Orca Exploration Group Inc. announces the successful completion of its SS-11 development well in Tanzania, provides an update on the Company’s operations and announces a bridge loan facility.
SS-11 successfully completed
On the 30 May 2012, the SS-11 development well in the Songo Songo field was successfully completed. Orca estimates that the well will be tied in and on stream by September 2012 and management’s expectation is that the well will be highly productive. It is expected to be initially infrastructure constrained to a maximum of approximately 40 MMcfd. The total cost of SS-11 is estimated at US$38 million. The increased cost is primarily due to additional rig time and the fact that the rig was mobilized from Syria specifically for this one well.
SS-11 was drilled towards the crest of the reservoir structure encountering 352 metres of high quality Neocomian reservoir at a 40 degree inclination and was completed with a large 5-1/2” chrome completion. While the Company believes that the well may be capable of producing up to 70 million standard cubic feet per day (MMcfd) unconstrained, actual productive capacity and production rates cannot be determined until the well is tied in and flow tested. The well will be tied in through the flow line of SS-5, which well has been formerly shut-in and now being suspended due to the gradual deterioration in wellbore integrity.
SS-12 development well deferred
Mounting unpaid TANESCO receivables and unresolved negotiations with the Government Negotiating Team (GNT) have resulted in a decision by Orca to defer drilling the SS-12 development well at this time. The Company’s initial plan was to move the rig to drill SS-12 immediately following the completion of SS-11. The Company intends to return to SS-12 and drill the well when additional deliverability is required and the issues with TANESCO and the GNT have been resolved.
Tanzania Government secures financing for Infrastructure Expansion Project
In late June the Government of Tanzania announced that it had entered into a lending agreement with the Export-Import Bank of China to fund approximately US$1.2 billion in energy infrastructure expansion. The majority of the funds will be used to construct a new 24- to 36-inch pipeline to be laid between Mnazi Bay and Somanga Funga, and to twin the existing 16-inch pipeline between Somanga Funga, the onshore tie-in to Songo Songo, and Dar es Salaam with a new 36-inch pipeline. This is designed to increase pipeline capacity allowing transport in excess of 210 MMcfd.
“Orca Exploration and PanAfrican Energy Tanzania would like to congratulate the government of President Kikwete on recently achieving this important milestone in infrastructure expansion to meet the growing energy needs of Tanzania,” said Orca Chairman and CEO W. David Lyons. “As the first and principal natural gas producer in Tanzania, we have been solid partners with the Government of Tanzania for over a decade. Our company has spent in excess of $200 million over this period building a natural gas industry in Tanzania in good faith and on the strength of our contracts and PSAs and we are committed to provide a sustained, secure supply of natural gas. Orca and PanAfrican Energy are very conscious of the potential for natural gas to contribute to Tanzania’s energy needs, and we look forward to continuing to play our part in realizing this potential.”
No increase in SS-9 corrosion levels
Corrosion testing was completed on SS-9 as of 1st June 2012. The test did not show any material increase in corrosion levels in the production tubing at critical locations and SS-9 has been confirmed safe to continue production for another nine months, subject to successful integrity pressure tests. The plan is to shut in SS-9, currently producing 30 MMcfd, when SS-11 is brought onstream. Following shut-in SS-9 will still be available to provide spare capacity and redundancy allowing more thorough testing of all production wells during the remainder of the year.
Offshore rig for Songo Songo West drilling released
Orca had earlier announced its intention to secure a jack-up rig, expected to arrive in Mozambique in Q3 2012, to drill the Songo Songo West exploration well in Q4 2012. The Company will not proceed with the drilling of Songo Songo West until the TANESCO receivables are brought current and GNT issues are successfully resolved. In the interim Orca will be actively seeking a more cost effective method to test the resource potential of Songo Songo West.
Government Negotiating Team status of discussions
As reported in the Company’s 2011 Annual Report, in February 2012, the Government of Tanzania announced that it was setting up a Government Negotiation Team to discuss a number of issues in relation to the Company’s Songo Songo Production Sharing Agreement (PSA) with the Tanzania Petroleum Development Corporation (TPDC) that was signed in October 2001.
The scope of the GNT is to discuss a number of points that were raised by the Parliamentary Committee for Energy and Minerals into the workings of the PSA. This includes, but is not limited to, TPDC back in rights, profit sharing arrangements, the divestment of the downstream assets, cost recovery and Orca’s management of the upstream operations. Orca has been and will continue to discuss these matters in good faith with the GNT, but reserves its rights to vigorously defend its position in accordance with Tanzanian and International law should no satisfactory agreement be reached.
TPDC has indicated that they wish to exercise their right to ‘back in’ to the field development by contributing 20% of the costs of the future new wells, including SS-10 and SS-11, in return for a 20% increase in the profit share percentage for the production emanating from these wells. The implications and workings of the ‘back in’ will be discussed with the GNT and there may be the need for additional reserve and accounting modifications once these discussions are concluded. For the purpose of the reserves certification, it has been assumed that they will ‘back in’ for 20% for all future new drilling activities and other developments and this is reflected in the Company’s net reserve position.
The Company’s cost pool in Tanzania was recovered early in Q2 2011. This resulted in a reduction in the percentage of net revenue attributable to the Company. The level of cost gas increased during 2012 as a result of significant expenditure on the drilling activities. TPDC is still in the process of auditing the historic cost recovery pool and is currently disputing US$34 million of costs that have been allocated to the cost pool for the period 2002 through to 2009. The Company contends that the disputed costs were appropriately incurred on the Songo Songo project in accordance with the terms of the PSA.
Negotiations with the GNT are ongoing. In this regard, Orca submitted a proposal in mid-May, which was subsequently rejected by the GNT. The Company has today received a counter proposal which it requested and now intends to assess and subsequently meet with the GNT thereafter to further discussions. To the extent that it is not possible to satisfactorily resolve the differences with the GNT, the Company will utilise the extensive dispute mechanisms outlined in the PSA which include international arbitration.
Bridge Loan Facility to fund Tanzania operations
The Company has entered into a loan agreement with Stanbic Bank Tanzania Limited, a subsidiary of Standard Bank, for a senior secured bridge loan facility of US$10 million. The loan is repayable six months after drawdown amortized over the ensuing 12 months. The loan attracts interest at 3-month LIBOR plus 8% per annum, with an additional 2% interest premium should TANESCO payments exceed 240 days overdue. Proceeds will be used to fund the Company’s ongoing operations and working capital requirements in Tanzania, including payment of current corporate taxes due. The Company has withheld remittance of VAT relating to overdue TANESCO payments until said payments are received.
