I love HC but there are times we get carried away over analysing things making assumptions which are later proven wrong. To be fare I have to put my hand up and say that I am guilty of this as well. I assumed that the drilling of Samo would/could/should be delayed because of the issue with Erin’s parent company going into bankruptcy. Some on here reported that CN stated that Erin’s 20% would go to the operator… sounds good but maybe just too good to be true.
We know Erin have been issued with a JV default notice so why haven’t they been kicked out of the JV before we drill Samo? My assumption is that it’s not that simple. My first example of a JV default is between FAR the operator and PCL for the L6 lease. PCL have been and still are in default for non-payment of a cash call by the operator, but as of the Q2 report PCL is still shown as holding 40%. I understand that Kenya is in mothballs until the security situation improves but if L6 has as much value as we have previously been told then surely FAR should have sorted PCL out by now. The second example is block L9, a few years ago it was reported in the media that Ophir the operator had taken over 100% control over L9 as FAR was in default. I email FAR about this and they replied stating they were in negotiations with Ophir and hope to resolve the matter. FAR continued to show L9 as an asset in their accounts for some years, so they must of believe the issued could be resolved if they (FAR) choose to.
Then we have African Petroleum who was described by The Gambian government as speculators, they were in default of their lease and after arbitration had the lease reinstated only to lose it again and we still await the outcome of the current arbitration to see if they will be compensated for the loss of the lease. Clearly kicking a JV partner out of a JV is not a simple process and as we know we could end up in arbitration which could take years to resolve.
So if we have a JV partner that can’t pay its way why would you drill Samo and hand over 20% of 825mb rather than sorting it out before the drilling? I think the answer to this question is simple FAR’s agreement with Erin stated Under the terms of the agreement, the well to be funded by FAR can be carried out in either Block A2 or Block A5 before 31 December 2018 or such later date if the current licence periods are extended. The Licence period wasn’t extended so the deadline to earn the 80% is the 31 December 2018. So regardless of any issues with Erin FAR must ensure that they drill a well before this date to complete the farm-in into A2 and A5, otherwise they would be in default of the farm-in agreement.
FAR as operator
As part of the farm-in agreement FAR became operator of the two blocks, this is not unusual as I expected FAR to farm down part of their 80% to a larger company which in normal circumstances would become the operator of the blocks. The issue that FAR had was the deadline of 31/12/18. From the 28/03/17 to 31/12/18 was only 21 months in which time FAR had to organise a farm out and drill a well in a relative short period of time. FAR to its credit started both process at the same time as most on here realised you can’t ring the Drillmax captain and ask him to be onsite next Tuesday, there are long lead times to get a drillship onsite. The farm out to Petronas only happened on the 26/02/18 only leaving 8 months until drilling but as FAR had done all the work to date the agreement stated FAR will remain Operator through the exploration phase of the A2/A5 licences, including the drilling of the Samo1 well, and PETRONAS has a right to become the Operator for development, CN also stated that PETRONAS brings world class technical and financial strength to our joint venture. PETRONAS also has significant deep-water development expertise in the event of a discovery. My point here is that normally Petronas would have become the operator for the blocks due to its size and experience but if FAR where to be operators for the exploration phase why would they state “includes the drilling of Samo 1 well” we would all expect that the exploration phase automatically included Samo, Soloo and any other exploration well so why make the above statement. It is my simple opinion that FAR will be the operation for the Samo1 well and if there is a discovery Petronas will become the operator of the blocks. If FAR does remain the operator of the block, it may be in name only as we may see a similar situation as SNE where CNE are the operator but in conjunction with WPL, WPL are already doing a fair bit of the work, so many of the Petronas staff would be assigned to the Samo project if they find oil.
Drilling Program
There has been a lot of discussion about the second and third drill slot and we may drill FAN or a second Samo well. CNE in their report this week clearly stated that any additional drilling will be done as part of development of SNE: makes good sense as it will be a lot cheaper for the JV because the drillship will be onsite for a very long period of time. Additional the drilling cost would be wrapped up in the development costs and therefore no additional funding would be required for the JV which suits FAR, CNE and even WPL. I know PC made comments about drilling FAN but he also made comments about each partner needing to finance their share of SNE. These comments are in direct contradiction to what CNE state in their latest Q and A. PC I believe tried to publicly bully FAR into submission regarding arbitration, I am surprised that by now he has not realised that bully FAR isn’t going to change things and that CN will not back down.
If we drill a second Samo well who is going to pay for it? The ann on the 22/08/18 does not mention an option to drill a second well and I can’t imagine drilling a second well until the JV is sorted out. It will also take time to analyse the result of the Samo 1 well so I really don’t understand the rush to drill Samo 2 or Soloo. If we were to drill a second well FAR would need to fund $20 to $16m so you could expect a CR, it all depends on how confident CN is about Samo. If there is a CR before we get results from Samo 1 then CN would be hedging her bet which is good management, but if there is no CR before results of Samo 1 then that would indicate a very confident GM.
We are drilling one well and that’s it, but its one hell of a well and if that does not come off we will drill Soloo next year sometime.
The main point I have been dancing around is the time frame that FAR have worked on for the Samo 1 well. We were told about the acquisition of the lease March last year and drilling in the next few months that is amazing by any company standard and speaks volumes of the confidence CN has for success at Samo 1 well. It wasn’t that long ago FAR acquired the option to the DJ block but passed on the drilling, if they had seen good prospects I am sure they would have farmed out and drill DJ as required but they didn’t. Clearly FAR believe Samo will be a success, but FAR is in the business of raising money, farming out and drill and if they don’t drill what is the purpose of the company. FAR will always be looking for the next project to drill but more importantly can it mature into production and paying its own way.
I have faith in FAR but I am not as confident in Samo as CN is
IMHO
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