pan orient release tonight, page-9

Two production problems have emerged in recent CVN reports:

1. The field is now producing about 50% water overall

2. Wells that do flow at an initial high rate, and come on production at a high "flush production" rate, can only be run at these sort of levels for a month or so before they start to draw up water and have to be choked back to lower production levels, to suppress the water flow.

This is a function of a) the viscous, waxy nature of the oil, through which the underlying water will easily 'cone up' if production rates are kept high, and b) the fracture porosity of the reservoirs, which inevitably extends down through the oil-water contact in places, and forms a conduit, through which water can be drawn up.

The net result is that initial high production rates for even the best wells have to be cut back rapidly, on top of the expected reductions due to natural decline, so that the only way that CVN can maintain or increase its production rate is by constantly drilling new wells that maintain or increase the overall, temporary 'flush production' capacity of the field.

To paraphrase Lewis Carrol: "They have to keep running as fast as they possibly can just to keep standing in the same place.."

And any period in which they fail to bring several new high-production wells on stream, or in which the rig does not perform to expected standards, will further reduce their production capacity.

It is perhaps unfortunate then that right up until this time last year we were led to believe that the falling production rates were due, not to these reservoir problems, but to a repeated focus on reserve exploration rather than oil production and cash flow.

Now however, it is a year since the company stated, in its June 2009 Quarterly Report, that: "The balance of the 2009 drilling programme will target both production and reserves adds, with the goal to reach and hold field production rates between 12,000 and 15,000bopd (4,800 and 6,000bopd net to Carnarvon) by third quarter 2009." And yet they still haven't even got back up to the 3,210bopd net production rate that they had back then.

CVN and POE have a water problem right across the field, and have had, ever since the original Na Sanun well back in the 1990s. This flowed 1,400bopd for three days and then watered out. Nothing has changed about this. It was and is a function of the high viscosity of the oil and the deep fracture porosity of the reservoirs. It is a characteristic of the field.

Short of getting a second or a third rig then, there doesn't seem to be much that they can do to improve things on the production front. They have consistently over-promised and under-delivered on their production targets, and the market has treated them accordingly.

So with this, and the risk that the King's imminent demise will plunge the country into civil war, I can no longer see any reason why I would buy back into this stock.

That's just my analysis though. Do not pay any attention to me.