oilbarrel

October 10, 2013
Tangiers Petroleum Terminates Australia Farm-Out As Cash-Strapped Chinese Partner Misses Key Deadline

When signing a farm-out investors often look not only for the terms agreed but also the credibility of the farm-inee. There's a good reason for this: it's one thing to promise investment and activity, quite another to deliver it. And it's the reason why, as we reported in December 2012, shares in AIM-quoted Tangiers Petroleum dipped on news of the farm-out deals struck for its acreage in Morocco and Australia. Not only were the terms rather less generous than senior management had indicated when they began the farm-out process but the partner bagged for its Bonaparte Basin acreage off the coast of Australia was some little known Chinese outfit.
The agreement saw China's CWH Resources, in its first JV in Australia, agree to spend A$35 million on exploration activities to earn a 70 per cent interest in the WA-442-P and NT/P81 blocks, which lie in the southern Bonaparte Basin some 250 km southwest of the port of Darwin. As we pointed out at the time, should drilling there yield the kind of success Tangiers was hoping for, with talk of multi-billion barrel and multi-TCF prospects, then ASX-quoted CWH would have got the “steal of the century”.
Earlier this year, however, it became clear that all was not going well in the newly formed JV. In Its quarterly activities report for the June quarter, it was clear Chongqing-based CWH didn't have the money to fund its forward work commitments, with just A$84,000 in cash and talk of debt financing its work commitments, which would be highly unusual for an exploration project.
Now just days before a key licence deadline, Tangiers, which is also listed on the ASX, has terminated the farm-out agreement after CWH, currently suspended from trading on the ASX for failing to submit its accounts, failed to meet an extended deadline to award a seismic contract. Tangiers is actively seeking an alternative partner to fund the work commitments on the block, which require the award of a seismic contract by the end of this week – or risk cancellation of the permits.

The loss of the permits would remove the significant upside that Tangiers said could lie on its Australian acreage, such as the super giant Nova and Super Nova prospects and the Milligans Fan Oil Play. It would also remove the financial liabilities of meeting the work commitments on the acreage at a time when new executive chairman Eve Howell has made clear the future of the company lies in Africa. It has already relinquished an onshore Queensland block to tighten its focus on Africa and, once the Galp deal completes, will have an additional US$10.5 million in the kitty to seek out new opportunities on the continent.

In Morocco, the JV between Tangiers and farm-in partner Galp Energia of Portugal is faring rather better. Again the terms may not be as generous as shareholders would have liked, nor is Galp a headline name, but it is a known and reputable offshore operator with E&P interests in Brazil's pre-salt Santos Basin and offshore Angola. Galp agreed to take on 50 per cent of the Tarfaya Offshore block, leaving Tangiers and state oil company ONHYM with 25 per cent each, in return for spending US$41 million exploring the block, including a US$7.5 million payment to Tangiers to cover back costs.

Although the JV still requires final sign off from the ministry, Galp is already moving ahead with well planning in readiness to spud the Tao-1 well in the first half of 2014. This will give Tangiers a front seat in the surge of exploration drilling in Moroccan waters that is set to kick off in the coming months as exploration heavyweights Cairn Energy, Kosmos and Genel rev the drillbit across their acreage.

Shares in Tangiers are currently trading at 11.62 pence in London, a far cry from highs north of 30 pence in November 2012.