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RBC Capital Markets issued a sector note yesterday https://rbcnew.bluematrix.com/docs/pdf/1b7ed148-531e-4351-b36d-bc42e9067e29.pdf? (thanks to ohisay on TMF)
They have a total NAV of 536p (449p + 87p risked explo) with a further E&A activity unrisked upside of 91p.
A quick calc shows them attributing circa $20 per boe for 2P reserves.
Their view of SOCO for 2014 and 2105 is of no change to year end reserves and falling to flat production.
Based on the production estimates this gives a reduction in cash-flow and with the impact of higher capex going forward (2014 especially) a reduction in free cash flow and hence capital distribution.
On provided guidance and figures to date I can’t argue with the production and cash-flow figures but I hope they will get a surprise in year end reserves and production post 2015 in due course, requiring a rework of their model.
kyu66
ee - can I ask why you would expect an issue to be IRO $400m? If there is a tie-in to Bach Ho, I understood that this was expected to cost $60-100m, although that figure was pre-H5 discovery.
this does raise the issue why you'd borrow $400M at say 5% when you only need $100M or less,
ok there is other capex but there's also cash in the bank. I wonder if we're just being conservative and considering that we might need $100M's to fund exploration costs on the newly acquired farm in ?
If that's not the case (or some other capex/expo costs on perhaps as yet concluded deal ?) , wouldn't it be much better to get some kind of flexible deal with a bank ? secured on the additional production revenues ?
you would think this would be a pretty safe bet for a bank, therefore relatively cheap ?
will be interesting to hear what is said about this at the agm, I do hope there is not a convertible option to a bond, It might be better to do a share issue, although that would dilute too, at least we would have the option to join in. ( I suppose you could counter dilution by increasing your shareholding anyway which would achieve the same),
K
K
See reply above #696
There wouldn't need to offer equity conversion rights to do a bond in current market conditions - so just forget that idea.
Bonds, bank finance and every other alternative will be considered - so there is absolutely zero point in speculating about what they might do and why (not least because in this case we probably have visiblity re only about 15% of the total picture eg re TGT plans !!!)......
Numis note from yesterday:
In this note, we take another look at our SOCO investment thesis. We find a
company that offers investors a c.5% yield, a balance sheet that remains net cash,
has growing operational cashflow and material yet low risk upside. Despite having
over 100 UK listed E&P peers, SOCO is unique in this regard.
We disagree with the reasons why analysts have moved to a consensus neutral on
SOCO and believe a valuation premium to the mid-cap E&P peer group is justified.
SOCO currently trades at 0.85x RENAV versus a sector 0.76x. Limited exploration
catalysts may deter investors that prefer the more speculative end of the E&P
spectrum, but we believe management have shown strong capital discipline by only
investing in high IRR developments and positive EMV E&A. Management and board
remain significant shareholders, and remain highly selective when deploying risk
capital.
SOCO remains one of our top E&P picks in 2014...........Valuation: We remain of the view that the risk/reward balance of investing in SOCO is
compelling with limited downside from the current share price, with the stock trading
close to our core 2P NAV of 424p/share. Our RENAV stands at 496p/share, 18%
above the current share price. We expect our Core NAV to rise over the next 12m as
the result of FPSO de-bottlenecking, new infrastructure investments, higher TGT
recovery and improved gas prices......We expect the HLJOC to look at alternative oil evacuation options this year.
Options include:
a) Installation of additional pipe-line infrastructure in order to take multi-phase flow
to the Bach Ho platform for processing. This would be largely an opex solution
with TGT partners installed a new multi-phase line and paying Bach Ho a
processing tariff.b) Installation of a small CPF with processing infrastructure at TGT and replace
the existing FPSO (contract ends in 2016) with a simple FSO to enable tanker
offloading. This would be a more capex biased development solution given the
additional infrastructure requirements, but will negate the opex related to FPSO
lease.In our view, de-bottlenecking this year has the potential to offer a short term solution to
production constraints. We potentially could see an increase in total gross oil processing
capacity from 55kbod to c.65kbod with TGT share of production rising by 10kbod or
3kbod net to SOCO. We believe the net NAV impact to be relatively small (c.20p/share),
however, the impact on short-term cashflow and dividend would be far more material. A
3kbod net increase would be a 20% increase in current group production driving a
similar order of magnitude increase in annual cash-flow leading to a higher dividend.
In our view, a step change in production is likely to come from the installation of
additional field infrastructure. The pressure is currently on state-oil company,
PetroVietnam, to boost production. In our view, we could see further significant
investment in TGT as early as 2015 leading to a step up in production in late 2016.Why the change in TGT development philosopy?
We believe the political nuances associated with the development of TGT are not well
understood, and has led unfair criticism of SOCO. In our view, TGT has been optimally
developed given the constraints imposed by the TGT operator, HLJOC. HLJOC, is
driven by conservative internal estimates of field-wide resource potential (included in a
Reserve Assessment Report or RAR), which in turn has driven a conservative approach
to field development. Nevertheless, RAR recoverable volumes for TGT have risen
significantly since first oil and we believe should now support incremental investment in
the asset base.
We understand that conceptual design work and pre-FEED is already underway on
alternative oil evacuation solutions for TGT and that we could see the HLJOC making a
decision on additional infrastructure investments as early as 2015; this in turn would
drive a step-change in production as early as late 2016. We expect investments in new
pipelines or a CPF to be value enhancing for shareholders (NPV12 positive)
Our base case assumes a gross oil plateau of just below 55kbod but clearly, this could
be substantially higher (eg >80kbod) if additional investment is sanctioned
My bolds. But...just for emphasis.....Numis are looking at the possibility that TGT production could be somewhere over 80k bopd. IMO that could prove conservative, if they can agree a generous capacity solution.
There is no real point in starting a thread just to post my comments on a pretty uneventful AGM, so I'm commenting here.
First, comments on the presentation:
1. Note the big increase planned on VN capex - $155mn in 2014, up from $99mn in 2013 (p4). The main reason for that is the plan to drill 8-10 wells on TGT for the next 3-4 years (if I correctly noted those numbers). Remember that there is very quick cost recovery on development capex.
2. Ed noted the news on the morning of the AGM that Talisman were intending to sell their assets in VN (and elsewhere. This was an aside - but I expect to hear more about that.
3. The H5 jacket will be set in September and they will then drill 5 wells before installing the topsides in the middle of 2015. They will then put those 5 wells on production and home in rapidly on a single preferred production option for TGT as a whole. Currently they have 10-15 production scenarios they are evaluating, including a) expanding FPSO capacity (they expect it to do 70,000 bopd) b) adding another FPSO c) Hooking up just H5 to Bach Ho, at a capex of $75mn and d) hooking up the entire field production to go across Bach Ho, at a capex of ballpark $300mn. The multiple scenarios result from combinations of these elements, coupled with differing production scenarios (see slide 11) - production capability is the product of the capex spent on well drilling together with a pure JOC management decision on the optimal way to produce from the reservoir. I have the impression that there is a wide range of production plateau levels that might be chosen. It is clear to me that Bach Ho has moved a long way up the possible range of production possibilities - though ultimately the choice will come down to project economics (ie it is still possible for the operators of Bach Ho to be so greedy in their tariff expectations that the JOC picks another route to evacuate TGT - but other things being equal one or other Bach Ho solution seems highly likely to me).
4. Another aside - Talisman are experiencing much higher watercuts than on TGT (which impacts the FPSO water handling)
5. Once the H5 topsides are set, they then expect to drill fault blocks H4S and H5S (see map on p10 for all drilling locations). I also noted that one of the wells in the plan was intended by the JOC as a water injector but was also thought to have potential as a producer.
6. I particularly noted from both the presentation comments and subsequent discussions, that they are getting to have a very high level of confidence in the ERC Equipoise analytical approach. Their dynamic model has been extensively backtested successfully and is now being used with a geological model overlay in order to provide a predictive tool to indicate the most productive locations for drilling development wells. Ed was very excited to be visiting ERC Equipoise head office shortly, in a part of South London that he has never visited......though, since I am extremely familiar with that part of South London and was born less than two miles from their office, I had to bite my tongue and resist pointing out to Ed that it is in fact a bit of a hell-hole - a point that was reinforced by the weekend news of an illegal rave in an office block over the road ;-) Hopefully his excitement was more geological...... ;-)
7. Litchendijili rig should be signed up this week and the intention is to unitise the expected oil leg to that field (clearly shown on p14). As others have said, there was comment about this becoming the cornerstone of an "African business". Nanga IIA is also "becoming pretty interesting".
8. Distribution details will be announced with the interims. Minimum $100mn. Theoretically that would be c 18p per share buy (depending on FX rates!!) they might stretch a bit, IMO.
9 Block V seismic now complete. Whilst the oil window is thought to be on the DRC side of the lake, it depends critically on the oil migration pathways (note that wells on the Ugandan side showed the oil had migrated elsewhere). IMO....whether anything gets done on Block V depends entirely on the DRC Gov't and UNESCO - but it completely clear (IMO) that anything that is done would be done in a tightly-defined area very close to the lake (and would not have a material impact on wildlife). I'd expect most of the block to be relinquished (especially if the WWF keep trying to ponce off the company with their PR - in which case I'd expect the assets to end up with someone far less interested in operating ethics and far less susceptible to NGO pressure! - and I have made that point in person very forcefully to both Anthony Field and David Nussbaum)
Questions:
a) There were some interesting responses to questions about reserves and OOIP. Ed gave the impression that OOIP numbers weren't really very relevant at this point. I note that some have interpreted this negatively - but I'm unsure that this is correct. I think the point is that it is all about recovery rates at this juncture - and the net recovery rates (backed by the ERC Equipoise modelling) are going to be very much more important than theoretical gross OOIP. Management thinking is clearly centred on validating their expectations of recovery rates (which, from discussions, I see as the main issue responsible for the valuation gap between SOCO's concept of TGT and the approaches from potential buyers that have been made to date. It is ALL about producing evidence and data which stands up to very close scrutiny by both the JOC partners and by potential buyers!). Note that ERC Equipoise are the only consultants who have actually examined in detail all of the core samples taken.
b) There were a range of questions on Block V, mostly from 20-30 year olds who were very keen to justify their existence by trying to dig up dirt on behalf of clients (there were at least 10 such people, representing "clients" or NGOs). Two of these questions were on specific allegations of intimidation by "agents", both of which are already under investigation by the company (as Global Witness, the main protaganist on that point, clearly knew - despite which they promptly blogged and ignored the categorical repudiation of any such alleged actions by RdS, in which he made it pretty clear that if there was found to be anything in such allegations, the services of the people responsible would be dispensed with pronto). Both MadDutch and myself made it publically crystal clear that we would not be invested in the company if we were in any doubt that the company was doing its level best to operate ethically in all respects [and, if any of these professional lobbyists are reading this, I invite them to compare the effort made by SOCO to address these aspects with the efforts made by peer group FTSE 250 companies - using the relevant annual reports!]. Note that the Aviva rep smugly marked the NGOs' card by saying that they had commissioned an "independent report" that came up with 6 recommendations....which had already clearly been discussed with the company!..... RdS made clear they are happy to engage with any and all NGOs and institutions who wish to discuss such matters. I also pointed out in a preamble to my own question that the overall environment in that part of DRC is such that violence and lawlessness is a daily occurrence - and it therefore would be unsurprising if local "entrepreneurs" tried to take advantage of the oil company presence by seeking to blame it (cf. the shameful lying of claimants against BP in Texas and Louisiana) - rather in the manner that others have also done.....;-/
c) My question was about the analysts' understanding of the business. Roger C was excoriating in his comments. In essence he thinks only two analysts come anywhere close and that the great mass of "analysts" do no useful analysis at all - merely lopping arbitrary percentages off management estimates and/or producing fanciful industry analyses that give too much credit to "moose pasture" wildcats in the NAV estimates and not enough to companies that are actually producing oil and cashflow. Apparently SOCO is generally not considered "exciting enough" - though RC fairly pointed out that most investors who were interested in "drilling excitement" had exited the sector at the time of the financial crisis [a point well borne out by examination of the share prices of dozens of explo-focused companies!]. I infer from some of the discussion that the new CFO, Anya Weaving (who is both smart and delightful (IMO!!) incidentally) will take on more IR responsibilities going forward - starting with interfacing with the analysts.
d) Roger made it clear that indicative offers for TGT had been received in the past, but at a level that made it a no-brainer to dividend out value at a high rate to shareholders instead of accepting a lower offer. That is clearly going to be what they are doing until someone finally gets round to making a sensible offer that can be accepted. It is clear that the ERC Equipoise work (and the ongoing drilling) is key to providing the evidence that would be needed for that - the only question is when (as ever!).
In sum, there wasn't very much new to be learned - as I'd expected. I was greatly encouraged that the ERC Equipoise work seems to be very well-regarded and therefore hopeful that there will be significant value to be added from that source as the process of reserves reviews comes to a conclusion for 2014 at year-end. As ever, it is impossible to predict when a third party might decide to approach SOCO with serious intent. I would think that the present situation in Iraq is a wildcard in that regard.
Thank you ee
That's one of the most informative posts I have ever read.
Best wishes, Martin
2. Ed noted the news on the morning of the AGM that Talisman were intending to sell their assets in VN (and elsewhere. This was an aside - but I expect to hear more about that.
>> yes given that soco can't seem to get any offers that match their valuation of tgt due to them believing it's worth more than purchasers, you do wonder if the talisman bit might be worth more to soco than to anyone else ? especially since they might improve recovery rates there by dropping production and increasing on the rest of tgt. I don't know who the talisman partners are and if that might cause some political complications.
The comments re water cut and fpso might also suggest this is worth very little, though potentially still more to soco than to others without the direct link to tgt? doesn't do as a potential buyer to appear too keen thought,
K
Thanks Martin.
I'd also suggest people re-read my preceding post in this thread concerning Numis research. Taken together, the direction of travel becomes very clear, IMO!
There were some interesting responses to questions about reserves and OOIP. Ed gave the impression that OOIP numbers weren't really very relevant at this point. I note that some have interpreted this negatively - but I'm unsure that this is correct. I think the point is that it is all about recovery rates at this juncture .
well obviously the figures all investor/buyers are interested in are how much oil is recoverable, you can keep the oil that can't be got out of the ground. To this end, recovery factors and oil in place are important since these are the two things that tell you how much you can get out.
The attitude at the AGM, echoed the type of feed back I got some months back speaking to soco about these figures and whether the oip figure inclued h5 or not. At the time I got mocked on Motley fool with people suggesting I had spoken to the Janitor ! or that I should go and lie down, I was telling it as I'd heard it, this confirmed this to me.
I know you (ee) produced an rns suggesting that the reserves figure should be 1.2 bn or 1.3bn, including H5, though I can't find that now. Interesting that neither the the company itself isn't quoting this previously rns'ed figure now in answer to how much oil is there. Also I recall last years numbers, where from memory, the engineers had suggested a recovery factor between 25 and 34%, soco were claiming a 32 to 50% recovery, and suggesting it would be 50 %. They may still think that but they seem to have settled on 40% for this years AGM, and prefer to not say for the other figure.
I have sympathy with the management, they have always said that they thought tgt was a 1bn barrel oil field, and their have been good results and bad results. So when we get a good result the temptation is to want to push this figure up, no one is so keen to push it down when there's a bad result ! So perhaps it was over optimistic to push up to 1.2/3Bn on the h5 result, I don't know.
All of this leaves us in limbo, (still), where we've been for years, certainly since we were promised the reserves report in the fall of 2012 or was it 2011 ?
There are promising things in there that's for sure, tgt might be a great asset to produce from but it's not a great asset to sell. Something else missing from calculations re it's value, is that large amount of capex/ work required to achieve these high recovery rates or keep the field producing. 10 wells per year for the next couple of years (I think ee said 4 years from his notes?) obviously this makes the field worth less than a simple field that will just produce 360M barrells over the next 15 years needing only a couple of water injectors added toward the end.
I don't know how much they can get production up with this drilling campaign, and how much of a bottle neck the fpso will be. I recall people posting that they had been told tests on the fpso couldn't happen because talisman couldn't produce the 15k per day, it seems now more accurate to say, the partners together couldn't produce the 70k per day as it seems we're not in a position to produce more oil either.
Given all the uncertainties, the market seems to have got it about right for the time being. Of course if you're holding in a year or so's time, and they announce that H4s has a lot of oil, and that they'll tie in to bach ho and expect to produce 90k per day, then obviously the price will jump. However given how conservative the partners are on these things, that's by no means a certainty. that a tie in to bach ho can be agreed.
The cnv gas issue shows us how PV are more interested in their own interests than those of the JOC.
It might be that the price we will have to pay for an agreement to tie in to bach ho and raising production will be a high tarrif for the use of Bach Ho infrastructure. How this might compare to the fpso costs we'll have to see. It seems so far off ( drilling H2 2015, and only agreeing additional capacity when that's done), that its not surprising the market is telling Roger that they don't have exciting news flow (his reply of course, no, but we do have exciting cash flow !)
really sorry this is a bit rambling I've been dragged off a couple of times to do some other things so if I've wondered off from my original points I apologise.
I was disappointed by the agm, I saw little to give me confidence that they thought a sale of vietnam was likely, but you never know. There are a few bits going on, and who knows perhaps tgt will gradually grow, tgt4s and tgt5s failure to give a "current figure including what we know of h5 was disappointing, and goes somewhat against the view that we're gradually proving the resource up. No mention of connectivity again this year so I think we can forget the idea that some resevoirs are much bigger than we thought because they span bigger distances that we thought.
Still I prefer the management being honest, it's not a plumbing job, there's work to be done here but while everything is always for sale at the right price there's nothing to suggest that anyone is likely to match the managements valuation any time soon. (though this does suggest perhaps soco buying talismans bit of tgt),
H5 will take some time, as will a pipeline, if that can be agreed, it won't be for another year. In the meantime the fpso can do 60k, perhaps 70 after it's next shut down period (later this year or next). We don't know when the talisman production will drop off, which again makes capacity planning difficult,
I'll be holding for the decent yield, the bits of potential, and the possibility that at some point the rest of the company will be sold off at a premium to the current price.
cheers K
Hi K,
Firstly, now that you've met me you know that I am of advancing years and my higher faculties are fading! So please, please can you try using italics of something like that to separate out quotes from content? Otherwise some of your pearls of wisdom may be lost!
Re Bach Ho costs - while I'm sure the operators would like to charge as much as they can get away with they are sitting on a dirty great processing platform that is running well below capacity, and getting worse. There aren't a lot of other potential sources of input so I'd be disappointed if the JOC can't negotiate worthwhile terms. We'll have to see.
On Talisman, their production doesn't come from an extension of TGT, I know there was some time ago a bit of discussion about possible unitisation as a tiny bit of TGT went over the license boundary. My, faint, recollection is that nothing came of it - there wasn't anything material. Their production comes from HST/HSD. Interestingly, looking at their June presentation they reckon be getting $84 per BOE netbacks, similar to the TGT figure - no real surprise. However, their projected production profile show a peak average of about 12kbopd for 2014, falling only slightly to a stable 10kbopd for the next 4 years - so assumptions that HST is tailing off fast, and of little value, may be premature. That doesn't mean a possible bid by Soco for the acreage isn't a possibility, but if they are right then they will want a reasonable sum for it and to recoup that any buyer would need to keep producing at reasonable rates through the FPSO - so the benefits of a Soco purchase may not be that great.
There are promising things in there that's for sure, tgt might be a great asset to produce from but it's not a great asset to sell.
It's not a great asset to sell at the moment - as witnessed by the failure to obtain worthwhile offers. However, there is clearly interest, and as the drilling and modelling progresses it clearly becomes more so. I am in effectively the same position on this as I have been for some time - at some point there will be a sale. However, I am not going to try to predict when as I'm in no position to do so - but I'm pretty sure I'll no real inkling of a likely offer till there's an RNS - it could happen tomorrow, or in several years.
But, as you say, and as Roger Cagle made clear at the AGM - it's not a major problem and the company is in a strong position. If they feel offers undervalue the asset they can continue to produce from it, and while doing so increase the resolution on the assets size, so probably making better offers more likely, and return cash to shareholders. That's a situation I'm quite happy with for now.
Regards
Peter
I know you (ee) produced an rns suggesting that the reserves figure should be 1.2 bn or 1.3bn, including H5, though I can't find that now. Interesting that neither the the company itself isn't quoting this previously rns'ed figure now in answer to how much oil is there
It wasn't an RNS. It was an interview shortly after the H5 well.
I would expect them to take the view that numbers cannot be RNS'd (as "fact") unless they have been verified and agreed independently. That remains a work in progress.
Also I recall last years numbers, where from memory, the engineers had suggested a recovery factor between 25 and 34%, soco were claiming a 32 to 50% recovery, and suggesting it would be 50 %. They may still think that but they seem to have settled on 40% for this years AGM, and prefer to not say for the other figure.
The 40% number is considered an average for the field, as Ed said
I don't know how much they can get production up with this drilling campaign, and how much of a bottle neck the fpso will be. I recall people posting that they had been told tests on the fpso couldn't happen because talisman couldn't produce the 15k per day, it seems now more accurate to say, the partners together couldn't produce the 70k per day as it seems we're not in a position to produce more oil either.
AIUI the original test plan was expecting to have 15k bopd from Talisman, which wasn't forthcoming. Since the HLJOC had never planned to produce 70k per day, it is hardly surprising they couldn't produce it at the drop of a hat - why would they spend money just for a few weeks' test when they know they'd just shut it all back in again once the test is done? Feel free to investigate this further though - I agree it seems counter-intuitive, though I certainly wouldn't rush to form the judgement you have without knowing the exact circumstances. In particular, there are insurance and contractual issues.
Incidentally, Talisman's block is 60% owned by Talisman, with the rest owned by PVEP. I can't help but feel that things would run more smoothly if the whole area was combined in some way.
rgds
yes sorry about that Peter, I have only just noticed I hadn't made the quote bold.
Re Bach ho, yes I see your point, however would they have any costs in upgrading I wonder ?
Also we're in the unfortunate position of negotiating with the owners of bach ho, who I assume consist at least in part, PV, as a company and we have PV as significant shareholders. so the people that we're negotiating with have the inside info on what we pay for fpso etc etc. Any tarrif they get from us goes straight into pv's pocket so there is some conflicts of interest there. Of course the best for everyone would be to tie into bach ho, and produce as much oil as we can, and pay a reasonable royalty, for use of the facilities. If relations with PV were as good as the directors would like to portray, I guess we'd be getting some payment for the liquids in the gas by now !!
Re Talisman, I stand corrected, It was my understanding it was coming from the pimple on the rhinos bottom, as Roger once called it.
Re not a great asset to sell, at the moment, yes, but we keep thinking soon it will be, we'll just prove this up, we'll just do that. before it was tgd, then they dropped that, and H5 became the hope, now we need to get that to production, but they'll be no pipeline planned until after that is done in a years time. I think my point also is that because there are so many individual resvoirs a lot is needed in development drilling to exploit it, with wells delivering between 1m and 8m barrels.
The management have in the past clearly signalled when assets were likely to get sold off, with both yemen and thailand, while I agree with you it could happen at any time, there was no indication this year that they thought this was likely soon.
I'm happy with the situation too, but how do things stand compared to pre agm, I'm a little less sure that there's a big upside in the near future, and if there is it is probably not tgt / sale based probably more likely to come from marine xi.
K
It wasn't an RNS. It was an interview shortly after the H5 well.
I would expect them to take the view that numbers cannot be RNS'd (as "fact") unless they have been verified and agreed independently. That remains a work in progress.
Aha, thanks that's why I couldn't find it. I think the point I'm making is that I'm disappointed that they don't feel able to say, like in the interview the figure we would be planning towards is now 1.3BN. It suggests to me that yes H5 was much better than expected but perhaps others haven't performed so well so we have an overall estimate of 1BN still.
The 40% number is considered an average for the field, as Ed said
I understood that the estimates in last years report were supposed to be some kind of average ? not sure they would be of any use otherwise ? Management were definitely suggesting 50% recovery last year, looks to me like they've moderated to a 40% recovery factor this year.
AIUI the original test plan was expecting to have 15k bopd from Talisman, which wasn't forthcoming. Since the HLJOC had never planned to produce 70k per day, it is hardly surprising they couldn't produce it at the drop of a hat - why would they spend money just for a few weeks' test when they know they'd just shut it all back in again once the test is done? Feel free to investigate this further though - I agree it seems counter-intuitive, though I certainly wouldn't rush to form the judgement you have without knowing the exact circumstances. In particular, there are insurance and contractual issues.
Well, I'm surprised, I had been under the impression that we had plenty of capacity behind the pipes and there was a real fpso constraint. There isn't, perhaps there will be again when they drill 10 wells this year and H5 comes on line etc, but now we're unable to produce more than 40k even though there's 5k unused capacity on the fpso. Hopefully this means as new wells are drilled production will rise this year.
Incidentally, Talisman's block is 60% owned by Talisman, with the rest owned by PVEP. I can't help but feel that things would run more smoothly if the whole area was combined in some way.
Thanks for the info, I also hadn't realised that it wasn't for tgt, as Peter has pointed out. You are still probably right that it might be better to have it all combined in some way. Not sure some of the same logic I was using still applies though. Do you have any insight into the reserves at this talisman field ? we keep hearing it won't last long etc etc, would be interesting to understand more. I wonder if they are indeed producing 15k even now ? if not perhaps the additional capacity available now is 5k to get to 60k, + perhaps 5 that talisman aren't using ? plus the option at next downtime to add another 10k ? That would effectively mean there's 20k to be had in the next 8 to 12 months, pretty significant. Purely speculation at this point of course.
thanks, K
Aha, thanks that's why I couldn't find it. I think the point I'm making is that I'm disappointed that they don't feel able to say, like in the interview the figure we would be planning towards is now 1.3BN. It suggests to me that yes H5 was much better than expected but perhaps others haven't performed so well so we have an overall estimate of 1BN still.
One of the many things I have learned in recent years is that if you RNS something you are not 100% certain you can prove if asked, then you are offering up a hostage to fortune. That applies particularly to figures and timescales. If I were them I'd be sticking to an "about 1bn" figure too - after all, we do want some form of upside "surprise" in the event of any positive news!!
The 40% number is considered an average for the field, as Ed said
I understood that the estimates in last years report were supposed to be some kind of average ? not sure they would be of any use otherwise ? Management were definitely suggesting 50% recovery last year, looks to me like they've moderated to a 40% recovery factor this year.
Not quite. They were suggesting up to 50%; personally I'd translated that as an average of 40-45%, so you are right that this represents a minor moderation. It is quite likely that if you include more reservoirs (current and future) then the average recovery will be less than some of the earlier ones. I regard the ERC Equipoise work as quite important in this regard, as the reservoir modelling seems considerably more detailed than was available 15 months ago.
Well, I'm surprised, I had been under the impression that we had plenty of capacity behind the pipes and there was a real fpso constraint.
You are missing my point on this. If there is capacity behind the pipe then by definition it hasn't been perf'd and put into production. You simply wouldn't perf more wells and put them into production for the sake of a week or two's flow test, especially if you probably then have to shut down again and could also compromise the complex reservoir management. Why not ask as directly as you like, rather than speculating?
You are still probably right that it might be better to have it all combined in some way. Not sure some of the same logic I was using still applies though. Do you have any insight into the reserves at this talisman field ? we keep hearing it won't last long etc etc, would be interesting to understand more. I wonder if they are indeed producing 15k even now ?
Combining operations would mean that an unfilled 15k of contractual capacity can be used more efficiently. I think it has underperformed even SOCO's expectations, but there is probably a price at which one or more of the HLJOC partners would buy them out (PV probably have pre-emption rights, I guess).
You are missing my point on this. If there is capacity behind the pipe then by definition it hasn't been perf'd and put into production. You simply wouldn't perf more wells and put them into production for the sake of a week or two's flow test, especially if you probably then have to shut down again and could also compromise the complex reservoir management. Why not ask as directly as you like, rather than speculating?
Not wanting to be augmentative, but this doesn't really make sense to me. We are not even producing the 45k that we could produce so if we had capacity un perfed which we could persuade the partners to bring on stream, why wouldn't we ? The answer Ed gave Peter is we haven't drilled wells for 12 months, so we don't have capacity to produce above 40k. I'm not sure what you're suggesting I ask, it seems to me there isn't much current potential to increase production or we would. I was under the impression that the resevoir management was to do with producing some here, and resting it, some elsewhere etc, so it wouldn't suggest that by definition any extra capacity requires perforating. It would be nice to believe that we have the capacity to ramp up to 80 or 90k, but I don't buy it, I don't know if the limitations are geographical or partner based (ie pv don't want to open up areas faster), it makes little difference to the amount of oil coming out of the pipe.
I really have no confidence in asking the details of this kind of issue, what should we ask ? the question I want the answer to is can't you open up a few more zones to get production up to 45k ? I think we know that the answer is no. Whether that's due to partner caution, or geology, or whatever. This all leads on to whether we'll be able to persuade the partners to tie in, because even after H5, and the other development wells what level will they be willing to produce at ? and how much more than the 55k+ any unused talisman capacity might that be ? Seems to me that come the time the partners might be more likely to go for the option of the processing platform and a larger fso (as opposed to fpso), But without understanding the costs I can't say this with a great conviction.
cheers K
We are not even producing the 45k that we could produce so if we had capacity un perfed which we could persuade the partners to bring on stream, why wouldn't we ?
Because if/when Talisman CAN produce 15k bopd, we are contractually obliged to give them capacity! Therefore it makes no sense whatsoever to spend millions to drill/perf additional wells purely for the test. Slightly different situation as we move into 2015, because there is a foreseeable opportunity to produce if Bach Ho has become a viable cost-efficient option.
The answer Ed gave Peter is we haven't drilled wells for 12 months, so we don't have capacity to produce above 40k. ....It would be nice to believe that we have the capacity to ramp up to 80 or 90k, but I don't buy it
There is a distinction between actual capacity and potential capacity. See slide 11. Capacity CAN be raised - but hasn't yet been (so can't be produced today!).
I'm not sure why this point seems such a struggle.
There is ultimately going to be a question over what the unconstrained plateau production level will be - but see post 701 above, quoting Numis:
Our base case assumes a gross oil plateau of just below 55kbod but clearly, this could be substantially higher (eg >80kbod) if additional investment is sanctioned
We are not even producing the 45k that we could produce so if we had capacity un perfed which we could persuade the partners to bring on stream, why wouldn't we ?
Because if/when Talisman CAN produce 15k bopd, we are contractually obliged to give them capacity!
Hi EE,
I think what K is getting as is that they tested at 60k over a year ago - so in principle should be able to produce 45k now from TGT, plus the 15k from Talisman. I was trying to get an answer to that from Ed, both in my question during the AGM, and in conversation afterwards. I did get what seemed a categorical confirmation that there were no issues of regulation or permission preventing gross production at 60k now. The answer that was effectively repeated after the AGM was that it was because there was "no development drilling last year". I have to say I remain a bit sceptical that the answer is quite as simple as that! I'm sure they could perforate more zones now to increase production - it was perfectly clear zone perforations are an ongoing process, the implication being there are (plenty?) more yet to perforate on the existing wells. There are several possible reasons why they aren't doing so - the most likely of which, I'd think, is that they are still finding their way in terms of maximising both total recovery and production rates. The fact that they have felt the need to hire Equipoise I think reflects that - and I'd hope that the model will allow higher production with greater confidence as it progresses.
Peter
I don't understand your point.
We are producing 40k, lets assume talisman are producing 15k, the fpso could handle 60k,
so there is 5k extra capacity, minium, regardless of what talisman do now or in the future.
We are not producing this. Why not ? because we don't have the capacity to. Capacity can be raised, ok, well lets see it, if it was just a case of perfing some more areas why isn't it being done ? It can only be because they don't want to for whatever reason, basement management etc.
My point was really that we've got work to do to get capacity up, and as a minium I would like to see the company producing 45k asap, moving up to 55k, after the fpso upgrade, and ideally with a bit of extra capacity in hand to fill in whenever Talisman cannot produce their full 15k. It doesn't seem that odd to me to have capacity available to fill in at such times, and even to be rotaing production between different basements to optimise production, but for test purposes to bring it all on line at once to test the fpso.
But anyway lets leave that, Its of limited interest why it hasn't happened. There seems to be something stopping production going up to 45k. Hopefully when the new wells come on stream we will be able to produce well over the fpso capacity. Its clear we can't now, we can hypothesise about "potential capacity".
re the numis note, thats all well and fine, I still recall the slide soco showed the year that tgt 1 started production, they showed production for tgt2 at 90k(a figure higher than numis are suggesting even with h5 in the mix). When production of tgt 1 started and only ran at 20-25k, I was worried that there wasn't enough capacity, and that we wouldn't reach sustained 55k production until phase 2 came on line, a view that some poo pooed, but in actual fact we didn't start producing at 55k for extended periods until phase 2 came on line. This suggests that either soco were over optimistic or PV over conservative. The figures that matter are the oil coming out of the pipes.
I look forward to progress with increased production, and hope that by the next agm they are able to report production at 55k + ( depending on talisman output, with a total of 70k) . But we do have a history of issues with PV and production levels, it's not easy to judge if PV are too conservative or SOCO too optimistic. I'm trying to assess what is likely to happen, given that a team can only travel at the speed of the slowest member.
I don't know the detailed economics of the fpso, or the deal that could be done to tie into bach ho, so it's hard to judge if indeed it is the no brainer we are being told. And it needs to be a no brainer to PV, not just to soco.
Cheers K
I think what K is getting as is that they tested at 60k over a year ago - so in principle should be able to produce 45k now from TGT, plus the 15k from Talisman. I was trying to get an answer to that from Ed, both in my question during the AGM, and in conversation afterwards. I did get what seemed a categorical confirmation that there were no issues of regulation or permission preventing gross production at 60k now. The answer that was effectively repeated after the AGM was that it was because there was "no development drilling last year". I have to say I remain a bit sceptical that the answer is quite as simple as that!
I do agree that you are right to be sceptical - and am sure it "isn't as simple as that" (because nothing ever is in the oil business!!!). Perhaps you could frame a further enquiry? I do think, however, that it is a massive leap from being sceptical to assuming a lack of production potential "behind the pipe", which was the main point I was taking issue with (and note the analyst reference to 80+k bopd above).
I'm sure they could perforate more zones now to increase production - it was perfectly clear zone perforations are an ongoing process, the implication being there are (plenty?) more yet to perforate on the existing wells. There are several possible reasons why they aren't doing so
The main reason here is undoubtedly that the economics are a nonsense. You wouldn't take the expense and risk of perfing new zones just for a few weeks test (until you knew that you were going to be able to continue producing after the test and not concede the capacity to Talisman).
Regarding Kenobi's question about why we aren't producing 60k in total, when we know that can be done, I suspect the answer may be as mundane and irritating as insurance on the FPSO. The rated capacity of 55k bopd will be there for an insurance reason - and until the nameplate capacity is formally raised, that limit is likely to continue to apply. If I was Bumi, though, I'd be trying to raise it - because a low capacity makes it more likely that the FPSO will be given up after the initial term expires.
I agree with Kenobi's point here - as I suspect everyone else does:
My point was really that we've got work to do to get capacity up, and as a minium I would like to see the company producing 45k asap, moving up to 55k, after the fpso upgrade, and ideally with a bit of extra capacity in hand to fill in whenever Talisman cannot produce their full 15k
....and I think it would be good to get to the bottom of exactly why that isn't happening. I do think it will be a relatively complex set of reasons though - and not a simple "lack of capacity".
Kenobi also makes an excellent point here:
a team can only travel at the speed of the slowest member.
I don't know the detailed economics of the fpso, or the deal that could be done to tie into bach ho, so it's hard to judge if indeed it is the no brainer we are being told. And it needs to be a no brainer to PV, not just to soco.
The slowest member has historically been PV (or some element thereof), whose over-caution now seems to be reflected in VN struggling for production overall, as well as the specific issues re the FPSO bottleneck. The $64,000 question (or rather more these days, with inflation ;-)) is whether that has changed, is changing or can be made to change. My opinion is that the thrust of the ERC Equipoise work is to provide irrefutable evidence that will persuade PV to be more aggressive on capacity expansion - in other words to give them reassurance that expansion can be safely done without jeopardising total recovery.
As Kenobi says, it needs to be a no-brainer to PV ....and that is the most important reason for the ERC Equipoise analysis IMO. Unfortunately (and as I've had reinforced from elsewhere) it is certainly the case that the larger an oil company is (and the closer that company is to government) the more they seek "belt and braces" in relation to data. Large oil companies do not generally take "fliers"!