Range and Red Emperor seal Georgian gas deal

A consortium consisting of Range Resources (RRL) and Red Emperor Resources (RMP), along with their partner Strait Oil and Gas UK, has executed a heads of agreement with the Georgian Industrial Group (GIG) with respect to the joint development of the Coal Bed Methane project (CBM) and conventional potential around the Tkibuli–Shaori Coal Field in the Republic of Georgia.

GIG and the consortium will jointly establish a development company on a 50:50 basis. The company will commence feasibility and technical studies, followed by an initial three to four-well pilot project. Appraisal/pilot production wells will be drilled first to clarify flow rates and other key parameters including optimum well construction and completion strategy, well spacing and water treatment, prior to full-scale development.

There are plans to execute six CBM wells per annum that are forecast to produce between 0.3 and 0.5 million cubic feet (mcf) per well per day. The work programmeme is expected to commence in the second half of 2013 and will be predominantly debt financed, resulting in limited financial commitments for Range. The fast-track programme is designed to allow potential gas production and sales to begin within 18 months, given the existing infrastructure and logistics.

GIG has agreed a "take-or-pay" arrangement for all gas produced by the development company at a 5% discount to a regional indexed price less transportation, removing the monetisation risk so often faced with prospective CBM projects.

Tkibuli has been estimated to contain mean contingent resources of approximately 0.4 trillion cubic feet (tcf) of CBM gas. Sand horizons have also been identified around the coal beds, which could add additional, conventional hydrocarbon resources to those estimated for CBM at Tkibuli alone.

Over 400 exploration and non-hydrocarbon wells have been drilled in the Tkibuli area, many encountering hydrocarbons and one producing gas for over 35 years.

"CBM has become an increasingly important source of energy around the world and production is well established in the US, Australia and China," Range Resources pointed out. "Access to market is key to commercialisation and, although major pipelines transect the country, Georgia remains almost entirely dependent on imports of foreign natural gas.

"CBM production from Tkibuli, therefore, could immediately be fed into the local energy market."

Range executive director Peter Landau added: "This is a major opportunity for the company and the significance of the project should not be understated. The partnership with GIG, the largest industrial and holding company within Georgia, is a milestone towards establishing itself in [the] country."

He also noted that the existence of take-or-pay arrangements in place for all gas produced removed the monetisation risk associated with the project, while the ability to finance the project through debt further underpinned the proposition, by removing any immediate financial commitments to Range.

"We believe that the deal has huge potential for the company in the next three to five years as the production base grows, and will generate significant revenues for the company," he commented. "The joint venture complements Range's current focus on production growth, whilst ensuring its operational and financial capabilities remain with Trinidad."

Analyst view

Analysts at broker FoxDavies said Monday's announcement resolved one of the main outstanding issues that had beset both Range Resources and Red Emperor, i.e. what was happening with Georgia.

"The deal with GIG is a major step forwards in two respects for both companies as it (i) alleviates one of the key issues regarding its portfolio; (ii) provides the prospect for near-term cash flow; and (iii) means that neither company have to continue to pay for the acreage as the partner will take it forward," they commented.

"Given the nature of CBM production (potentially long lead times before any one well attains peak flow), we are maintaining our carrying value for this asset within both companies."

FoxDavies reiterated its 'buy' recommendation on both Range Resources and Red Emperor, with price targets of 25p and 48p respectively.