Sarah Belfield - Reporter and writer, freelance

s a r a h b e l f i e l d

reporter & writer, freelance

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OIL SEARCH EXPECTS LOWER PRODUCTION

(Oil & Gas Gazette, April 2006)

FOLLOWING an almost doubling of after-tax net profits to US$200.2 million for calendar 2005, Oil Search Ltd (OSH) is expecting oil production to drop slightly in 2006 to between 11 million and 11.5 million barrels.

It was the completion of asset sales to AGL, effective from the start of 2006, that was expected to drop OSH oil production by about 2.9 mmbbl over the year.

Key factors influencing production in 2006 would be SE Mananda production and the speed of production ramp-up at Nabrajah in Yemen, the company's first asset outside of PNG.

Higher oil production and stronger oil prices were largely responsible for the company's record profit result, OSH said.

Total oil and gas production was 12.2 mmbbl of oil equivalent in 2005, up 10% on the corresponding 2004 figure.

OSH sold 10.84 mmbbl of oil (up 15% year-on-year) during 2005 at an average of US$58.06/bbl. The company reported that PNG light sweet crude was selling at a premium to TAPIS for much of 2005. Gas sales were reported to be slightly lower year-on-year, at 5.4 billion cubic feet.

All up, operational revenues increased 59% to $664 million. Earnings before interest, tax, depreciation, amortisation and expensed exploration costs were up 68% to $554.3 million. The company's NPAT for 2004 was US$107.3 million.

Net operating cashflows were up 29% to US$357.7 million, with oil revenues partly offset by a 113% increase in tax paid, OSH said. The overall net cashflow was US$1.8 million (US$107.7 million in 2004), a figure largely influenced by an accelerated capex program in PNG and the Middle East, and by expenditure for the PNG Gas Project, where Oil Search held a 54.2% interest at February 2005.

The company's total 2005 dividend was seven US cents a share, which included a two-cent special dividend on top of a three-cent final dividend.

Production

Production turnarounds at the company's mature PNG oil fields was described as the year's key operational achievement, given a 20% decline rate historically.

During 2005, OSH managed to increase the gross daily production rates at its Kutubu (by 9%) and SE Gobe (by 2%) oil fields in PNG.

"Our assets teams expect that we can continue to mitigate the decline rates at Kutubu and SE Gobe," managing director Peter Botten said.

As well, Moran production (up 26%) now exceeded 20,000 barrels of oil per day after a number of years of underperformance, the company said. New production began from NW Moran (PPL 219) during 2005 and by year's end yielded 0.17 million bbl net for the company. Moran production was expected to improve when additional development wells were drilled and reservoir pressures built.

OSH's 2005 share of total oil production from Kutubu amounted to some 5.1 mmbbl, while the share from Moran ground (PDL 2, PDL 5 and PPL 219) was approximately 3.65 mmbbls and the share from Gobe (PDL 3, PDL 4) was approximately 2.23 mmbbl.

As at 31 December, OSH held 71.9% at Kutubu, 71.9% at PDL 2, 40.7% at PDL 5, 72.5% at PPL 219, 36.4% at PDL 3, and 76.7% at PDL 4.

The company sat tight during a four-week production shut-in while the Kumul loading terminal in the Gulf of Papua was undergoing repairs. The repair bill was a net US$4.8 million, but part of that amount may be partly recoupable via an insurance claim, OSH said. The repairs involved one broken and one worn anchor line.

"Despite this, Oil Search was able to meet its full year production targets," Botten said. He said this was done by optimising wells and operating facilities, and by identifying and exploiting opportunities for new production.

OSH delivered first oil from SE Mananda (OSH: 84.2% at PDL 2) in April 2006 — later than originally expected for reasons of poor weather and changes in scope. The company also reported cost overruns for the project, increasing the project development forecast to around US$140 million. The expectation was to reach around 7,000 bopd by mid-2006.

...

Yemen

Production at the Nabrajah field (OSH: 28.33%) kicked off in late November at the Nabrajah-5 Basement well and by year's end five wells had produced around 12,500 bopd gross from the Qishn and Basement reservoirs. Botten described this rate of production build as "slightly lower" than anticipated.

The company said it intended to further expand Nabrajah facilities in 2006, a process that in April will see capacities reach 25,000 bopd. During February, wells Nabrajah-9 and -10 were being put down to appraise the field's Basement oil accumulation potential.

The Nabrajah-9 sidetrack intersected the Basement and the overlying Kohlan carbonate but failed to flow oil to surface and has been suspended while the rig has moved to Nabrajah-10.

A Nabrahjah-11 well was also on the cards.

At its Middle Eastern and North African plays, OSH said it would also be optimising production at its new Area A facilities in Egypt, acquiring seismics for all its licences and drilling up to six exploration wells. Drilling would include Yemen's offshore Block 15 (OSH: 50%) and Block 43 (28.3%), while in Egypt the recently-acquired Area A (100%) that flanks the Gulf of Suez and the East Ras Qattara Block (49.5%) would be drilled.

Botten said the company would expand its holdings in the region if any opportunities arose that cleared its commercial viability hurdles.

Total operating costs in 2005 were up 27% from the previous year to US$109.7 million, or US$6.99 per barrel.

Field operating costs were up 10% to US$4.99 per barrel. OSH said costs were "very acceptable" in light of a "much higher" level of field activities. Botten said that like all companies in the oil and gas industry, the company had been affected by higher costs for oil field services and equipment, along with "much increased" competition and demand for personnel.

Spending ahead

On the production side, the company said among work planned for 2006 was a series of well work-overs in Kutubu and Gobe, and development drilling programs at SE Mananda, Moran, Kutubu and SE Gobe.

After a relatively quiet exploration year in 2005, the company said it was also looking to conduct a more active program of exploration drilling in 2006 — to the tune of around US$110 million that year — and in 2007.

The 2006 exploration focus would be on drilling prospects that were close to existing infrastructure, along with higher risk-reward targets, the company said.

"In addition, we expect to drill two wells on the large Juha structure [within PRL 2]," Botten said. The aim would be to define a major new gas and liquids resource, he said.

A detailed calendar of proposed exploration and development drilling was set out in the company's December 2005 quarterly activities report.

OSH, which reported spending US$73.3 million on exploration and US$182.2 million on development in 2005, said this year's work program would be the most active in the company's history.

The company expected to spend more than US$200 million on development at the PNG Gas Project, assuming project sanction in the March 2006 quarter.

Under 'successful efforts' accounting, OSH expensed US$37.3 million in exploration and evaluation expenditure for the 2005 period. In extending the same accounting policy to its 2004 figures, the company restated its expensing of costs to US$64.3 million from US$6.2 million. Before the start of 2004 all costs surrounding exploration, evaluation and development activities had been capitalised. The 'successful efforts' method is permitted under International Financial Reporting Standard 6.

Debt-free and cashed up

OSH reported becoming debt-free since year's end, after repaying its US dollar facility. This followed the company's initial receipt of US$395.6 million for the early sale completion of equity interests to AGL, which included a 10% interest in the PNG Gas Project and interests in oil and gas reserves, and production and processing infrastructure. The total consideration was around US$427 million, according to a February market announcement.

From 1 January, as a result of AGL's acquisitions, OSH's interests changed to 60% at Kutubu, 49.4% at PDL 2 and 5 (Moran), 10% at PDL 4 (Gobe Main), and 25.5% at PDL 3/4 (SE Gobe).

In events since the end of the December quarter, the company confirmed it had approval from PNG authorities to amalgamate the Oil Search Group of companies.

Towards the end of February this year, OSH was holding around US$530 million in cash.

s a r a h b e l f i e l d reporter & writer, freelance

About Services Clips Ideas Contact	Sample clip OIL SEARCH EXPECTS LOWER PRODUCTION (Oil & Gas Gazette, April 2006) FOLLOWING an almost doubling of after-tax net profits to US$200.2 million for calendar 2005, Oil Search Ltd (OSH) is expecting oil production to drop slightly in 2006 to between 11 million and 11.5 million barrels. It was the completion of asset sales to AGL, effective from the start of 2006, that was expected to drop OSH oil production by about 2.9 mmbbl over the year. Key factors influencing production in 2006 would be SE Mananda production and the speed of production ramp-up at Nabrajah in Yemen, the company's first asset outside of PNG. Higher oil production and stronger oil prices were largely responsible for the company's record profit result, OSH said. Total oil and gas production was 12.2 mmbbl of oil equivalent in 2005, up 10% on the corresponding 2004 figure. OSH sold 10.84 mmbbl of oil (up 15% year-on-year) during 2005 at an average of US$58.06/bbl. The company reported that PNG light sweet crude was selling at a premium to TAPIS for much of 2005. Gas sales were reported to be slightly lower year-on-year, at 5.4 billion cubic feet. All up, operational revenues increased 59% to $664 million. Earnings before interest, tax, depreciation, amortisation and expensed exploration costs were up 68% to $554.3 million. The company's NPAT for 2004 was US$107.3 million. Net operating cashflows were up 29% to US$357.7 million, with oil revenues partly offset by a 113% increase in tax paid, OSH said. The overall net cashflow was US$1.8 million (US$107.7 million in 2004), a figure largely influenced by an accelerated capex program in PNG and the Middle East, and by expenditure for the PNG Gas Project, where Oil Search held a 54.2% interest at February 2005. The company's total 2005 dividend was seven US cents a share, which included a two-cent special dividend on top of a three-cent final dividend. Production Production turnarounds at the company's mature PNG oil fields was described as the year's key operational achievement, given a 20% decline rate historically. During 2005, OSH managed to increase the gross daily production rates at its Kutubu (by 9%) and SE Gobe (by 2%) oil fields in PNG. "Our assets teams expect that we can continue to mitigate the decline rates at Kutubu and SE Gobe," managing director Peter Botten said. As well, Moran production (up 26%) now exceeded 20,000 barrels of oil per day after a number of years of underperformance, the company said. New production began from NW Moran (PPL 219) during 2005 and by year's end yielded 0.17 million bbl net for the company. Moran production was expected to improve when additional development wells were drilled and reservoir pressures built. OSH's 2005 share of total oil production from Kutubu amounted to some 5.1 mmbbl, while the share from Moran ground (PDL 2, PDL 5 and PPL 219) was approximately 3.65 mmbbls and the share from Gobe (PDL 3, PDL 4) was approximately 2.23 mmbbl. As at 31 December, OSH held 71.9% at Kutubu, 71.9% at PDL 2, 40.7% at PDL 5, 72.5% at PPL 219, 36.4% at PDL 3, and 76.7% at PDL 4. The company sat tight during a four-week production shut-in while the Kumul loading terminal in the Gulf of Papua was undergoing repairs. The repair bill was a net US$4.8 million, but part of that amount may be partly recoupable via an insurance claim, OSH said. The repairs involved one broken and one worn anchor line. "Despite this, Oil Search was able to meet its full year production targets," Botten said. He said this was done by optimising wells and operating facilities, and by identifying and exploiting opportunities for new production. OSH delivered first oil from SE Mananda (OSH: 84.2% at PDL 2) in April 2006 — later than originally expected for reasons of poor weather and changes in scope. The company also reported cost overruns for the project, increasing the project development forecast to around US$140 million. The expectation was to reach around 7,000 bopd by mid-2006. ... Yemen Production at the Nabrajah field (OSH: 28.33%) kicked off in late November at the Nabrajah-5 Basement well and by year's end five wells had produced around 12,500 bopd gross from the Qishn and Basement reservoirs. Botten described this rate of production build as "slightly lower" than anticipated. The company said it intended to further expand Nabrajah facilities in 2006, a process that in April will see capacities reach 25,000 bopd. During February, wells Nabrajah-9 and -10 were being put down to appraise the field's Basement oil accumulation potential. The Nabrajah-9 sidetrack intersected the Basement and the overlying Kohlan carbonate but failed to flow oil to surface and has been suspended while the rig has moved to Nabrajah-10. A Nabrahjah-11 well was also on the cards. At its Middle Eastern and North African plays, OSH said it would also be optimising production at its new Area A facilities in Egypt, acquiring seismics for all its licences and drilling up to six exploration wells. Drilling would include Yemen's offshore Block 15 (OSH: 50%) and Block 43 (28.3%), while in Egypt the recently-acquired Area A (100%) that flanks the Gulf of Suez and the East Ras Qattara Block (49.5%) would be drilled. Botten said the company would expand its holdings in the region if any opportunities arose that cleared its commercial viability hurdles. Total operating costs in 2005 were up 27% from the previous year to US$109.7 million, or US$6.99 per barrel. Field operating costs were up 10% to US$4.99 per barrel. OSH said costs were "very acceptable" in light of a "much higher" level of field activities. Botten said that like all companies in the oil and gas industry, the company had been affected by higher costs for oil field services and equipment, along with "much increased" competition and demand for personnel. Spending ahead On the production side, the company said among work planned for 2006 was a series of well work-overs in Kutubu and Gobe, and development drilling programs at SE Mananda, Moran, Kutubu and SE Gobe. After a relatively quiet exploration year in 2005, the company said it was also looking to conduct a more active program of exploration drilling in 2006 — to the tune of around US$110 million that year — and in 2007. The 2006 exploration focus would be on drilling prospects that were close to existing infrastructure, along with higher risk-reward targets, the company said. "In addition, we expect to drill two wells on the large Juha structure [within PRL 2]," Botten said. The aim would be to define a major new gas and liquids resource, he said. A detailed calendar of proposed exploration and development drilling was set out in the company's December 2005 quarterly activities report. OSH, which reported spending US$73.3 million on exploration and US$182.2 million on development in 2005, said this year's work program would be the most active in the company's history. The company expected to spend more than US$200 million on development at the PNG Gas Project, assuming project sanction in the March 2006 quarter. Under 'successful efforts' accounting, OSH expensed US$37.3 million in exploration and evaluation expenditure for the 2005 period. In extending the same accounting policy to its 2004 figures, the company restated its expensing of costs to US$64.3 million from US$6.2 million. Before the start of 2004 all costs surrounding exploration, evaluation and development activities had been capitalised. The 'successful efforts' method is permitted under International Financial Reporting Standard 6. Debt-free and cashed up OSH reported becoming debt-free since year's end, after repaying its US dollar facility. This followed the company's initial receipt of US$395.6 million for the early sale completion of equity interests to AGL, which included a 10% interest in the PNG Gas Project and interests in oil and gas reserves, and production and processing infrastructure. The total consideration was around US$427 million, according to a February market announcement. From 1 January, as a result of AGL's acquisitions, OSH's interests changed to 60% at Kutubu, 49.4% at PDL 2 and 5 (Moran), 10% at PDL 4 (Gobe Main), and 25.5% at PDL 3/4 (SE Gobe). In events since the end of the December quarter, the company confirmed it had approval from PNG authorities to amalgamate the Oil Search Group of companies. Towards the end of February this year, OSH was holding around US$530 million in cash.
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