what"s in a name?.."the world is changing,and so is STATOIL",so says ceo JON ERIK as it seeks to broaden its horizon beyond oil and gas and change its name to EQUINOR., maybe a suitable name change for rockhopper should be DOORMAT?
Despite what FOGL may have said, unitization was never really in play with respect to the the first phase of Sea Lion after it had been broken down into a staged development. Claiming it was, was most likely desperation and/or a plea my management for RKH/PMO to come and keep them in jobs..."we'll make life difficult for you, etc."
RKH acquired FOGL (or at least the reason they gave was) because it would make any farm-out discussions (and at that time PMO was highlighting a farm-out as necessary), almost certainly involving the wider Falklands basins, more straightforward. RKH obviously thought by doing so they could expedite sanction and, although apparently they got very close, nothing came to fruition. Potentially PMO had a more realistic read and chose not to flip FOGL themselves.
I agree it's frustrating that RKH currently has little leverage, but it is clearly PMO's show for now. If RKH can come out of sanction with its interests relatively intact that may change.
Why unitization is not required? When fogl was not taken over by rkh, at that time fogl was shouting for unitization and claiming for share in phase1, now fogl is part of rkh, so where is that gone? Why rkh share in phase 1 is not gone up? Why rkh is a pmo's bi*tch, whatever pmo says they accept without any negotiations
On the carry, I totally agree that it would be in RKH's interest and what you suggest is entirely possible, but my suspicion is that RKH may end up giving a bit more it terms of value (however that transpires - possibly in reduced carry) to facilitate sanction. It's not obvious from the economics that they would have to or should. I just look at what has happened to date and it suggests to me that PMO have been reasonably adept at squeezing a bit more value out of RKH at various stages. Given the number of project scope changes and term revisions since the initial farm-out, all of which as far as I am aware don't obligate any party, but in particular PMO, to do anything, it must be getting pretty complex by now, any very much detached from that initial agreement.
On tax, it will be interesting to see what comes out of the consultation in May/June, subject to what is made publicly available before the end of the year in terms of legislative action. Royalties are specifically mentioned as being excluded from the consultation, but stranger things have happened.
That aIl sounds extremely sensible, and I'd not disagree with any if it. I do have a quick thought on one or two points:
"Given the financing structure has changed since then, the carry will almost certainly change once again also, simply for no other reason than it exceeds RKH's equity commitment (under current shares) before first-oil. "
This may well be absolutely right, but it could be in Rockhopper's interest to keep the carry as it is. After all, according to the EIS, Premier are planning to drill up to 13 wells after first-oil, so the development carry could still I presume be used then too.
"The biggest challenge in the medium-term may be an absence of material news flow."
I think that's true. There is one possible exception though, which is outside of Rockhopper's control, and that's a decision on tax. I appreciate that the tax consultation document mainly focused on corporate tax deductions, but I imagine FIG are going to go beyond that to encourage oil production. After all, at the beginning of their executive council document outlining the background to the tax consultation, FIG acknowledges that "Changes to the Falkland Islands Oil Taxation regime are required to improve the commercial viability of an oil development in the region."
If I were a betting man, I'd guess we could be hearing about any revisions to the tax regime (and hopefully royalties) in late Q2/early Q3.
Anyhow, thanks again for your post. It made for interesting reading.
I'd agree with much of that sentiment. The main barrier to Sea Lion sanction has now clearly shifted towards events outside RKH's or PMO's control; world collapse, economic melt-down etc. Fast forward to the end of the year with today's conditions and the odds appear very much in favour of a positive FID.
As to how much of the benefits RKH (or its shareholders) reap, however, still depends on factors somewhat or largely within its control; particularly how much effective equity RKH will have in the project and how many shares will be in issue.
A lot is mentioned of RKH's carry, but let's remember that it has already been split once and the PMO was also able to elicit from RKH a "guarantee fee" that largely negates its present value, just to move forward with FEED at a glacial pace.
Given the financing structure has changed since then, the carry will almost certainly change once again also, simply for no other reason than it exceeds RKH's equity commitment (under current shares) before first-oil. I have no idea what will happen, but my best guess would be RKH is carried on any capex and as before revised side agreements act to split the NPV c50/50 under some common assumptions. This of course assumes no farm-in partner.
If there's a farm-in arrangement, then all guesses are off. My sense is that if the senior debt financing can be secured, particularly any low-cost export credit financing, that the project may well be kept in house for the time being until the market ascribes a value that matches or at least approaches the companies. I would see this as positive for RKH because as it stands today any farm-in partner is clearly positioned to drive a hard bargain.
The thing that has most surprised me over the last 12 months or so is the lack of acquisitions. Management team's usually need little incentive, particularly if it sustains the business (keeps them in a job), and when its written into their incentives (as with RKH) its almost a given. It will be interesting to see if next years targets (disclosed with the annual report to be published in April) include something similar. Any acquisitions will almost certainly involve an equity element, diluting the Sea Lion upside, given its difficult to see that RKH has the capacity to acquire any assets which are comparably undervalued.
In a couple of months (June last year) the top team will also get their annual allocation of options under the LTIP which at today's prices could be anything up to c2m shares. Undoubtedly this will receive the usual derision (and probably rightly so), but it may just focus their minds on what could be if they just sit on their hands and keep the share count as small as it can be for the time being. I hope so.
I think most shareholders principally own RKH as a Falklands play. They don't want that story diluted by acquisitions elsewhere. Get some production to cover some overheads, fair enough, but don't go off empire building, just when things might just be approaching their climax. Let's not kid ourselves, if The Falklands were to go away overnight some token production in the Med isn't going to prevent a catastrophic collapse in value. Optically, it might look nice to have operating cash flow covering overheads instead of drawing down on cash, but when you're then paying equivalent to a good proportion of those overheads in capex to sustain that cash flow there's not all that much difference.
The biggest challenge in the medium-term may be an absence of material news flow. This year is all about financing and the key information like the required rates of return, interest rates, or even actual availability, that people can but in their models and use to determine a likelihood of sanction and value, are all likely to be kept commercially confidential until agreed. Heads of terms, expressions of interest, etc. are not meaningful catalysts as we have seen. It could be a news vacuum for the next 9 months and then wham!
There is real momentum now behind achieving Sealion sanction in late 2018 subject to government approvals, which will probably happen by Q1 2019.
Until now, there has been much doom and gloom and, quite frankly, much of it has been justified as the project languished amid the ruins of an oil industry reeling from low prices. But that's changed and, while confidence is still fragile, the immense potential of Sealion is coming into sharper focus.
Whisper it softly, the management of Premier know it, the people of the Falklands know it and we as investors in Premier and Rockhopper know it, we're sitting on the cusp of sanctioning a project that will create enormous wealth and transform our lives over many, many years.
And it is hard to fathom that our market capitalisation is still less than it closed at on the day of the discovery.
Just reflect on that for a second. Yes, progress has been slower than we would have liked but we are in an amazing position sitting on a massive, fully appraised oil field that is about to be sanctioned. Not to mention it is surrounded by highly prospective acreage of which we've only scratched the surface.
Anyone buying in today is buying in at the point of maximum leverage: at the lowest possible price but the with the greatest near term potential for share price gains.
When this flies, and fly it will, the scramble for shares will be a sight to behold!
cheers RP.................half decent post that, but in terms of RKH "contributions" Mister Sheamus goes for a "i got a 12p target" and then tags it a strong sell............so with that in mind could you step up the effort and research levels next time please :D
"why not a dozen north sea oil companies"?..maybe because F.I is an overseas territory?, apart from which PMO previous communications refer to talks with possible farminees?..radio silence zzzzzzzzzzzz
We are fortunate on this board to have some excellent posters. Two of the most outstanding are Rpoodle and Biffadog thanks to you both.
Rpoodle thats a very helpful write-up you just posted re. the Premier webcast.
[However, I think there is an obvious typo as follows:
even at our existing equity, we cant fund the Sea Lion project, whether we choose to do so, at the existing equity is a decision for the future.
I presume this to be CAN fund the project at 60% equity].
A farm down by PMO is not excluded from consideration, however. Rpoodle, do you still believe the $2.4 /barrel farmin price, as stated in your post of 23 August 2016, is about right? This applied to Suncor farming into the Rosebank project. The rise in the oil price may have increased this number.
Thanks RP...overall very encouraging - strange that there was no mention (unless I've misread it) of the:
"He told the Financial Times he is hopeful of securing about $800m in export credit finance a cheap form of government funding to help UK companies exploit opportunities abroad."
which was reported in Oct 17?
Hi. I have included below an edited version of Premier Oil's annual results transcript, with all major Falklands comments included. Forgive me: it's a lot of text.
Tony Durrant (CEO)
Thanks, Robin. Perhaps for obvious reasons, the work carried out by the Sea Lion market team in the last couple of years has been somewhat under the radar screen. Its now time frankly to explain to all our stakeholders the nature of that work, where we are on the project, what remains to be done, how it is that weve de-risked the project for Premier and why it is that its an economically attractive project for us to pursue.
If we start with the subsurface, 17 wells have been drilled into the Sea Lion area. It is a very well understood reservoir, it is fully appraised and the nature of the North Falklands Basin with some 1 billion barrels of in place means that even in the downside cases during development drilling, we can simply drill more wells into the Discovery Area and deliver the reserves predicated for the first phase of the project. From an engineering perspective, its proven technology.
There were issues often referred to in the early stages of development of an oil business in Falkland Islands, people talked about waxy crude, people talked about metocean conditions, people talked about logistic difficulties, despite the fact that weve had a number of successful drilling campaigns, those frankly have been designed into the project or dismissed as not being an issue. The project itself is very straightforward and particularly for Premier, we gained a lot of comfort from the fact that it has a very straightforward and parallel design concept to our Catcher project.
We are now moving really from the first phase of contracting. Were very well advanced with the principal contractors into the supply chain and logistics chain. There are contracts for helicopters for fixed-wing, for port facilities, for telecommunications, for an operations yard in Stanley. These are all designed into our project concept and we have begun the process of tendering where appropriate, working closely with the Falkland Islands government to deliver on those service contracts. I think there is still much to be gained in terms of reducing our cost level on those secondary contracts.
We have a world-class contractor team lined up to deliver on this project. And although there are competitive processes still going on, we do expect there to be quite an overlap between the chosen contractors for Sea Lion and those that worked successfully for us on the Catcher project. Of course, contractors always do due diligence on a project, but as Ill come back to in a moment, weve in parallel to our discussions on supply of services, we have vendor financing lined up by contract partners. That means theyve done more than their usual share, I would say of due diligence on the project. They would not be putting up money to help us with the funding of the project unless they were very comfortable with the technical outcome.
And finally, on the regulatory side, where we have a substantially agreed field development plan after a number of iterations with the Falkland Islands government, that plan will now only be updated for a final time as we approach sanction. A huge amount of work has gone into the environmental assessment, very sensitive to the Falkland Islanders. I think our team has gained substantial plaudits from local interested parties in the Falklands for the amount of work weve done in that area.
Tomorrow, actually is the final day of public consultation on the environmental impact, all the feedback so far has been extremely positive. And on fiscal commercial terms with the Falkland Islands government themselves, weve made very good progress. Were substantially aligned, obviously for the Falkland Islanders theres a strong economic interest in getting this project moving forward we are very well aligned with them on that.
"Letters of Intent have now been signed with contractors for the provision of a range of services including vendor financing. Premier is working towards a final investment decision by the end of 2018. "
I would strongly suggest, for all interested parties, to listen to Premier's annual results webcast. I will post up the key points if/when I have a bit more time. Nonetheless, summing up, the overwhelming impression in my view is that--barring catastrope--Sea Lion is going ahead. Or, to quote Tony Durrant in this interview with local Falklands TV, "with the recovery in the oil price...we can push ahead with the project, which is very exciting".
Link to short interview with Tony Durrant (CEO of Premier Oil) below, with clearly planted questions. Notable that Sea Lion is given its own question (around 2mins), and TD sounds pretty upbeat about its prospects.
Given the potential of Sealion, its clear to me that they actually don't want a farm in partner if they can help it so will do their best to finance it themselves and reap all of the rewards with Rockhopper, you and me!
that premier has said clearly in their webcast that they are trying for FID by 2018 and they have said that they afford sealion from their cashflow without farm-out, they can still go for farm-out but its not mandatory
I know it's repeating the bleedin' obvious, but some here don't appear to appreciate the magnitude of starting production in a virgin territory, which is considered an environmentally important region, thousands of miles from the UK, with nearest neighbours not having been best friends until quite recently, which means that security (and its costs) remains an issue.
By the time the various "I"s have been dotted and "T"s crossed, the price of oil is likely to be higher and firmer and then the expansion of the region will be considerably less complicated.
Also, the lessons learnt from Catcher can be applied, so the process will be even smoother.
It's just that bleedin' waiting that's getting to us all!
"Premier continued to engage with the Falkland Islands Government ('FIG') on environmental, fiscal and other regulatory matters with a view to obtaining the consents and agreements necessary to be in a position to reach a final investment by the end of 2018. As part of this process the latest drafts of the Field Development Plan and Environmental Impact Statement ('EIS') for Sea Lion Phase 1 were submitted to FIG and the formal public consultation of the EIS commenced in January 2018."
The focus in 2017 for the Premier-operated Sea Lion Phase 1 project has been on progressing commercial and regulatory work streams and on securing commitments from key contractors for the project.
Pre - development
The Sea Lion project and the wider North Falklands Basin, has the potential to be significant for Premier and the strategy is to develop the discovered resources in several phases. Sea Lion Phase 1 (60 per cent interest), which is targeting gross reserves of over 220 mmbbls in PL032, will utilise a conventional FPSO based scheme, very similar to Premier's successful Catcher development. Engineering design work which was largely completed in 2016, focused on optimising the facilities design and installation methodology required reducing the estimated gross capex to first oil to US$1.5 billion.
During 2017, Premier focused on securing agreement with key supply chain contractors for the project. Good progress was made in this respect with Letters of Intent signed with a number of contractors for the provision of a range of services and vendor financing. Further discussions with senior debt providers including commercial banks and export credit finance agencies will progress in 2018.
Alongside this, Premier continued to engage with the Falkland Islands Government ('FIG') on environmental, fiscal and other regulatory matters with a view to obtaining the consents and agreements necessary to be in a position to reach a final investment by the end of 2018. As part of this process the latest drafts of the Field Development Plan and Environmental Impact Statement ('EIS') for Sea Lion Phase 1 were submitted to FIG and the formal public consultation of the EIS commenced in January 2018.
It is estimated that a subsequent Phase 2 development will recover over 300 mmbbls (gross) from the remaining volumes in PL032 and the satellite accumulations in the north of the adjacent PL004. During 2017 further technical analysis carried out on Phase 2, including the 2015 Zebedee discovery in PL004, has resulted in an increase in net 2C resources at the year-end.
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