13 Jun 2016
Addition of Further Southern North Sea Gas Hub via Acquisition of Vulcan Satellites fieldsIndependent Oil and Gas plc ("IOG" or the "Company") (AIM: IOG.L), the development and production focused oil and gas company, is pleased to announce that on 10 June 2016 it signed a Sale and Purchase Agreement (“SPA”) with Verus Petroleum Ltd (“Verus”), to conditionally acquire 100% of the shares of Oyster Petroleum Limited (“Oyster”) a subsidiary of Verus. The acquisition is conditional upon Verus completing the transfer of certain licences into Oyster which have 2C recoverable resources of 320.7 billion cubic feet of gas (“BCF”).
- SPA signed to acquire 100% of the shares of Oyster, for an initial consideration of £1 million, £0.75 million nine months after Completion with further payments of up to £3.25 million upon the achievement of certain milestones (the “Acquisition”).
- Initial consideration to be funded by drawing down on the Company’s available loan facilities.
- Oyster will hold 100% of Block 49/21a (Licence P039), 100% of Block 49/21d (Licence P2122), 100% of Block 48/25b (Licence P130) and 100% of Block 49/21c (Licence P1915), in the UK sector of the Southern North Sea. These licences contain the Vulcan East, Vulcan North West and Vulcan South fields (collectively, the “Vulcan Satellites”). Oyster also has approximately $25.6 million in UK pre-trading expenditure which can reduce the future amount of tax payable.
- The Acquisition increases IOG’s 2C recoverable resources by 320.7 BCF or 53.45 million barrels of oil equivalent (“MMBoe”) at an effective cost of US$0.22/Boe.
- Acquisition consists of 77.4 BCF at Vulcan East, 131.3 BCF at Vulcan North West and 112.0 BCF at Vulcan South.
- Subject to completion of this and previously announced acquisitions, the Company’s combined 2P reserves and 2C resources increases to 102.3 MMBoe.
- The Vulcan Satellites, which require no further appraisal, lie 30-45km east of the Blythe field which is 100% owned by IOG pending completion of the Blythe acquisition.
- Vulcan East has a suspended well requiring decommissioning which has been independently estimated to cost £3.0 million.
- IOG is in advanced discussions regarding an export route for its SNS gas hubs. Once these offtake arrangements are in place IOG will prepare Field Development Plans.
We are extremely pleased to have agreed this major transaction, to acquire a number of attractive assets, in what remains a challenging market. These assets will more than double our 2P and 2C recoverable resources at a very compelling price and come with substantial pre-trading expenditure.
This acquisition expands our hub strategy; to gain control over a number of dormant discoveries that can be developed through common existing infrastructure, thereby generating significant economies and capturing many synergies.
Once all announced transactions have completed, we should have more than 100 MMBoe of low risk resources in our portfolio. This will be approximately two thirds gas and one third oil which provides an excellent springboard for us to become a significant development and production company. The additional scale will further enable IOG to contribute positively to UK energy security, in line with the principle of Maximising Economic Recovery for the UK North Sea.
We remain confident that with the right approach, there is considerable value remaining in the North Sea and I look forward to making further updates on the Vulcan Satellites development plans in due course.
Simon Hume-Kendall Chairman of London Oil & Gas Limited (“LOG”) commented:
This transaction demonstrates that LOG's investment in IOG has assisted the Company in overcoming the worst of the upheaval in the oil and gas market. The company is now clearly able to expand and develop its portfolio in innovative ways by seeking to commercialise these sizeable developments.
Furthermore and most critically, LOG is pleased to be in advanced discussions with IOG and other parties regarding the development funding required to unlock the considerable value in their portfolio, which we believe to have multi-billion dollar revenue potential.
LOG special adviser, The Right Honourable Charles Hendry, former UK Minister of Energy added:
The interaction between Government, leading British multinationals and the Company throughout this process has been invaluable and has shown "UK Plc" operating in harmony to extend the life of the North Sea, in line with the Government's aspirations.
With recoverable resources of more than 100 MMBoe now in sight, IOG is on its way to becoming a substantial North Sea company. The agreement shows that even in challenging times for the industry, major partners are able and willing to work together to deliver new investment.
Details of the Acquisition:
Oyster will hold 100% of Block 49/21a (Licence P039), 100% of Block 49/21d (Licence P2122), 100% of Block 48/25b (Licence P130), and 100% of Block 49/21c (Licence P1915), (together, the “Licences”) in the UK sector of the Southern North Sea. These Licences contain the Vulcan East, Vulcan North West and Vulcan South fields.
This transaction significantly enhances IOG’s 2C recoverable resources by 320.7 BCF or 53.45 MMBoe at a cost of US$0.22/Boe. This consists of independently verified resources of 77.4 BCF at Vulcan East, 131.3 BCF at Vulcan North West and 112.0 BCF at Vulcan South. Subject to completion of the Blythe and Cronx acquisitions, the Company’s combined 2P reserves and 2C resources increases to 102.3 MMBoe.
The Vulcan Satellites, which need no further appraisal, lie 30-45km east of the Blythe field, which is 100% owned by IOG pending completion of the acquisition of the other 50% of the Blythe licence as announced on 19 April 2016. IOG is in advanced discussions regarding an export route for these fields and once that is in place the Company will prepare a Field Development Plan. IOG will take on liability for decommissioning a suspended well on Vulcan East, which in April 2015 was independently estimated to cost £3.0 million as part of a development campaign, based on prevailing rig rates at that time.
As of 31 December 2015, Oyster held approximately US$25.6 million in UK pre-trading expenditure, which the Company can use to reduce the future amount of tax payable.
The Acquisition has an effective date of 30 June 2016 (the “Effective Date”) and is conditional upon the approval of the UK Oil and Gas Authority (“OGA”), upon receipt of which the Acquisition will complete (“Completion”).
The Acquisition is for an initial consideration of £1 million payable at Completion, subject to interim period adjustments for the period between the Effective Date and Completion. The initial consideration will be funded by the draw-down of the Company’s available facilities under the loans provided by London Oil and Gas which has approved the Acquisition and this payment. In addition, the Company will make three further deferred consideration payments as follows:
- £0.75 million payable nine months after Completion;
- £1.75 million payable within 30 days of approval of a Field Development Plan on the Licences by the OGA; and
- £1.5 million payable within 30 days of the production of first gas from the Licences (defined as a minimum period of seven days of continuous production).
About Independent Oil and Gas:
IOG is an oil and gas company with established assets in the UK North Sea. The company's strategy is to deliver near term development and production assets in North West Europe, through its extensive technical and commercial expertise, whilst maintaining some exposure to exploration upside. The company is looking to grow both organically and through acquisition. Following the Blythe acquisition, the Company’s combined estimate of 2P reserves in Blythe and 2C resources in Skipper net to IOG will be 40.2 MMBoe.
Upon completion of the Blythe and Cronx acquisitions IOG will have five licences in the North Sea. All of these licences will now be owned 100% by IOG and subject to OGA approval will be operated by IOG. IOG has a 100% working interest in two other licences, one awarded in the 27th licensing round and another in the recent 28th licensing round. One is to the east of Blythe containing the Truman prospect and Harvey discovery (IOG estimate 16 BCF or 3.1 MMBoe) and the other is between the Blythe and Cronx licences which contains the Elgood and Hambleton discoveries and the Tetley and Rebellion prospects. Both these 100%-owned licences have potential resources that could be tied back to nearby infrastructure or to the Blythe development.
Further information can be found on www.independentoilandgas.com
The Blythe gas discovery in the Rotliegendes Leman formation straddles Blocks 48/22b and 48/23a in the Southern North Sea in licence P1736. The Blythe Leman needs no further appraisal and has independently verified 2P reserves of 34.3 BCF (6.1 MMBoe). (Source: ERC Equipoise Competent Person’s Report (“CPR”) dated September 2013.)
Gas tested to surface from three separate intervals in the Carboniferous beneath the Blythe Leman gas discovery from one of the Blythe discovery wells, 48/23-3 drilled by Arco in 1987. The maximum rate achieved was 0.9 MMcfd from an unstimulated vertical test. (Source: End of well report 48/23-3 – November 1987.) This was deemed uncommercial at the time, before the advent of horizontal multi-fracture stimulated wells. Further technical work including seismic reprocessing and remapping needs to be completed to evaluate this potential resource to refine the gas-in-place estimates which are between 70 BCF and 310 BCF. (Source: Tullow Oil 48/23a Relinquishment Report – May 2009.)
Oil has flowed to surface from the naturally fractured Zechstein Carbonates in the Hauptdolomit formation above the Blythe Leman gas discovery from two wells. Well 48/22-1 drilled by Burmah in 1966 flowed 39° API oil at rates up to 2,000 barrels per day (Source: Composite well log 48/22-1 – October 1966) and well 48/23-3 drilled by Arco in 1987 at flowed 38° API oil at a maximum rate of 1,128 barrels of oil a day. (Source: End of well report 48/23-3 – November 1987.) The extent of the structure and potential oil resources in the Hauptdolomit remains unknown. Previous estimates considered that the mapped closure was probably small. Oil-in-place has been estimated between 2 MMBbls and 4 MMBbls. (Source: Tullow Oil 48/23a Relinquishment Report – May 2009.) Further evaluation and re-mapping is now warranted now that a development will proceed on the main Blythe gas discovery.
The Skipper oil discovery is in Block 9/21a in the Northern North Sea in licence P1609. IOG owns 100% of the Skipper licence P1609. Skipper needs further appraisal by drilling a well to retrieve an oil sample in order to design the optimum field development plan. Skipper has independently verified gross 2C resources of 26.2 MMBbls. IOG management estimates that the recoverable oil from Skipper is 34.1 MMBbls based on a recovery factor of 25%, compared to the historic CPR estimate of 19%. Successful flow tests from nearby heavy oil fields substantiate the company’s estimate of a 25% recovery factor. The appraisal well will also target two exploration prospects directly beneath the Skipper oil discovery which may contain oil in place of 46 MMBbls. (Source: AGR Tracs CPR dated September 2013.)
IOG has agreed to acquire 100% of Cronx (Block 48/22a, licence P1737) which is subject to completion. The Cronx gas discovery is 14km north-west of the Blythe field. Cronx was discovered in 2007 by well 48/22b-6 drilled by Perenco UK Ltd.
IOG commissioned an independent CPR by ERC Equipoise on Cronx in July 2012 which shows a base case expected gas recovery of 17.6 BCF or 3.4 MMBOE 2C resource. IOG anticipates drilling a well in 2016, subject to rig availability, the necessary permits and funding. IOG expects the well to confirm the recoverable resources, which IOG believes has the potential to be larger than the 17.6 BCF base case in the CPR. IOG is currently evaluating options for the development and export of the Cronx gas.
About Elgood and Hambleton:
The Elgood discovery (IOG 100%) (Block 48/22c, licence P2260) was drilled by Enterprise Oil in 1991 and tested gas to surface at 17.6 MMcfd but was not progressed by Enterprise due to size and gas prices at that time. IOG's estimate of the recoverable reserves in Elgood is 2.1 MMBoe.
The Hambleton discovery, to the south of the same licence, was drilled by Century Exploration in 2005 but also was not progressed to development. IOG estimates that Hambleton has recoverable resources of 6 BCF (1 MMBoe). IOG believes that the reprocessing of existing 3D seismic data could increase recoverable resources up to 26 BCF.
There are prospective resources on licence P2260 of 5.3 MMBoe in the Tetley and Rebellion prospects. Reprocessing of existing 3D seismic across 48/22a and 48/22c is required to determine whether Elgood connects to Cronx which would boost recoverable reserves significantly. The new seismic interpretation will also determine the likely size of Hambleton. IOG is now working on the potential development plans and will commission a CPR to confirm the resources over this area.
Competent Person’s Statement:
In accordance with the AIM Note for Mining and Oil and Gas Companies, IOG discloses that Mark Routh, IOG's CEO and Interim Executive Chairman is the qualified person that has reviewed the technical information contained in this announcement. Mark Routh has an MSc in Petroleum Engineering and has been a member of the Society of Petroleum Engineers since 1985. He has over 35 years' operating experience in the upstream oil and gas industry. Mark Routh consents to the inclusion of the information in the form and context in which it appears.