DRAGON OIL PLC Trading Statement July 2011
Dragon Oil plc, an international oil and gas exploration and production company, today issues the following trading statement, which includes an operational update and financial highlights for the six months’ period ended 30 June 2011. All information referred to in this update is unaudited and subject to further review. Dragon Oil expects to publish its 2011 Interim financial results on 10 August 2011.
Key operational highlights
25% increase in average daily production rate at approximately 58,000 barrels of oil per day (“bopd”) in 1H 2011 compared to 46,420 bopd in 1H 2010;
Seven new development wells completed to date;
2011 drilling programme updated to complete 12 wells, a sidetrack and a workover versus 11 wells previously targeted.
Key financial highlights
Capital expenditure on infrastructure and drilling amounted to US$151 million for 1H 2011 (1H 2010: US$174 million);
The Group’s cash balance net of abandonment and decommissioning funds at 30 June 2011 was US$1,256 million (31 December 2010: US$1,163 million); the Group remains debt-free.
Dr Abdul Jaleel Al Khalifa, CEO, commented:
“We have achieved a significant production growth of 25% over the first half of last year, which puts us in a comfortable position to reiterate our guidance for gross production growth in 2011 of up to 20%. With three rigs currently operating full-time for Dragon Oil in the Cheleken Contract Area, we expect to drill and complete 12 wells, a sidetrack and a workover within the 2011 drilling programme.
“On the infrastructure front, we have seen encouraging progress in a number of projects and some delays in other projects. We have also recently awarded a contract for the construction of Block 4, a riser platform, together with the associated pipelines to cater for new wellhead and production platforms to be installed in the Dzhygalybeg (Zhdanov) field.
“With significant budget allocated for infrastructure development in 2011-13, we will be tendering out contracts for the construction of at least three new platforms with associated pipelines in the next 18 months alongside a number of other projects.”
OPERATIONAL UPDATE – Production
The average daily production rate on a working interest basis was approximately 58,000 bopd for 1H 2011. The growth over the level of 46,420 bopd achieved during the comparable period in 2010 was 25%. Part of this increase is due to commissioning the new infrastructure at the end of 2010, including the 30-inch trunkline, associated 20-inch, 18-inch and 14-inch infield pipelines and the expanded Central Processing Facility. The balance of the production growth in 1H 2011 came from the six wells we put into production on the Dzheitune (Lam) 28 and B platforms. The Dzheitune (Lam) B platform area has not been very prolific. Nevertheless, it is worth assessing such areas and the information will be utilized to optimize future drilling plans.
Dragon Oil sold 4.9 million barrels of crude oil in 1H 2011 (1H 2010: 3.7 million barrels), which is 32% higher than the volume sold during the corresponding period last year. This is mainly attributable to more entitlement barrels due to higher gross production during the period. The entitlement production for 1H 2011 was approximately 52% of the gross production compared to 55% for the comparable period in 2010.
Entitlement barrels are dependent, amongst other factors, on operating and development expenditure in the period and realised crude oil prices. Notably in 1H 2011, higher crude oil prices, production measurement factors and lower capital expenditure, resulted in slightly lower percentage of entitlement barrels.
We continue to export our share of the crude oil production FOB Aladja Jetty via Baku, Azerbaijan. Thus, in 1H 2011, 100% (1H 2010: approximately 25%) of crude oil was marketed via this route, primarily using the BP-operated Baku-Tbilisi-Ceyhan pipeline. In 1H 2010, a major portion of our crude oil was exported through Neka, Iran.
In line with our strategy to have a number of routes available to access international markets and maintain flexibility in operations, Dragon Oil continues to review alternate routes for marketing its crude oil, including via Iran if the terms become favourable.
The Group was in an underlift position of approximately 0.3 million (31 Dec 2010: overlift position of approximately 0.2 million) barrels of crude oil at the end of 1H 2011.
Drilling and current operations
During the first half and in July 2011, seven development wells were put into production: one well within the 2010 drilling programme and six wells within the 2011 drilling campaign. The following table summarises the results of the development wells drilled in the Dzheitune (Lam) field to date.
The NIS rig and the Iran Khazar rig are currently drilling the next two development wells in the Dzheitune (Lam) field, 28/158 and B/159, respectively. The Group’s own Rig 40 is currently drilling the Dzheitune (Lam) 13/160 development well.
The construction of the Dzheitune (Lam) C wellhead platform and Block 1 riser platform is progressing on schedule. Block 1, which will act as a gathering station and help increase the throughput capacity of the Dzheitune (Lam) West area, has been put in water and is due to be commissioned within the next few weeks. The delivery of the Dzheitune (Lam) C wellhead and production platform is expected on schedule in 4Q 2011.
Dragon Oil has recently awarded a contract for the construction of Block 4 riser platform and associated pipelines in the Dzhygalybeg (Zhdanov) field to offshore construction companies. Block 4 is expected to be completed in the second half of 2012 and will act as a gathering station for the production from new wellhead and production platforms in the Dzhygalybeg (Zhdanov) field.
The respective deliveries of both the Dzhygalybeg (Zhdanov) A platform and the Super M2 jack-up rig will be in 1Q 2012. This represents a possible delay in these two projects for a few months. We have assessed the status of these two projects and adjusted our drilling plans for 1Q 2012 to maintain flexibility and ensure continuous drilling during this time.
We are likely to experience a possible delay in the construction and delivery of the 100-tonne crane vessel. However, taking into consideration the fact that we have access to crane vessels, the delay will not have any impact on our operations.
FINANCIAL UPDATE – Cash and cash equivalents
The cash and cash equivalents and term deposits as at 30 June 2011 were US$1,472 million (31 December 2010: US$1,337 million), including US$216 million (31 December 2010: US$174 million) set aside for abandonment and decommissioning activities.
Capital expenditure for 1H 2011 was approximately US$151 million (1H 2010: US$174 million). Of the total capital expenditure, approximately 45% (1H 2010: 35%) was attributable to infrastructure with the balance spent on drilling. The infrastructure spend during the first six months of the year included the ongoing construction of the two new platforms, Dzheitune (Lam) C and Dzhygalybeg (Zhdanov) A and the crane vessel.
Capital expenditure on infrastructure is expected to range between US$200 and US$250 million for 2011 based on the progress with infrastructure projects and around US$600-700 million overall for infrastructure projects during 2011-13.
The average realised crude oil price during 1H 2011 was approximately US$100/bbl (1H 2010: US$75/bbl), which was 33% higher compared to the corresponding period last year. The Group’s realised crude oil prices achieved a discount of approximately 10% (1H 2010: approximately 3%) to Brent during the first six months of the year.
We expect to drill and complete 12 wells plus a sidetrack as well as to perform a workover of one well within the 2011 drilling programme. Out of 12 wells, six wells have already been put into production.
The Rig 40 is scheduled to complete two wells, including the 13/160 well currently being drilled, and a sidetrack on the Dzheitune (Lam) 13 platform before the end of 2011.
The Iran Khazar will complete one more well on the Dzheitune (Lam) B platform, Lam B/159 well currently being drilled. Subsequently, the rig will be mobilized to the Dzheitune (Lam) A platform to perform a workover.
The NIS rig is to complete three more wells by the end of 2011, including the 28/158 well currently being drilled.
As part of our plan for infrastructure expansion in 2011-13, we are planning to tender out contracts for the construction of at least three new wellhead and production platforms together with associated pipelines, which will be located in both fields and which will be called Dzheitune (Lam) D, Dzheitune (Lam) E and Dzhygalybeg (Zhdanov) B.
Given the solid production flow from the fields and updated drilling programme, we reiterate our production growth guidance for 2011 of up to 20% and maintain our medium-term guidance of average 10-15% per annum for 2011-13.
Dragon Oil continues to look actively for acquisition targets in the regions of interest to us, such as North, West and East Africa, the Middle East (with a focus on, but not limited to, Iraq) and Central Asia. We consider assets and opportunities in a range of countries through participation in bidding and sponsorship of workshops.
Discussions with the government of Turkmenistan on the gas monetization continue. We are pursuing a dual strategy of having a short-term arrangement in place for the near future given the not so strong global gas demand and then a long-term agreement more in line with export marketing on the expectation of the more favourable gas market conditions in the future.