Oil Search: Quarterly Report to 31 December 2010 (Papua New Guinea)

Oil Search today announced activities report for the quarter ended 31 December 2010.

Commenting on the quarter, Managing Director, Peter Botten, said:

PNG LNG Project

“Work on the PNG LNG Project in the fourth quarter continued to focus on preparing the various key Project sites and on the construction of essential support infrastructure. By the end of the year, contractors for the major worksites were mobilising in readiness for the main construction activities, which will progressively commence through 2011. With camp facilities now operational, work has started on the Hides Gas Conditioning Plant site and construction of the Komo airfield. In addition, line pipe is being received and stockpiled at Kopi, the southern supply base, and the onshore pipeline contractor has begun line clearing while fabrication is underway on long lead time equipment.

November saw the official opening of the Port Moresby Construction Training Centre, where Papua New Guineans will be trained for jobs in construction and transport services. These employees will play a vital role in the construction of the LNG Plant and associated marine facilities. Training will be certified to international industry standards, enabling graduates to compete for employment opportunities beyond the construction of this Project.

PNG LNG continues to attract strong support from all sectors of the community in PNG. During the quarter, a number of landowner companies began to supply services to the Project via a range of subcontracts.”

Production and revenue performance

“Production of oil and gas increased by 1% in the fourth quarter of 2010, to 1.86 mmboe, taking 2010 full year production to 7.66 mmboe. While 6% lower than in the 2009 full year, this was above the Company’s guidance range of 7.2–7.4 mmboe, a pleasing performance given the maturity of our PNG oil fields.

Total operating revenue for the quarter was US$164.7 million, 16% above third quarter revenue of US$142.2 million. This reflected higher oil sales volumes of 1.63 mmbbls, with a 67,000 barrel drawdown from inventory during the period, together with a 12.5% increase in the average realised oil price. Total operating revenue for the 2010 full year was US$583.5 million, 14% ahead of the 2009 full year result, with the increase driven by higher oil prices.”

Gas expansion

“During the quarter, Oil Search had active discussions with its joint venture partners regarding the timing and scope of an integrated exploration and appraisal drilling programme designed to mature resources for LNG expansion. Hides appraisal drilling timing continues to be discussed, with a focus on commencing the programme in the second half of 2011. Alignment was reached on the potential timing of drilling the Huria exploration well in the fourth quarter of 2011, should outstanding technical analysis and validation work prove positive. An appraisal well on the P’nyang gas field is also planned, to take place in the first quarter of 2012. In addition, seismic acquisition over the Angore gas field and the Huria lead in the Foldbelt/Highlands region, which is part of the prospect assessment process, took place during the quarter and was completed in early 2011.

Following an extensive regional review of PNG, Oil Search believes that the best potential for finding significant new hydrocarbon accumulations in the country lies in the Foldbelt/Highlands, where there are large structures close to the PNG LNG upstream infrastructure and where Oil Search already has large equity positions, and in the Gulf of Papua, which is gas prone yet under explored. In line with this view, during the fourth quarter, Oil Search took further steps to extend its portfolio in the regions offshore and immediately onshore the Papuan Gulf. The Company completed two acquisitions in PRL 1, which contains the Pandora offshore discovery, taking its interest to 24.1% in that licence and farmed-in to four additional licences (PPL 276, PPL 338, PPL 339 and PPL 312).

These farm-ins have significantly extended the Company’s acreage spread in the Gulf Basin. An extensive 4,720 square kilometre 3D seismic survey over Oil Search’s existing Gulf licences is close to completion and an additional 1,585 square kilometres of 3D seismic will be acquired in the new licence areas during the first quarter of 2011. While still at an early stage, the initial interpretation of the first phase of offshore seismic acquired in 2010 has highlighted a number of interesting leads.

Drilling is expected to commence in late 2011 and the area is believed to have the potential to be the basis for a new LNG growth stream for the Company and/or provide resources for PNG LNG expansion.”

Oil exploration success in PNG and MENA

“Mananda 5, an exploration well located in PPL 219 approximately 18 kilometres north west of the SE Mananda oil field targeting the Mananda Attic Prospect, was spudded in November. The well has discovered both oil and gas in the primary Toro objective. Initial formation evaluation indicates a 14 metre hydrocarbon column and, based on the preliminary interpretation of pressure data, the column has the potential to extend over an additional 28 metres, making a total of 42 metres. Pressure data also indicates the potential development of a second 17 metre hydrocarbon column within the lower Toro sandstone. The well is currently being deepened to evaluate the Koi-Iange sandstone. Once drilling is complete, the zones of interest will be tested to evaluate the potential commerciality of this discovery.

The Al-Meashar-2 appraisal well in Block 7, Yemen spudded during October and had reached a total depth of 3,750 metres by the year end. Oil shows were observed over much of the basement section while drilling and on test, the well flowed at an estimated average rate of 145 barrels of oil per day. The well has been suspended as a potential future producer, pending evaluation of the well results.”

Strategic Review

“A major Company-wide strategic review, set in motion in early 2010, was completed during the fourth quarter of 2011.

The key conclusions of the review are as follows:

– Reinvestment in PNG has driven a 30 fold increase in market capitalisation since first oil production from Kutubu in 1992. There has been a four fold increase since January 2005.

– Oil Search has skills in its management team and workforce that, when linked to its high potential asset base, are capable of delivering top quartile total shareholder return for the next seven years.

– The key value drivers in the near to medium term will be superior performance in the areas of project delivery and operations management, including the continued active management of the operating environment in PNG, which presents a range of unique challenges.

– Oil Search will remain an oil and gas growth company, notwithstanding that the balance between reinvestment and dividends will need to be adjusted with delivery of PNG LNG.

– The core continuing oil business will provide important cash flow to support delivery of PNG LNG T1 and T2, as well as further growth initiatives in LNG expansion and oil investments.

– Delivery of Train 3 and then Train 4 remains the major catalyst for value creation, with comprehensive programmes defined to maximise the Company’s ability to deliver these projects in a timely fashion.

– Programmes are in place to progressively mature the Company’s MENA based assets and review each asset for attractiveness and materiality.

The review has provided a clear indication of the future value creating initiatives available to the Company and the work programmes and resourcing requirements that are needed to achieve the Company’s five year objectives.

Further information about the review will be outlined to the market in February, following final Board approval of the proposed forward strategy, associated programmes and objectives.”

2010 full year results and outlook for 2011

“The Company’s financial results for the year to December 2010 will be released to the market on 22 February 2011. Operating costs per barrel equivalent lifted are expected to be slightly below the lower end of the previous guidance range of US$16 – 18 per boe. This is primarily due to a deferment of the planned 2010 second half workover programme into 2011 and the recovery of operating costs from the PNG LNG Project, partly offset by the impact of the strong A$ on A$ denominated corporate and operating costs. The full year amortisation rate (including depreciation and site restoration) is expected to be in line with the previous guidance of US$6 – 8 per barrel of oil equivalent lifted. Total exploration expensed for 2010 will be US$131.5 million, as outlined on page 5. A proportion of this is related to exploration activities in the Middle East, the costs of which are non-deductible for tax purposes. All the above guidance is subject to the finalisation of the financial statements, Board review/approval and the year end audit currently taking place.”

The Oil Search Board is expected to approve the 2011 work programmes in February, at which time our outlook for the year, including production and expenditure forecasts, will be released to the market. At this stage, the Company expects that production in 2011 will be in the range of 6.2 – 6.7 mmboe. While underlying field production performance remains strong, output will be impacted by a planned shut-in of facilities in the second and fourth quarters of 2011, to enable Associated Gas work related to the PNG LNG Project to occur. Present forecasts suggest that production is likely to be slightly above this level in 2012 and then remain largely flat into 2013, assuming planned future development activities are successful.”


Source: Oil Search, January 25, 2010;