..Releases Annual Report
Yemisi Izuora
The chief executive officer, CEO, of LEKOIL, Olalekan Akinyanmi, has said that the company will strive to grow production volumes at Otakikpo through Phase Two development to reach gross volumes of 15,000 to 20,000 barrels of oil a day, bopd, in 2019.
The first step has already occurred, with 3D seismic data acquisition and interpretation now completed.
“We also continue to advance toward the start of the appraisal drilling programme on Ogo in OPL 310. We will work with our joint venture partner, Optimum to negotiate agreements that will allow us to make progress on the block, after securing all relevant regulatory extensions and approvals.
“In light of delays to key initiatives on assets, the Company is taking action on general and administrative costs with the aim of a reduction of 25 per cent annually including a 25 per cent cut in Board remuneration.
“The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business.”
According to him, 2018 marked LEKOIL’s first full year as a producing company and represents a major milestone as we continue to implement our strategy to build a diversified, self-funded Africa-focused exploration and production business. We seek to achieve this through growing production at the Otakikpo marginal field, our existing producing asset, situated in oil mining lease (OML) 11 in the south eastern coastal swamp of the Niger Delta and through unlocking the value of our interest in OPL 310, the offshore block adjacent to Lagos which contains the world class Ogo discovery. In addition to the Otakikpo marginal field and OPL 310, the Group also has an interest in OPL 325 which in our view has significant exploration upside potential.
In 2018, production levels at Otakikpo averaged approximately gross 5,345 bopd, (2,076 bopd net to LEKOIL). Phase Two preparations for development commenced with the acquisition of 3D seismic in February. Plans are underway for a three to five well drilling programme, which is targeting to increase production levels to around gross 15,000 to 20,000 bopd, and further investment in infrastructure facilities for crude oil evacuation.
Also, in 2018, LEKOIL had equity crude sales proceeds of US$48.7 million from 739,106 barrels, exclusive of cost recovery barrels and cash call barrels (US$34 million from 507,176 barrels and US$6.6 million from 100,243 barrels, respectively). The Group’s total entitlement crude consisted of 1,346,525 total barrels net to LEKOIL which includes both cost recovery barrels and barrels produced post the end of cost recovery. Of these, the Group lifted 1,305,888 barrels. LEKOIL realised an average sales price of approximately US$66 per barrel.
In November, the 3D seismic acquisition and processing operations undertaken by Sinopec Changjiang Engineering Services Limited (“Sinopec”) at Otakikpo was completed. The data interpretation stage has also now been completed and the results will form the basis of an updated Competent Person’s Report (CPR), to be finalised and then published.
The completion of the seismic survey and CPR is assisting the joint venture, with LEKOIL as Technical Partner and Green Energy International Limited as Operator, in optimising the planned Phase Two development.
On March 28, 2019, the Federal High Court, sitting in Ikoyi, Lagos State, Nigeria ruled that LEKOIL’s purported acquisition of shares in Afren Investment Oil and Gas (Nigeria) Limited (“AIOGNL”) and by that, the 22.86 per cent interest in OPL 310, is inchoate and invalid given the failure to obtain Ministerial Consent in respect of the transfer of the said shares. The Judge also ruled that pursuant to Articles 13.1.4 and 13.1.5 of the Joint Operating Agreement (JOA) between Optimum and AIOGNL, Optimum’s consent is required to effect a transfer of AIOGNL’s interest in OPL 310, or any part thereof, to LEKOIL.
The implication of the Judge’s pronouncement that our subsidiary LEKOIL 310 Limited has not acquired the shares of AIOGNL is that pending receipt of Ministerial consent to the acquisition, AIOGNL retains its 22.86 per cent participating interest in OPL 310. On the basis that the Group still requires Ministerial consent in order to control the entity and associated mineral rights, the entity is not consolidated into the Group accounts of LEKOIL.
LEKOIL 310 Limited had initially filed an appeal against the decision of the Federal High Court, but decided to withdraw legal action following receipt of a letter dated 8 May 2019 from the Ministry of Petroleum Resources relating to an application for an extension (re-award) to the OPL 310 licence.
The Letter states that the Government has noted that the OPL 310 licence expired on 10 February 2019 and ownership of OPL 310 has accordingly reverted to the Government in line with Petroleum Act. The Letter further sets out that the re-award will not be considered by the Honourable Minister of Petroleum Resources (“HMPR”) until such point as the suit filed by LEKOIL against the HMPR is withdrawn by LEKOIL and other parties to the action. Failure by LEKOIL and others to withdraw the suit within thirty (30) days of the Letter forecloses any consideration of re-award to Optimum Petroleum Development Limited, LEKOIL and their affiliates or subsidiaries.
Also, LEKOIL 310 Limited decided to withdraw legal action on 16 May 2019 but will continue engagements with the regulator and the Operator of the Asset to conclude agreements and resolve all outstanding issues.
Although the ten-year tenure granted to OPL 310 licence in 2009 has lapsed, Optimum in its capacity as Operator has begun the extension process and whereas there is no guarantee that the license will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard.
Exploration asset – OPL 325
OPL 325 is located in the offshore Dahomey Basin, some 50km to the south of OPL 310.
In January 2018, the company announced the completion of a Technical Evaluation Report for OPL 325 which is available on our web site. The Report was compiled by independent oil and gas industry specialists Lumina Geophysical, which carried out a geophysical evaluation of approximately 800 sq km of 3D seismic data provided by LEKOIL.
Lumina identified and reported on a total of eleven prospects and leads on the block, estimated to contain potential gross aggregate Oil-in-Place volumes of over 5,700 mmbbls (un-risked, Best Estimate case). Lumina focused primarily on the Paleocene section of the block, generating new structural and stratigraphic maps using 3D pre-stack time migrated seismic data. These maps were used in the volumetric approach to come to an estimation of potential resources in OPL 325.
The independent report underlined our belief in the prospectivity of this asset that was part of LEKOIL’s original Dahomey Basin study. We believe that the deep water turbidite fan play is particularly exciting for OPL 325 in which we have a significant interest via our subsidiary, Ashbert Oil and Gas Limited. After finalising terms for the Production Sharing Contract (the “PSC”) on the block, we intend to farm-down a portion of our 62 per cent. working interest following a detailed prospect/lead risking study.
LEKOIL holds its 62 per cent equity interest in OPL325, through Ashbert Oil & Gas Limited. LEKOIL will seek the consent of HMPR for the OPL 325 acquisition when Ashbert either transfers interest in the PSC directly to LEKOIL or farms down to a third party.
In the year ended 31 December 2018, LEKOIL recorded a loss of US$7.8 million (2017: profit of US$6.5 million) and ended the period with cash and bank balances of US$10.4 million (31 December 2017: US$6.9 million, 30 June 2018: US$9.8 million). Total outstanding debt financing net of cash was US$10.1 million (2017: US$22.6 million)
In June 2018 LEKOIL and its bankers re-denominated approximately N3.1 billion of debt facilities into one new US$8.55 million facility which reduced the high financing costs of local currency debt. The documentation to complete this was finalised in March 2019.
There was also a concerted effort during the year to pay off vendor financing from prior periods, as can be seen by the improved gearing position and reduction in liabilities.
The Board and Management regularly monitors the Company’s cashflow projections. The cash balance as at the end of May 2019 was US$13.1 million. In light of delays with progressing key assets, we have decided to take action in order to reduce our overheads. Management has created a project team to review costs with the aim to decrease general and administrative costs by 25 per cent. This includes a 25 per cent reduction in Board remuneration.
LEKOIL Exploration and Production (PTY) Limited
In July 2017, LEKOIL Exploration and Production (Pty) Limited, a subsidiary of LEKOIL, relinquished Namibian block 2514A and renewed block 2514B until July 2019. It has been noted that there is low prospectivity on Block 2514B. The Directors have decided to relinquish the Company’s interest in block 2514B and commence a voluntary winding up of LEKOIL Exploration and Production (Pty) Limited.
In May 2019 it announced Lisa Mitchell’s departure as the Company’s Chief Financial Officer. Greg Eckersley, currently Non-Executive Director, will assume the role of interim Chief Financial Officer, to oversee, with the support of the Company’s financial controller, the Company’s finance function, following publication of the 2018 annual report and accounts. Greg is currently Chairman of LEKOIL’s Remuneration Committee and is a member of the Company’s Audit Committee.
The Company has commenced the search to identify candidates for the role of a permanent Chief Financial Officer. In view of the needs of the business, the Company is focusing the search on a candidate that will be based primarily in Nigeria.
Outlook
Creating long-term value for our shareholders is our focus and thus the priority for 2019 is to advance toward the start of the appraisal drilling programme on Ogo in OPL 310. The company intends to work with its joint venture partner, Optimum and negotiate agreements that will allow us to make progress on the block, after securing all relevant regulatory extensions and approvals.
At Otakikpo it seek to grow production volumes with Phase Two development and expect to reach gross volumes of 15,000 to 20,000 bopd. The first step has already occurred, with 3D seismic data acquisition and interpretation now completed.
The company will continue to look at new, promising opportunities in-country that are consistent with LEKOIL’s original portfolio strategy of securing assets with robust production and exploration upside. The Group will continue to focus on new ventures-driven growth for producing or near producing assets.
The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business.