Document date: Wed 11 Dec 2002 Published: Wed 11 Dec 2002 13:08:02 Document No: 283228 Document part: A Market Flag: Y Classification: Open Briefing ROC OIL COMPANY LIMITED 2002-12-11 ASX-SIGNAL-G
HOMEX - Sydney
+++++++++++++++++++++++++ CORPORATEFILE.COM.AU
Roc Oil Company Limited ("ROC") has interests in two new oil provinces in the offshore Perth Basin and offshore Mauritania as well as two established oil and/or gas provinces in the Beibu Gulf, offshore China and eastern England, onshore UK. You're planning to undertake an exploration drilling programme in all four areas during 2003 and have recently released to ASX an indication of the typical target reserve potential for prospects in these areas. Please comment as to ROC's current thoughts about the 2003 drilling programme and the size of the targets youre going to test?
CEO JOHN DORAN
As part of our continuing exploration and appraisal drilling programme, which started in mid-2002, ROC plans to drill between 10 and 20 wells during calendar 2003. This heavy drilling activity represents about 75% of our Base Case Exploration and Appraisal Budget for next year. If we ignore the upside potential of each prospect, take a realistic view of the size of the targets we're going to drill and add together the "typical" reserves that we might expect to find, we end up targeting about 70 to 80 MMBOE of potential net ROC reserves.
Needless to say, not all the wells will be successful, but it's equally true to say that some of the wells may prove to be more successful than we expect. Even if we hit only about half of the targeted reserves, which would be a terrific result, the 2003 exploration dollar cost for reserves added would be just over US$0.5/BBL, which is pretty good by any industry standard.
CORPORATEFILE.COM.AU
At 30 September 2002, ROC had A$79 million cash and had reduced its debt to US$21 million. Is this sufficient to fund your exploration plans?
CEO JOHN DORAN
ROC's cash and cash flow are well able to fund the 2003 programme. ROC will not need to raise fresh capital through the issue of new shares nor reduce its interest in the relevant permits through farmout, although it may consider that option in the UK where our interest is 100%.
We've just completed our 2003 Budget process and it has been particularly interesting because there is such a wide spread of potential drilling outcomes. This has caused us to come up with an "Expected" Base Case Budget with two sensitivities representing "Minimum" and "Maximum" scenarios. The Base Case Budget tries to anticipate the success/failure mix of the wells to be drilled, particularly those to be drilled in the early part of the year in places such as the Perth Basin. If our first three wells in 2003, all in the Perth Basin, are all dry then we certainly won't be spending as much of our budget as would otherwise be the case!
Working on what we consider to be a realistic assumption of a mix of success and failure through the entire year, ROC expects to spend between A$30 and A$40 million on exploration and appraisal activity through 2003, 75% of which is related to the drilling of between 10 and 20 wells. This is a heavy duty drilling programme for a company of ROC's size, but our cash reserve and cash flow allow us to handle this magnitude of activity without resorting to shareholders or farming out. We couldn't say the same thing with equal confidence if our "Maximum" case eventuates, but since that assumes that most/all of the wells are successful, it's a problem we would love to have - and one I'm sure we could handle.
Over the last couple of years, four factors have combined to provide this financial self-sufficiency: peripheral assets have been sold; the cash balance has been nurtured; our modest debt has been reduced further; and our equity exposures to most of the various plays have been pitched at the appropriate level. That is why the 2003 drilling programme may well "make" the Company, but it certainly won't break it.
CORPORATEFILE.COM.AU
Although at the AGM in May this year you mentioned that alongside the high exploration success and strong balance sheet there were two less positive points: the share price which has not been re-rated despite ROC's exploration successes; and, company-wide proved and probable reserve base at around 20 million barrels of oil equivalent is fairly slim. Where, and how, do you expect to grow your reserves? When do you expect to release an updated reserve number?
CEO JOHN DORAN
Our preferred way of adding reserves is through the drill bit. Our results during the last couple of years suggest that it's also the most cost effective and practical approach for a company like ROC.
We currently view the Perth Basin as the area that could have the biggest immediate impact on ROC's reserve growth and market standing - but only if the upcoming wells are successful and there's no guarantee of that! This reflects the size of the targets, the amount of equity held by ROC and the area's location offshore Australia. Depending upon the extent of that potential success, ROC's current reserve base could double or treble just on the basis of the Perth Basin drilling.
Depending upon the size of the prospects which are currently being worked-up onshore UK, that is another area which could have a significant impact, possibly in the order of 50% to 100% reserve growth for ROC, even if the targets prove to be significantly smaller than the Saltfleetby Gas Field (onshore UK, ROC 100 percent). While it would be wonderful to find another Saltfleetby Gas Field you can't run a company on that basis; we've got to be sure ROC can generate positive cash flow onshore UK even if the discoveries prove to be smaller than Saltfleetby.
We continue to look at asset acquisition, but only occasionally. This is because we're mainly focussed on our current assets. However, if the assets are Australian-based with current or imminent reserves, production and revenue, we'd be interested, partly because of our Australian tax efficiency. Unfortunately, as we've stated on previous occasions, it's hard to find the right opportunity and we routinely walk away from what we perceive are the wrong opportunities for ROC.
We don't exclude corporate activity but, quite frankly, the opportunities that we're currently aware of and those that we think may potentially arise in 2003, do not appear to us to offer good value. Therefore, we have no current appetite on the corporate front, although we'll continue to monitor various situations.
CORPORATEFILE.COM.AU
As you continue to seek new reserves through exploration, asset purchase or corporate acquisitions, have you considered non-conventional areas such as coal bed methane?
CEO JOHN DORAN
On occasions we've extended our search for new reserves to coal seam gas ("CSG") or coal bed methane ("CBM"), as it's more commonly known. We've been aware of this sub-set of our industry for more than a decade, particularly in the US, where two of our directors, both with considerable oil and gas experience, are based. In fact, if either of those gentlemen were living in Australia they would probably be regarded as CSG "experts". One of them is currently an active CSG player in the US in his own right. Clearly, there are many situations where money can be made by extracting gas from coal seams. Over the last few years we've considered, to varying degrees, CSG projects in areas ranging from Australia to Botswana. If we found the right one for ROC we would give it a serious look. So far, we haven't found the right one.
CORPORATEFILE.COM.AU
Following the discovery of the Cliff Head Oil Field in WA-286-P in the offshore Perth Basin, Western Australia, in the last days of 2001 you drilled a successful appraisal well one kilometre to the north of the original discovery well which encountered a 36 metre gross oil column. What is the assessment, so far, of the value of Cliff Head?
CEO JOHN DORAN
Today, Cliff Head's value is a matter of pure speculation. It's only if/when a declaration of commerciality is made that ROC would consider the field as having tangible value. Various analysts and other industry watchers have suggested what that value might be, but we prefer to wait and see what the next few wells reveal. If the next few wells are successful, then, not only will they define the real value of the Cliff Head Oil Field, but they'll also upgrade the value of the other prospects and, in fact, the whole trend.
CORPORATEFILE.COM.AU
On several occasions in the recent past you've gone to some length to emphasise the need to appraise more fully the Cliff Head discovery to the point where it could be interpreted that you're not as optimistic about the potential development as some of your co-venturers. Is that really the case? If it is, do you think that that is one of the reasons why ROC's share price has effectively stayed flat as the drilling approaches, whereas many of your co-venturers have seen their share prices rise?
CEO JOHN DORAN
I certainly don't have a full understanding of what drives the share price of a small oil stock in the current market climate, although I have some private thoughts on that topic. What I do know, however, is that when youre coming into a major exploration and appraisal drilling programme you have to try to manage expectations in a realistic manner, both within and beyond the company. People may have forgotten that twelve months ago this part of the offshore Perth Basin was undrilled and was perceived by many to be high risk with a likelihood of poor reservoir and the consensus view was that, if there were any hydrocarbons to be found, it would probably be gas, not oil. Lately, you could be forgiven for thinking that Cliff Head is a slam-dunk development just waiting to happen. The reality is that every exploration and appraisal drilling programme carries with it a sizeable amount of risk and you never want investors to lose sight of that fact. Otherwise, if the drilling results are disappointing, you'll spend a long time trying to lift investors off the canvas and you'll find it even more difficult to persuade them to stay in the ring for another round or two of investment.
CORPORATEFILE.COM.AU
In April 2002, ROC released information to ASX indicating that the net present value of the Saltfleetby Gas Field was about A$100 million, approximately $0.92 per share. What's your current estimate of the value of Saltfleetby?
CEO JOHN DORAN
We won't be able to give a specific answer to that question until our year end reserves review has been completed. In a more general sense, if we look at the gas which has been produced since April, approximately 5.5 BCF, and the remaining recoverable proven and probable initial reserves estimated as at the end of last year, then the net present value of Saltfleetby to ROC is in the order of A$90 million (A$0.83/share).
CORPORATEFILE.COM.AU
During the September 2002 quarter, ROC temporarily shut-in production at Saltfleetby because of seasonal low prices. How have prices moved since then and what impact has your new contract, starting 1 October, had on your overall price received?
CEO JOHN DORAN
As expected, UK spot gas prices have strengthened lately with the onset of the British winter. They were recently around 20p/therm (A$6.00/MCF), more than twice what they were a few months ago and more lately they have spiked above 30p/therm (A$9.00/MCF). That more than justifies our decision to shut-in briefly during the period of low summer prices. In December 2001 gas prices were in the region of 25p/therm.
The new contract gas price has had a definite positive impact upon ROC's revenue base. In value terms the impact could be broadly regarded as being equivalent to a 25% increase in overall production.
CORPORATEFILE.COM.AU
ROC brought Saltfleetby into production in December 1999. It has averaged around 35 MMSCFD since then and was still producing at around 30 MMSCFD in September 2002. How is the field operating now, particularly in terms of production and cash generation?
CEO JOHN DORAN
Saltfleetby continues to behave very well. As far as cash generation is concerned, the recent increase in contract gas prices means that the field is now producing at its most profitable level ever, on the basis of cash flow per MCF of gas.
In the resource business you usually get your fair share of operational problems and it is a rare project which performs as sweetly and smoothly as Saltfleetby has for the last three years. With each passing month our production database is developed further and it appears to be confirming our view that the field is one of those unassuming assets which outperforms expectations. Having said that, we're not complacent as every field will eventually have some sort of operational or production hiccup - that's just part and parcel of the business.
CORPORATEFILE.COM.AU
Your aim is to find another Saltfleetby in the South Humber Basin. What progress have you made with processing the 3D seismic and progressing regional exploration?
CEO JOHN DORAN
3D seismic interpretation is progressing. First pass results should be available by the end of the year. It's too early to comment in any detail other than to say that we expect a few attractive drill targets to emerge with oil and/or gas potential. In terms of barrels of oil equivalent, the typical target range might be between 25% and 50% of the Saltfleetby Field as we now know it - which is twice the size we attributed to it when it was first identified.
CORPORATEFILE.COM.AU
ROC owns 40 percent and is operator of Block 22/12 in the Beibu Gulf, offshore southern China. In March 2002 you announced an oil discovery to add to the four previous discoveries in the block. What progress have you made in evaluating the potential low cost, collective development or planning further exploration?
CEO JOHN DORAN
Considerable progress has been made. The 3D seismic has been acquired and the quality is good to excellent. We continue to be hopeful that the hi-tech seismic techniques we've used in deep water offshore West Africa will help us to better define the subtle drill targets in our acreage offshore China. The seismic information is currently being interpreted with this degree of optimism, although we won't know whether or not this positive expectation will prove to be well founded until early 2003. We continue to discuss with the relevant government authorities the concept of the fast track, low cost, collective development of one or more of the oil discoveries which are known to exist in the block. So far those discussions have been very constructive. Naturally, there are still a number of issues that we haven't yet had time to address so discussions will resume early in the New Year.
As previously foreshadowed, ROC's drilling activities in the Beibu Gulf will probably slip into the fourth quarter of 2003, for a number of reasons, including likely rig availability. Coincidentally, that timing works well from the point of view of ROC's company-wide drilling schedule because it leaves the second and third quarters of 2003 to be taken up with drilling onshore UK.
CORPORATEFILE.COM.AU
What progress has ROC made in processing and interpreting the 3D seismic and planning a drilling program for your blocks in the Rio Muni Basin, offshore Equatorial Guinea?
CEO JOHN DORAN
We're fine-tuning the 3D seismic interpretation. We're also making initial preparations for the drilling of a deep water well in Equatorial Guinea, probably in 2004. We've talked to a few large companies about the possibility of farming out part of the block and we've received and rejected a farm-in offer. While some of these farm-out discussions are expected to continue/resume during the first quarter of 2003 we suspect that ROC, and the rest of the industry, will monitor drilling results in and around the Rio Muni Basin over the next six months or so before finalising a detailed drilling/farmout strategy. One of the key things to remember in this regard is that there are several quite different play types recognised within our block in different water depths and at various drill depths. There is no shortage of variety in this part of the Rio Muni Basin.
CORPORATEFILE.COM.AU
You recently announced that as a result of exiting Senegal you expected the 2002 accounts to show a write down of expenditure in the country in the order of A$2.5 million. Please comment on why this figure seems low, given the 46.75% equity you had and the fact that youve been active in the country for a long time?
CEO JOHN DORAN
You're right, it is a low figure. It reflects a number of factors, including ROC's cost efficient approach to operating which we're increasingly coming to regard as a key ingredient in the Company armoury - particularly when we look at the costs incurred by larger operating companies.
The decision to leave Senegal was made all the more difficult because we have a high regard for the government authorities who we rate as being amongst the best we deal with anywhere in the world. However, if parts of your portfolio are performing in a way that demands more time, energy and money be devoted to them, a company of ROC's size has no alternative but to swallow a large reality pill and remove other areas from the portfolio which, rightly or wrongly, are currently judged to be less attractive.
CORPORATEFILE.COM.AU
Along the same lines, you seem to be winding down your activities in Mongolia through the farmout you announced last year to a Chinese oil company. Could you update us as to ROC's current view of Mongolia?
CEO JOHN DORAN
It was the farmout of 50% of our interest in the East Gobi Basin that allowed ROC to remain in Mongolia for the last twelve months, otherwise we would have exited last year following more than five years of activity in that country. The basic rationale is the same as for Senegal: other parts of ROC's portfolio have outperformed our perception of the potential for our acreage in Mongolia. With this in mind, ROC is currently talking to the relevant government authorities in Ulaanbaatar with a view to exiting the permits in good standing. Again, just like Senegal, the support which ROC has received from the government in Mongolia has been terrific and that has made the decision to concentrate our activities elsewhere in the world particularly difficult. Nothing would have given us greater pleasure than to have found significant oil in Mongolia because, not only would that have boosted ROC's value, it would also have had a tangible effect on the economy of a country which seems to us to be largely composed of some of the nicest people on the planet.
CORPORATEFILE.COM.AU
You've also been in Mongolia for quite a long time and you've been much more active in that country than in Senegal, therefore, if you exit Mongolia how much would you expect to write off?
CEO JOHN DORAN
We're fortunate in that we took a large write off on Mongolia some time ago. Also we're in early stage discussions with regard to the possible sale of a drilling rig which we own in that country which would reduce the write off, at least to some extent. On this basis we would expect to be writing off about A$8 million as a result of exiting Mongolia.
CORPORATEFILE.COM.AU
So now that you've left Senegal and assuming you'll leave Mongolia, the countries where ROC is active will reduce from eight to five plus Angola, where you hope to initiate activities. Does it worry you that you might be concentrating too much effort on too few countries?
CEO JOHN DORAN
Not at all. Most investors, particularly institutions, would probably be relieved to know that ROC was continually high grading its portfolio with a commensurate reduction in the number of countries where it was operating. We're certainly not putting all of our eggs in one basket. We have a very good spread of project risk with active appraisal projects in Mauritania, Australia and China, continuing production/development onshore UK and active exploration in all of those countries, plus Equatorial Guinea and, hopefully, Angola. Most people would regard that as a reasonable amount of work to get through in any given week! In fact, we look at ROC's workload in terms of weight of activities rather than the number of countries. The worst thing we could do is to defocus our efforts by retaining all the acreage we've historically acquired.
The whole process is like throwing seed across a field then waiting to see which areas start to sprout first. Initially you cover a relatively large area with seed but then, as the portfolio evolves, you see where the growth potential is coming from and you zero in on those areas.
CORPORATEFILE.COM.AU
Finally, within the last week you've received a little bit of radio and television coverage in the UK with the BBC news services commenting on local council approval which has been granted to ROC that will allow the Company to drill a well near Hadrian's Wall, a World Heritage site in the north of England. Can you give us some background to this application and the implications which the approval has for ROC and the local community?
CEO JOHN DORAN
When you explore for oil and gas onshore Britain you do so within a well-defined and quite onerous regulatory framework largely designed to protect everybody's rights and entitlements - and that is exactly how it should be, particularly on a crowded island.
Amongst other things, UK legislation requires a company to apply to the relevant local government authority for planning permission to construct a drill site. Usually such applications are handled as a matter of routine. In this case, it just so happened that the relevant site was next to the World Heritage-listed Hadrian's Wall, which the Romans built to keep the Scots out of England. Understandably, that application generated more media interest than is usually the case. ROC welcomes the decision to approve the application but we're also totally sympathetic to the concerns of the people who live in the area. Naturally, many of them have little or no knowledge as to how ROC goes about its business; perhaps they may even have been influenced by popular media and movie portrayals of how a bog-standard, big, bad oil company might behave towards local communities. They may not realise that ROC just isn't that sort of company.
The reality is that every oil company in the world is now acutely sensitive to local community and environmental issues. ROC is no exception. In fact, we spend a great deal of time handling these matters in an appropriate manner in various parts of the world. When we operate offshore Australia we go to great lengths to take into account the needs of the local lobster fishing industry while at the same time we gather extremely useful scientific data for people who are concerned with gaining a better understanding of the behaviour of the Humpback whales which migrate down the coast of Western Australia about this time each year. In Mongolia, we interacted with and assisted nomadic herdsmen when their livelihood was threatened by an outbreak of foot and mouth disease a couple of years ago, while offshore China our seismic survey was conducted with minimum disruption to the local fishing community.
Quite simply: many of us got into this business because our love of Geology which in many cases was the result of a genuine appreciation of the environment - at a time long before it became a cause celebre. Working in the oil industry doesn't require you to change your pro-environment outlook - in fact, it puts you in a better position to ensure that operations are conducted in a proper and practical manner which takes into account the interests of all concerned parties. I know that probably sounds like standard corporate-speak, but at ROC that really is how we try to conduct our business.
CORPORATEFILE.COM.AU
Thank you John.
For previous Open Briefings by ROC visit www.corporatefile.com.au
For further information on Roc Oil Company Limited visit www.rocoil.com.au
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