PetroTal Corp. announces that the Northern Oil Pipeline (“ONP”) operated by PETROPERU S.A. (“Petroperu”) has been shut down by a public health directive from the Peruvian government, thereby resulting in PetroTal having to shut in the Bretana oil field as a result of storage capacity limitations. Additionally, PetroTal provides an update on financing initiatives to accommodate the impact of oil price reductions occurring from oil sales at the Bretana oil field in Block 95 in Peru. All monetary amounts in this release are in United States dollars.
- The health department of the Peruvian government issued a directive for COVID-19 prevention in high risk areas and for high risk individuals;
- Petroperu temporarily shuts down pipeline operations to comply with this directive;
- PetroTal temporarily shuts in Bretana oil field operations due to storage capacity limitations;
- The Company’s planned capital expenditure for 2020 continues to be deferred;
- Reduce compensation for Management and Directors by 20%;
- Oil field shutdown will trigger significant cost reductions of operating, transportation and general and administrative costs;
- Resulting from the global oil price reduction, the Company has a contingent derivative liability of $42 million at March 31, 2020;
- The actual liability of the oil price difference determination is expected to be lower due to the projected improvement in oil prices when physical sales occur in Q3 and Q4, and;
- PetroTal advises of financing discussions for a multi-year settlement of the contingent liability.
Pipeline and Bretana Oil Field Shut Down
PetroTal has been notified by Petroperu, the operator of Peru’s ONP that it has temporarily shut down the pipeline as a result of a directive from the Peruvian government intended to combat the spread of COVID-19 in the communities adjacent to the pipeline operations. The directive states that no employees over the age of 60 nor with serious chronic diseases, should be working in the high risk regions of Peru. Although Petroperu has filed an appeal with the Peruvian government to allow the pipeline to resume operations on the basis that it is an essential service, it is not clear how long the pipeline operations will remain suspended. PetroTal has commenced steps to temporarily shut down oil production at the Bretana oil field due to storage capacity limitations. The shut down is being managed to ensure that operations can be returned to full production levels in an orderly manner upon reopening of the ONP. As a consequence of this directive, PetroTal will necessarily move to significantly curtail all costs related to oil field operations, as the Company moves into a temporary hibernation mode. PetroTal is pleased to report that no COVID-19 cases have been reported at the Bretana oil field.
Additional Cost Reductions
The Company announces that, in addition to ongoing cost rationalization of operating, transportation and capital development costs, PetroTal has reduced overall general and administrative costs by approximately 20%. This includes company-wide salary cuts, including cash compensation reductions of 20% for management and directors. The Company continues to prudently manage its cash resources and is exploring ways to further reduce its cost structure, as needed. The temporary Bretana oil field shut down in response to the public health directive gives PetroTal the opportunity to reduce costs more than if production was voluntarily shut in, and the Company will temporarily layoff all but essential personnel at the field and offices.
On May 27, 2019, PetroTal entered into a Pipeline Transportation Service Contract with Petroperu, a state-owned company, to have access to Peru’s ONP that included an oil swap arrangement (“Swap Contract”) that allowed PetroTal to deliver volumes of its Bretana oil by barge to the ONP Pump Station No.1 (“PS#1”), located at Saramuro, in exchange for equivalent volumes of Petroperu’s premium supreme residual oil at the port of Bayovar. The Company delivered a total of approximately 580,000 barrels of Bretana oil to PS#1 pursuant to this arrangement before it expired in early December 2019.
On December 23, 2019, PetroTal entered into a new Sales Contract with Petroperu whereby all the Bretana oil delivered at PS#1 is sold to Petroperu at a monthly average reference price of ICE Brent minus $4 per barrel. As of March 31, 2020, PetroTal has delivered a total of approximately 1.2 million barrels of Bretana oil to PS#1 pursuant to the Sales Contract.
It can take up to eight months for Bretana oil to reach the Bayovar port where it can be stored for a further four months before it is ultimately sold by Petroperu. The Swap and Sale Contracts enable the Company to receive oil sales revenue earlier, improving PetroTal’s liquidity. When the oil is ultimately sold by Petroperu at Bayovar, PetroTal will be subject to a valuation adjustment based on the actual price achieved by Petroperu, whether higher or lower as compared to the price received at the time of delivery to PS#1.
On a monthly basis, the Company tracks the impact of fluctuating oil prices on volumes sold under both the Swap Contract and Sales Contract, as a commodity derivative and, as a result of the recent drastic drop in oil prices, the contingent liability accruing under these contracts is approximately $18 million and $24 million, respectively, at the end of March 2020. Given the current ONP timetable, it is expected that Bretana oil delivered pursuant to the Swap Contract will be sold by Petroperu in late Q3 2020, and Bretana oil delivered pursuant to the Sales Contract will be sold by Petroperu commencing in Q4 2020, at which time the contango effect forecasts a higher Brent oil price, which would result in a lower liability. The current shut in status of the ONP could result in these physical oil sales occurring further into the future. Under the terms of the Sales Contract, the Company is required to settle this contingent liability when the balance exceeds $10 million.
The Company is in discussions to facilitate an arrangement that is expected to result in this contingent liability, when crystallized, to be paid over a three year period from future cash flow. This is an effective way to settle these obligations now, thereby allowing the Company to realize the favorable impact of the expected future higher oil prices when the physical oil sales occur. As specific details are finalized, more information on this potential source of finance will be announced in due course. The Company continues to assess other financing alternatives to ensure it has the necessary funding for its operations.
Manolo Zuniga, President and Chief Executive Officer, commented:
“PetroTal continues to support initiatives to ensure the Peruvian government provides the support needed during this pandemic, just as other countries have done. In the meantime, we continue to work on securing the necessary financial backing to ensure we are properly funded and emerge stronger from this crisis. PetroTal appreciates the ongoing dedication of all employees and the support for our business during these challenging times of the pandemic impact.”