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Joint Update with OPL 310 Operator

Source: 8/30/2019, Location: Africa

LEKOIL, the Africa-focused oil and gas exploration, development and production company, is pleased to announce it has reached a resolution with Optimum Petroleum Development Company ("Optimum"), its partner on and the Operator of OPL 310 (the "Block").

The Company has executed a legally binding agreement ("Agreement") with Optimum to progress appraisal and development programme activities at the Ogo discovery (which sits within the Block). Optimum and LEKOIL (together, the "Parties") are initially targeting a two-well programme over the next twelve to eighteen months, subject to:

i) receiving an extension of the OPL 310 licence from the Ministry of Petroleum Resources for the Block ("Extension"); and
ii) the Parties securing the necessary funding for the programme.

LEKOIL and Optimum have agreed to drill two additional appraisal-development wells, contingent on the results of the initial two well appraisal campaign and the associated extended well tests to be undertaken. All wells will be designed to be compatible with an early production scheme.

Both Optimum and LEKOIL have agreed to progress the appraisal of the Block and conversion to an Oil Mining Licence ("OML"), as soon as practicable. Assuming a successful appraisal, a full field development ("FFD") programme will be undertaken and embarked upon by LEKOIL and Optimum with an industry partner, discussions on which are at an advanced stage. Assuming granted, which is at the discretion of the Department of Petroleum Resources, the OPL to OML conversion is expected to extend the licence by twenty (20) years.

Further to previous announcements, there has been an ongoing dispute as to the legitimate ownership of a 22.86 per cent stake in OPL 310. This dispute has been the principal reason that development of the Block has been delayed. Rather than pursue this matter further, the Parties have agreed to use the 22.86 per cent equity stake in the Block as a potential funding and security vehicle for the accelerated development of the Block by an industry partner or a third party that elects to farm-in to the Block to fund field development (both the industry partner and the third party being referred to herein as a "Funding Partner"). The potential Funding Partner may be sourced by either LEKOIL or Optimum.

Although the Agreement does not address the recovery of the US$13 million consideration previously paid by LEKOIL with respect to the acquisition of the shares of Afren Oil & Gas (Nigeria) Limited ("AOGNL") in 2015 (which held the 22.86 per cent. participating interest in OPL310), LEKOIL is working with Optimum on a resolution of this matter alongside the possible allocation of the 22.86 per cent to a potential Funding Partner and remains hopeful that an agreement can be reached.

Further Details on the Agreement

1. Pursuant to the Agreement, a payment structure for previously outstanding G&A arrears payable by LEKOIL to Optimum in the amount of approximately US$3.0m has been agreed, with approximately US$1m having been paid to date, with the balance to be paid by mid October 2019.

2. LEKOIL will also pay Optimum US$5.0m for an Operator's fee in regard to LEKOIL's 17.14 per cent participating interest upon receipt of the Extension.

3. The Agreement also makes provision for LEKOIL to pay Optimum certain production prepayments from the proceeds of a continuous sale of crude oil produced from Ogo, such amounts being subject to 2P reserves or aggressive production milestones being achieved. The payments, once due, include a US$10m per year payment for five years following completion of a successful well (being a well capable of producing 5,000 BBL/d of Crude Oil).

4. Further, LEKOIL has agreed to pay (a) 42.85 per cent of US$10m payable to the Nigerian Government on conversion of OPL 310 to an OML and (b) 42.85 per cent of US$10m to the Nigerian Government on reaching First Oil. The balance of the two US$10m payments will be made by the potential Funding Partner.

5. Upon receipt of the Extension, LEKOIL will also pay the Ministry of Petroleum Resources the fee to be prescribed by the Minister of Petroleum Resources in respect of the Extension, the quantum of which is expected to within normal parameters for a fee associated with a license extension.

In addition, LEKOIL will, subject to securing funding, cover 42.85 per cent of the capital expenditures and operating expenses of the Block to First Oil, being its 17.14 per cent pro rata of an aggregate 40 per cent participating interest held by it and the potential Funding Partner. The potential Funding Partner will cover the remaining 57.15 per cent of the capital expenditures.

All payments set out above made to or on behalf of Optimum are cost recoverable to LEKOIL. Whilst LEKOIL hopes to have secured a Funding Partner in short order and therefore progressing appraisal and development activities at pace, LEKOIL will be required to fund payments 1 and 2 within approximately the next 6 months. LEKOIL expects to fund these payments from a combination of existing cash resources, cash from future production and drawdown on available debt facilities.

Cost recovery terms are as follows:
- 70 per cent of net production (revenue less royalty) ("Cost Oil") will be allocated for cost recovery for all funding partners.

- 30 per cent of net production ("Profit Oil") will be split pro-rata amongst the three partners (18 per cent Optimum, 5.14 per cent LEKOIL and 6.86 per cent by the potential Funding Partner for the 22.86 per cent Interest).

- All LEKOIL's costs will be recovered at a mark-up of 150 per cent plus an additional compounding of 5 per cent per annum in respect of cost of capital to LEKOIL.

- Post cost recovery, all parties will split the net revenue according to their participating interest (Optimum 60 per cent, LEKOIL 17.14 per cent and the potential Funding Partner 22.86 per cent).

The Agreement provides for LEKOIL, Optimum and the potential Funding Partner to recover costs and expenses in the following priority:

- firstly, Optimum recovering its sunk costs in the amount of approximately $17m (to the extent not already settled);

- secondly, LEKOIL shall be entitled to recover its past costs with a 50 per cent agreed uplift and Optimum shall be entitled to recover one-third of its past costs with a 50 per cent agreed uplift pari passu from Cost Oil;

- thirdly, LEKOIL shall be entitled to recover its future costs with a 50 per cent agreed uplift and Optimum shall be entitled to recover a further one-third of its past costs with a 50 per cent agreed uplift pari passu from Cost Oil; and

- fourthly, the potential Funding Partner shall be entitled to recover its future costs and Optimum shall be entitled to recover one-third of its past costs with a 50 per cent agreed uplift pari passu from Cost Oil.

In addition, to underscore the resolution of historical issues and disputes between the parties, and to create a strong and lasting alignment with Optimum for the success of the OPL 310 joint venture, LEKOIL proposes, subject to LEKOIL shareholder approval, to grant to Optimum a combination of up to 1.2 per cent of LEKOIL's issued share capital as at the date of the Agreement, to be issued immediately following shareholder approval, and warrants for up to 0.8% of outstanding LEKOIL ordinary shares as at the date of the Agreement in four equal tranches exercisable at 25 pence, 50 pence, 75 pence and 100 pence.

LEKOIL and Optimum are committed to working constructively together and will be aligned in mutually increasing value for LEKOIL shareholders.

Lekan Akinyanmi, LEKOIL's CEO, commented,

"We are pleased to have come to an understanding with Optimum, the Operator of the OPL 310 Block. We look forward to working closely with them to unlock significant value for our investors and all stakeholders, not only with the appraisal potential identified at Ogo, but also with the other promising exploration leads readily identifiable in the OPL310 Block. We would like to thank all our shareholders for their continued patience and support through this prolonged process, and we feel confident that this support will be well rewarded in the future."

Engr. Yusuf K. N'jie, Managing Director, Optimum Petroleum, commented,

"We are pleased to be moving forward alongside our partner, LEKOIL, toward the appraisal and development of OPL 310 and look forward to a successful campaign, achieving our collective objectives for the benefit of our respective stakeholders."

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