cambay PSC and its potential.

Figure 2: Gas Pipeline Network to the Nation

Cambay Field, Onshore Gujarat, India

(Oilex - 45%, Operator)

Oilex is the Operator of the Cambay Field and holds a 45% participating interest. The remaining 55% interest is held by Joint Venture partner, Gujarat State Petroleum Corporation Limited (GSPC).

Exploration and production in the region started in the late 1950s and early 1960s. Oilex's focus on the tight Eocene siltstone reservoir is a step away from the conventional exploration and production that has dominated the past history of activity in the basin. This requires application of specific drilling and stimulation technologies to test whether the reservoir will produce at commercial rates.

Oilex has developed a work plan to drill 2 vertical wells to test the EP-IV tight gas accumulation in a pilot programme involving stimulation of the reservoir to determine flow rate potential. A Field Development Plan (FDP) has been approved by the government regulator. This was additionally submitted to the Government as a requirement for the application to secure a 10 year extension to the PSC beyond 2019.

The FDP encompasses a staged approach, initially focussing on drilling of a small number of new wells to gather key information on reservoir performance. It follows an in-depth review by Baker Hughes GE aimed specifically to identify reasons for the limited success of past drilling and stimulation, and to outline optimal drilling and stimulation methodologies for future work programmes to establish commercial gas production.

The evaluation provides a technical recommendation of the optimal well and stimulation design required to achieve commercial flow rates in the EP-IV reservoir. The results of the evaluation confirm the potential for substantially increased flow rates with the application of the appropriate stimulation technology suite.

The Government of India was very prompt in providing approval to both the FDP and the PSC extension application. The amended Cambay contract, reflecting the new expiry date of September 2029, is now pending finalisation by the Directorate General of Hydrocarbons.

This initial pilot programme is, subject to securing the necessary funding, and the intention is for a larger drilling programme to follow, with the aim of aggregating sufficient production volumes to connect to the high-pressure pipelines which offer greater offtake stability and improved gas prices.

Any early production will utilise existing processing and storage facilities upgraded as required to provide a low-cost path to commercialisation. Further work on this work programme will restart once the GPSC sales process is complete.

Figure 3: Cambay Field - recorded hydrocarbon flowrates from EP-IV (Y Zone) reservoir

During the year, a small volume of gas was produced into the local low pressure pipeline from the Eocene reservoir. During this financial year, the C-77H well produced 25.22 mmscf and C-73 produced nil mmscf with total production from the block of 5,730 boe.

Cambay Contingent Resources

Resource volumes for the Eocene are unchanged since June 2016 and are summarised in the following table which shows Oilex net working interest. The development plan submitted as part of the application for extension of the PSC term addresses a sub-set of these resources in a staged approach.

 
 Unrisked Cambay Field Contingent Resource Estimates at June 
  2019 
 
                              Net Gas Volume          Net Condensate Volume 
                                    Bcf                    million bbl 
                         ------------------------  -------------------------- 
                            1C       2C      3C      1C       2C        3C 
  ---------------------  -------           ------  -----             -------- 
 
      X & Y Zones          215      417      728     12      27.4      54.6 
-----------------------  -------  -------  ------  -----  ---------  -------- 
 
 

During the financial year, the Joint venture received US$560,438 gross from GSPC against outstanding cash calls for Cambay.

Bhandut Field, Onshore Gujarat, India

(Oilex - 40%, Operator)

Oilex N.L. Holdings (India) Limited is the Operator of the Bhandut Field Production Sharing Contract (PSC) in the Cambay Basin onshore Gujarat, India and holds a 40% participating interest. The remaining 60% interest is held by Joint Venture partner Gujarat State Petroleum Corporation Limited (GSPC).

The Bhandut Field was initially discovered and developed by ONGC in 1976. The field is currently on care and maintenance, however, with ongoing production and exploration potential, coupled with existing production facilities.

In parallel with the Cambay PSC, a Field Development Plan in support of the application for an extension of the PSC was submitted in September 2017 and approved by the Government of India in April 2018.

During 2019, GSPC ran a sales process for a number of its projects in the Cambay Basin. This sales process included the Bhandut PSC. The bid closing date was August 31 2019. Oilex is in discussion with potential bidders and is planning to include its participating interest and operatorship in the sale.

During the financial year, the Joint Venture received US$97,924 gross from GSPC against outstanding cash calls for Bhandut. At 30 June 2019, gross unpaid cash calls issued to GSPC totalled US$79,980.

Figure 4: Bhandut Production Facility

JPDA 06-103, Timor Sea

(Oilex - 10%, Operator)

On 22 October 2018, the Autoridade Nacional de Petoleo e Minerais (ANPM) issued arbitration proceedings against the Joint Venture to recover the claim it imposed upon the Joint Venture following the ANPM's termination of the PSC. Oilex has a 10% participating interest and is acting as the Operator of the Joint Venture in the arbitration proceedings. In August 2019, the Company announced that it had submitted the Respondent's First Memorial to the International Chamber of Commerce in Singapore. Furthermore, following a substantive legal and independent expert review, the joint venture has also lodged a US$23.3 million counterclaim against the ANPM as damages from the wrongful termination. The arbitration hearing is scheduled to commence in February 2020. Each Joint Venture party remains jointly and severally liable and has provided parent company guarantees. A notice of default has been issued against both Videocon JPDA 06-103 Limited and GSPC (JPDA) Limited for their failure to pay the joint venture cash calls.

West Kampar PSC, Central Sumatra, Indonesia

The Company was advised by the Indonesian Government regulator, SKK Migas,that the West Kampar PSC had been terminated following SPE's failure to meet its obligations under the PSC. The Company continues to engage with the regulator with a view to returning its interest in West Kampar.

Financial

Treasury policy

The funding requirements of the Group are reviewed on a regular basis by the Group's Chief Financial Officer and reported to the Board to ensure the Group is able to meet its financial obligations as and when they fall due. Internal cash flow models are used to review and to test investment decisions. Until sufficient operating cash flows are generated from its operations, the Group remains reliant on equity or debt funding, as well as assets divestiture or farmouts to fund its expenditure commitments.

Formal control over the Group's activities is maintained through a budget and cash flow monitoring process with annual budgets considered in detail and monitored monthly by the Board and forming the basis of the Company's financial management strategy.

Cash flows are tested under various scenarios to ensure that expenditure commitments are able to be met under all reasonably likely scenarios. Expenditures are also carefully monitored against budget. The Company continues to actively develop funding options in order that it can meet its expenditure commitments and its' planned future discretionary expenditure. During the year several capital raisings were completed to provide for working capital for the company.

A number of debt and equity capital raisings were undertaken during the year to provide working capital for the Company's activities:

-- In the September 2018 quarter, the Company arranged an equity capital raise resulting in the placement of 278,237,748 new ordinary shares at an issue price of GBP0.0019 (A$0.0034) for gross proceeds of GBP0.53m (A$0.96m);

-- In the December 2018 quarter the Company arranged an equity capital raise resulting in the placement of 180,555,555 new ordinary shares at an issue price of GBP0.0036 (A$0.0063) for gross proceeds of GBP0.65 m (A$1.2m)

-- In July 2018, the Company entered into loan agreements with existing investors raising $330,000 before costs with a one-year term, 5% interest rate and 91,666,666 attached unlisted options with an exercise price of $0.0036 and an expiry date of 26 July 2019. In July 2019, the Group entered into an amendment agreement to vary the terms of its loan funding facility of $330,000 entered into on 26 July 2018. Pursuant to the amendment, the loan repayment date has been extended from 26 July 2019 to 1 October 2019.

-- In September 2018 the Company entered into another binding loan agreement with existing investors to secure funding of $315,000 at 5% interest rate with a term to 31 October 2019 plus 76,417,758 options over ordinary shares exercisable at $0.004121. In November 2018, 15,772,871 options were exercised by the investor with the proceeds of the related equity issue being used to repay the related loans balance of $65,000.

Corporate

The Company has dual listing on the ASX and on the Alternative Investment Market (AIM) of the London Stock Exchange with approximately 80% of the Company's shares held on the Company's UK register.

During the year 100,190,999 broker options were exercised at WAEP GBP0.004.

As at 30 June 2019 the Company had:

   --      Available cash resources of $357,970; 

-- Borrowings at a carrying amount of $563,955 (face value: $580,000). (Reference should also be made to Note 27 - Subsequent Events for further information); and

-- Issued capital of 2,587,318,001 fully paid ordinary shares and unlisted options of 161,220,442.

Executive and Board Changes

In September 2019, after year end the Board was very pleased to announce the appointment of Mr Peter Schwarz as an Independent Non-Executive Director.

A former director of BG Exploration and Production Limited and CEO of independent exploration company Virgo Energy Ltd, Mr Schwarz is a certified petroleum geologist and business development professional with over 35 years' experience in the oil and gas industry. Mr Schwarz has previously held various senior management roles with Amerada Hess, BG, and Marubeni and is currently a director of Finite Energy Limited, an oil and gas consultancy business he founded over 10 years ago, specializing in strategy and business development advice in the UK and Europe. Mr Schwarz holds a B.Sc. in Geology and a M.Sc. in Petroleum Geology from the University of London.

Risk Management

The full Board undertakes the function of the Audit and Risk Committee and is responsible for the Group's internal financial control system and the Company's risk management framework. Management of business risk, particularly exploration, development and operational risk is essential for success in the oil and gas business. The Group manages risk through a formal risk identification and risk management system.

Health, Safety, Security and Environment

Policy

Oilex is committed to protecting the health and safety of everybody who plays a part in our operations or lives in the communities where we operate. Wherever we operate, we will conduct our business with respect and care for both the local and global, natural and social environment and systematically manage risks to drive sustainable business growth. We will strive to eliminate all injuries, occupational illness, unsafe practises and incidents of environmental harm from our activities. The safety and health of our workforce and our environment stewardship are just as important to our success as operational and financial performance and the reputation of the Company.

Oilex respects the diversity of cultures and customs that it encounters and endeavours to incorporate business practices that accommodate such diversity and that have a beneficial impact through our working involvement with local communities. We strive to make our facilities safer and better places in which to work and our attention to detail and focus on safety, environmental, health and security issues will help to ensure high standards of performance. We are committed to a process of continuous improvement in all we do and to the adoption of international industry standards and codes wherever practicable. Through implementation of these principles, Oilex seeks to earn the public's trust and to be recognised as a responsible corporate citizen.

Qualified Petroleum Reserves and Resources Evaluator Statement

Pursuant to the requirements of Chapter 5 of the ASX Listing Rules, the information in this report relating to petroleum reserves and resources is based on and fairly represents information and supporting documentation prepared by or under the supervision of Mr Jonathan Salomon, Managing Director employed by Oilex Ltd. Mr Salomon has over 33 years' experience in petroleum geology and is a member of the American Association of Petroleum Geologists, and the Society of Petroleum Engineers. Mr Salomon meets the requirements of a qualified petroleum reserve and resource evaluator under Chapter 5 of the ASX Listing Rules and consents to the inclusion of this information in this report in the form and context in which it appears. Mr Salomon also meets the requirements of a qualified person under the AIM Note for Mining, Oil and Gas Companies and consents to the inclusion of this information in this report in the form and context in which it appears.

 
                              PERMIT SCHEDULE - 30 JUNE 2019 
  ASSET             LOCATION            ENTITY                EQUITY    OPERATOR 
                                                                 % 
                  ------------------  --------------------  --------  ------------------- 
  Cambay Field      Gujarat, India      Oilex Ltd              30.0     Oilex Ltd 
   PSC (1) 
                  ------------------                                  ------------------- 
    Oilex N.L. 
     Holdings (India) 
     Limited                                                   15.0 
  --------------------------------------------------------  --------  ------------------- 
  Bhandut Field     Gujarat, India      Oilex N.L.             40.0     Oilex N.L. 
   PSC                                   Holdings (India)                Holdings (India) 
                                         Limited                         Limited 
                  ------------------  --------------------  --------  ------------------- 
  JPDA 06-103       Joint Petroleum     Oilex (JPDA            10.0     Oilex (JPDA 
   PSC (2)           Development         06-103) Ltd                     06-103) Ltd 
                     Area 
                     Timor Leste 
                     and Australia 
                  ------------------  --------------------  --------  ------------------- 
 

(1) On 29 July 2018, the Company issued a notice to exercise its option to require GSPC to completely withdraw its 55% Participating Interest in the Cambay PSC following GSPC's failure to completely remedy the Event of Default issued on 29 May 2019. On 5 November 2018 the High Court of Gujarat issued a judgement to further delay the implementation of the EOD subject to certain conditions being fulfilled by GSPC. GSPC subsequently met the conditions and invoked the JOA dispute resolutions in the Singapore International Arbitration Centre. Discussions between the parties have resulted in a settlement agreement co-signed by the Directorate General of Hydrocarbons. The EoD has now been lifted and GSPC is commencing a sale process to dispose of its 55% interest in the Cambay PSC.

(2) PSC terminated 15 July 2015.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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