Shares in Petrel Resources (LSE: PET) were up 14% this morning following the release of its interim results.
Chairman John Teeling confirms that "the focus of Petrel remains firmly on Iraq, but the parameters of operating in the country are changing", and reflects in his summary on Petrel's continuing 'Iraqi odyssey':
Interim Results for the Six Months to end June 30th 2010
- Subba & Luhais project successfully remobilised and proceeding on schedule
- Cash owed to Petrel has been received
- Continued commitment to Iraq with return to African roots as diversification
The focus of Petrel remains firmly on Iraq, but the parameters of operating in the country are changing. The steady disengagement of foreign military personnel reduces undue overseas influence and boosts the legitimacy and self-confidence of the Iraqi authorities. Democratic elections were successfully run in March 2010, though the lack of an emphatic winner complicated Government-formation. Six months later there is still no government. This has serious implications for the development of the oil industry. Much will depend on the new Minister. We expect that policies will be improved and streamlined to arrest the decline in oil production and to encourage exploration and development. The terms must be reasonable. Iraq is capable of producing at least 9 million barrels a day, but current production is under 3 million.
The agreement on Subba and Luhais means that Petrel has refocused on exploration activities. The upside in exploration will be higher than that available through developing oil and gas fields under service contracts.
Under the current policy of awarding service contracts to international companies we have resolved all the outstanding issues with the Iraqi Ministry of Oil. These were complicating and delaying completion of the Subba & Luhais EPC contract in southern Iraq. The project has now been successfully remobilised and is proceeding smoothly within an agreed 14 month revised completion schedule. Both the Project Joint Venture company and Petrel have received the cash owed.
This is a satisfactory outcome for Petrel as it removes all obstacles to moving ahead with formalising our existing interests in Iraq in particular Western Desert Block 6 as well as possible future projects.
As noted at the July 2010 AGM, we opted not to proceed with the East Safawi Block in Jordan. We entered Jordan as a result of our analysis of the Iraqi western desert. We were hoping that seismic and well log reinterpretation would reveal large oil targets or Risha-type gas targets. Instead, the detailed analysis showed that sands at the targeted depth were thin and tight. Our technical team instead developed a shallower Triassic type play similar to Libyan reefs. This revealed a billion barrel potential target, but with high exploration risk. In normal circumstances this would suit a large farm-in partner. Following the Lehman Brothers failure and subsequent financial crisis, the risk appetite of potential partners evaporated. Several companies who were interested could not get management approval to drill. The Jordanian authorities have been very patient giving a 15 month extension. Jordan is a good business location with excellent terms - but Petrel decided not to drill at its own risk. This decision has no financial consequences as the expenditure and bond were written off in the 2009 accounts.
Though Petrel's focus is Iraqi oil, we have been offered an exceptional opportunity to diversify at low cost. Ghana's Tano Basin has recently emerged as an exploration hot-spot, with four discoveries by Kosmos/Tullow, including the giant Jubillee oilfield. Petrel seized the opportunity to take a 30% interest, with sister companies holding 60%, in a Petroleum Agreement on Tano Block 2A. A local partner holds the remaining 10%. This block covers 1,532km2 of highly prospective acreage. The Ghanaian National Petroleum Company (GNPC) has provided available data, including 44 geological reports and extensive, good quality 2D seismic. Analysis and processing of data is underway.
This agreement is subject to ratification by Cabinet and Parliament, which we expect in the coming months.
The Iraqi odyssey continues. Since we entered Iraq in 1999 we have dealt with 5 governments, survived a war, faced down many threats and risks, all in pursuit of oil. Iraq will in future years provide oil for a significant percentage of the world's energy needs. We will be part of it. The lengthy wait for a new Iraqi Government has strained patience. Iraqi oil production is down but the principle of international company involvement is gaining acceptance. This is an important step toward creating economic terms. Financial markets are nervous but it is a time of opportunity.
But 11 years is a long time to wait and uncertainty continues. By diversifying into Africa we return to our roots. Ghana will be a major force in world oil. We are taking the opportunity to participate at an early stage.