Quarter Financial Highlights - DNO 3Q Highlights 2006

Source: www.gulfoilandgas.com 11/15/2006, Location: Europe

Highlights for the Third Quarter 2006
DNO further built on its active exploration strategy in the third quarter, positioning the company towards continued reserve growth at low cost.
  • Start of development on the Tawke fi eld in Northern Iraq through appraisal drilling and investments in facilities and pipeline.
  • Successfull development drilling at the Tasour Field in Yemen added new production at an initial level of 8,000 barrels (gross) per day in September.
  • The fi rst of a two well back-to-back drilling program at the Goliat fi eld started in September.
  • Commenced preparations of 2007 NCS drilling program within DNO operated licenses.

    Financials
    The sales in the third quarter were infl uenced by a correction of approximately NOK 29 million due to overlifting of oil in fi rst and second quarter in block 43 (Yemen). However, due to the higher oil price, there was a growth in sales from NOK 230 million in the third quarter of 2005 to NOK 284 million in 2006. In the fi rst nine months, the operating revenues were NOK 1,058 million versus NOK 550 million in the same period in 2005 due to higher oil prices and increased production.

    The netback from producing assets was NOK 104 million in the third quarter 2006 compared with NOK 123 million in the third quarter 2005. Netback from producing assets increased to NOK 599 million in the fi rst nine months of 2006, compared to NOK 364 million in the same period in 2005.

    DNO expensed NOK 82 million in exploration costs (NOK 10 million in dry well costs) in the third quarter compared with NOK 45 million in the same period in 2005. Stepped up exploration through high drilling activity and seismic surveys are the main reasons for the higher expenses. The total exploration costs expensed year to date were NOK 410 million of which NOK 194 million were expensed as dry well costs.

    Net profi t for the third quarter was NOK 46 million and NOK 92 million for the fi rst nine months of 2006.

    Operations
    Start of development phase at Tawke and exploration of Khanke
    The appraisal well Tawke #2 tested 3,840 barrels per day and has confi rmed the western extension of the oil discovery. Based on the positive results from Tawke # 1, 1A and Tawke # 2, DNO is preparing a fast-track development for early production from Tawke which is planned to commence in the fi rst quarter of 2007. DNO has secured pipeline and central processing facilities for the Tawke development cabable of delivering 50,000 barrels of oil per day. The development plan of the Tawke fi eld has been approved by the Kurdistan Regional Government (KRG). At another prospect in the PSA-area, the fi rst exploration well (Khanke #1) was spudded in July, and currently two tests are planned to be undertaken.

    DNO is in the process of fi nalising an agreement with KRG to increase its working interest in the Production Sharing Agreements by 15% to 55% in return for providing 100% funding of the project costs.

    New production from Tasour 22STand high exploration activity in Yemen
    Successfull appraisal drilling of Tasour 22ST in block 32, has added new oil production at an initial level of around 8,000 barrels per day from September. The well is currently producing approximately 5,300 barrels of oil per day. In the same block, the Godah fi eld has commenced production from two wells. The initial combined gross oil production from the wells is appoximately 1,400 barrels per day. This is expected to increase to 2,000 - 4,000 barrels of oil per day by year end.

    At Nabrajah, a 3D seismic programme has been completed and this will serve as important input to new well locations and reserve revisions.

    In addition to fi eld development at Tasour, Godah and Nabrajah, exploration drilling continued on block 53 through spudding of Hekma #1. A 3D seismic survey was also acquired in block 47 in the third quarter. Preparations are ongoing for drilling of several new exploration and development wells in Yemen over the next 18 months.

    Exciting exploration and appraisal drilling in Norway
    Drilling of an appraisal well at the Goliat fi eld started in September, and the plan is thereafter to drill an exploration well at the western fl ank of the prospect. Preparations are ongoing for exploration drilling at the Zita prospect in the fourth quarter, and 3 wells operated by DNO starting in 2007. In addition, seismic and EM data have been collected and are being processed for DNO-operated licences of PL356 and PL383, and on PL 272/362, PL334 and PL369.

    Outlook
    The high exploration and development activity will continue in the fourth quarter and in 2007. DNO expects to participate in 40-50 wells from mid-year 2006 through year-end 2007, of which 30 are operated by DNO. The main objective is to further increase reserves at low cost, followed by new production. This will form a strong basis for continued value added to our shareholders.

    Third quarter Highlights - Result of Operations Producing Assets
  • The sales revenues were lower due to lower oilprice and slightly lower production.
  • The reduction in netback from DNOs operations and increase in tax rate is due to correction of overlifting of oil in the fi rst and second quarter in Yemen.
  • Bayoot SW #1 in block 53 was expensed as a dry well with NOK 10 million in the third quarter.

    Summary per segment

    Middle East
    Northern Iraq
    The development of the Tawke fi eld has commenced in the third quarter, and according to the plan fi rst oil production could start in the fi rst quarter of 2007. Investments in facilities and pipelines have been made with production equipment capable of delivering approximately 50,000 bopd.

    The appraisal well Tawke #2 penetrated and tested the same reservoir interval as Tawke #1 and #1A and fl owed 3,840 barrels per day. The plan is now to accelerate development drilling within the Tawke area in order to build production capacity during 2007. For this purpose another smaller rig will be mobilized into the area early 2007.

    A 3D seismic programme is also currently being performed in order to assess the full oil potential of the Tawke area. The results from this program will be important in the process of deciding the location of future production and appraisal / exploration wells in the Tawke area.

    A second drilling rig was mobilized into the PSA area in July. This rig is currently drilling Khanke #1 on a new prospect, and based on the results to date the plan is to undertake two production tests. The next well location is contingent on the results from Khanke #1. DNO has identifi ed several additional exploration prospects in the PSA area, and 2D seismic acquisitions will commence after the completion of the 3D seismic programme. Upon completion of the next exploration well, the rig is likely to be mobilized to the Tawke area for development drilling.

    DNO currently holds a 40% working interest in two PSA’s: The Dihok PSA including the Tawke oil discovery in the Northern region, and the Erbil PSA further south. Subject to an agreement which is in the process of being fi nalised with the Kurdistan Regional Government (KRG), DNO will be responsible for 100% of the funding obligations of the PSA’s in return for receiving additional 15% working interest (in both PSA’s). The exploration and development expenditures to date are primarily related to the Dihok PSA, and these costs are expected to be fully recovered in 2007, if fi rst oil is achieved in accordance with the current Tawke early production plan.

    Yemen
    The production in Yemen for the fi rst nine months of 2006 increased by 13 percent compared to the same period in 2005.

    In block 32, the successfull appraisal well Tasour #22ST came on stream August 28, with a production of more than 8,000 barrels per day. The production from this well has now been directed through the Tasour Central Production Facility (CPF). Following the oil production from Tasour #22ST, the Tasour fi eld averaged at 15,500 barrels per day (gross) in September. Tasour # 22ST is currently producing at approximately 5,300 barrels of oil per day. Tasour #23, which will drill through basement and overlying carbonates, was spudded as an exploration well on September 5. Tasour #23 is located on a prospect south of the Tasour field.

    At the Godah fi eld, located approximately 14 km east of the Tasour Field, production has started from Godah #2 and #3 at initial combined gross fl owrate of 1,400 barrels of oil per day. It is expected that the oil production from the two wells will increase to 2,000-4,000 barrels per day by yearend. The Godah production facility consists of a pipeline connected to the existing oil sales export line which passes through the Godah Field. Produced water will be trucked to the Tasour CPF for treatment and disposal until the fi rst quarter of 2007, when a 23 km pipeline to the Tasour CPF will be operational. The Godah development will be undertaken in stages, and it is expected that it will be fully developed over the next two years.

    A 3D seismic acquisition programme covering parts of both the Godah fi eld and the Tasour fi eld, commenced in September. The new 3D seismic will assist in the development of the Godah fi eld and in the exploration drilling planned for the eastern portion of block 32 and northwest of Tasour.

    In block 53, the well Bayoot SW #1 completed a test in the carbonates overlaying the basement. Commercial fl ow rate was not achieved during the test. It will be considered to re-enter the well and continue testing this zone at a later stage using more extensive stimulation techniques. The well has been expensed in the third quarter as a dry well. During testing of the exploration well Bayoot SW #2, a maximum fl ow rate of 700 barrels per day was achieved and early transport of oil to the Sharyoof facilities has commenced. The well is currently delivering 300-600 barrels of oil per day. Further work is considered to be undertaken with this well, with the view to further increase the production. Contingent on the outcome of this work, a pipeline and other facilities will be installed to connect the Bayoot oil production to the Sharyoof facilities on permanent basis.

    The exploration well Hekma #1 has been drilled some 5 km from Bayoot SW #2. The well was drilled to a depth of 3,715 meters, it was suspended and the drilling rig moved to drill Bayoot South #1A. The plan is to test Hekma #1 with a smaller drilling rig which is currently drilling Sharyoof #23 (infi ll well).

    At the Nabrajah fi eld in block 43, tests in recent wells have failed to deliver sustainable fl ow. Nabrajah #11 has been suspended and further stimulation and testing of wells #9, #10 and #11 is to be considered at a later stage. A 3D seismic programme has been completed and this will serve as important input to new well locations and reserve revisions. One exploration well is to be drilled at on another part of block 43 before new wells will be drilled within Nabrajah.

    Total exploration cost expensed for the Middle East business segment was NOK 37 million in the third quarter of 2006, compared to NOK 67 million in the previous quarter. This includes NOK 10 million as dry well costs for Bayoot SW #1. A 3D seismic programme at block 47 has been completed during the quarter (NOK 15 million).

    Syria
    The fi rst exploration well, Maree-1 on block 6 Syria was spudded in the third quarter. The results are currently being evaluated. DNO has a 19,9 % interest in the onshore block.

    Northern Europe
    Norway
    The Glitne fi eld was shut down for a planned revision one week during September. Startup of production on the Enoch fi eld, is planned towards the end of the fi rst quarter 2007. DNO has an interest of 2 % in the Enoch field.

    Seismic programs have been completed in the third quarter in PL 272/362 and PL 334. EM data has been acquired on PL 369. The processing of seismic and EM data are ongoing on these 3 licences, and in addition on PL 356 and PL 383.

    The drilling of an appraisal well at the Goliat fi eld started in September. An exploration well at the western fl ank of the prospect is planned in the fourth quarter. DNO holds a 15% interest in the Goliat field.

    Preparations are ongoing for exploration drilling at the Zita prospect in the fourth quarter. There are also preparations ongoing for three other exploration wells starting in 2007, all operated by DNO.

    The total exploration cost expensed for the Northern Europe business segment was NOK 45 million in the third quarter, all related to seismic data collection (NOK 16 million) and fi eld studies/G&G work (NOK 27 million).

    Africa
    Equatorial Guinea
    At block P in Equatorial Guinea, preparations have been undertaken for the drilling of the third exploration well. The well is expected to commence in November. The plan is then to drill two more wells during 2007.

    Mozambique
    Technical studies has continued in order to evaluate future possible drilling locations within the license.


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