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Below
is a transcript of interview ROC's CEO had with corporate.com
OPEN
BRIEFING - ROC OIL, CEO ON EXPLORATION UPDATE
Record
of interview:
corporatefile.com
Roc Oil Company Limited (“ROC”) has interests in two new oil
provinces in the
offshore Perth Basin and offshore Mauritania as well as two established
oil and/or
gas provinces in the Beibu Gulf, offshore China and eastern England, onshore
UK.
You’re planning to undertake an exploration drilling programme in
all four areas
during 2003 and have recently released to ASX an indication of the typical
target
reserve potential for prospects in these areas. Please comment as to ROC’s
current
thoughts about the 2003 drilling programme and the size of the targets
you’re
going to test?
CEO John Doran
As part of our continuing exploration and appraisal drilling programme,
which
started in mid-2002, ROC plans to drill between 10 and 20 wells during
calendar
2003. This heavy drilling activity represents about 75% of our Base Case
Exploration and Appraisal Budget for next year. If we ignore the upside
potential
of each prospect, take a realistic view of the size of the targets we’re
going to drill
and add together the “typical” reserves that we might expect
to find, we end up
targeting about 70 to 80 MMBOE of potential net ROC reserves.
Needless to say, not all the wells will be successful, but it’s equally
true to say that
some of the wells may prove to be more successful than we expect. Even
if we hit
only about half of the targeted reserves, which would be a terrific result,
the 2003
exploration dollar cost for reserves added would be just over US$0.5/BBL,
which
is pretty good by any industry standard.
corporatefile.com.au
At 30 September 2002, ROC had A$79 million cash and had reduced its debt
to
US$21 million. Is this sufficient to fund your exploration plans?
CEO John Doran
ROC’s cash and cash flow are well able to fund the 2003 programme.
ROC will
not need to raise fresh capital through the issue of new shares nor reduce
its
interest in the relevant permits through farmout, although it may consider
that
option in the UK where our interest is 100%.
We’ve just completed our 2003 Budget process and it has been particularly
interesting because there is such a wide spread of potential drilling
outcomes. This
has caused us to come up with an “Expected” Base Case Budget
with two
sensitivities representing “Minimum” and “Maximum”
scenarios. The Base Case
Budget tries to anticipate the success/failure mix of the wells to be
drilled,
particularly those to be drilled in the early part of the year in places
such as the
Perth Basin. If our first three wells in 2003, all in the Perth Basin,
are all dry then
we certainly won’t be spending as much of our budget as would otherwise
be the
case!
Working on what we consider to be a realistic assumption of a mix of success
and
failure through the entire year, ROC expects to spend between A$30 and
A$40
million on exploration and appraisal activity through 2003, 75% of which
is
related to the drilling of between 10 and 20 wells. This is a heavy duty
drilling
programme for a company of ROC’s size, but our cash reserve and cash
flow
allow us to handle this magnitude of activity without resorting to shareholders
or
farming out. We couldn’t say the same thing with equal confidence
if our
“Maximum” case eventuates, but since that assumes that most/all
of the wells are
successful, it’s a problem we would love to have - and one I’m
sure we could
handle.
Over the last couple of years, four factors have combined to provide this
financial
self-sufficiency: peripheral assets have been sold; the cash balance has
been
nurtured; our modest debt has been reduced further; and our equity exposures
to
most of the various plays have been pitched at the appropriate level.
That is why
the 2003 drilling programme may well “make” the Company, but
it certainly
won’t break it.
corporatefile.com.au
Although at the AGM in May this year you mentioned that alongside the
high
exploration success and strong balance sheet there were two less positive
points:
the share price which has not been re-rated despite ROC’s exploration
successes;
and, company-wide proved and probable reserve base at around 20 million
barrels
of oil equivalent is fairly slim. Where, and how, do you expect to grow
your
reserves? When do you expect to release an updated reserve number?
CEO John Doran
Our preferred way of adding reserves is through the drill bit. Our results
during
the last couple of years suggest that it’s also the most cost effective
and practical
approach for a company like ROC.
We currently view the Perth Basin as the area that could have the biggest
immediate impact on ROC’s reserve growth and market standing –
but only if the
upcoming wells are successful and there’s no guarantee of that! This
reflects the
size of the targets, the amount of equity held by ROC and the area’s
location
offshore Australia. Depending upon the extent of that potential success,
ROC’s
current reserve base could double or treble just on the basis of the Perth
Basin
drilling.
Depending upon the size of the prospects which are currently being worked-up
onshore UK, that is another area which could have a significant impact,
possibly
in the order of 50% to 100% reserve growth for ROC, even if the targets
prove to
be significantly smaller than the Saltfleetby Gas Field (onshore UK, ROC
100
percent). While it would be wonderful to find another Saltfleetby Gas
Field you
can’t run a company on that basis; we’ve got to be sure ROC
can generate positive
cash flow onshore UK even if the discoveries prove to be smaller than
Saltfleetby.
We continue to look at asset acquisition, but only occasionally. This
is because
we’re mainly focussed on our current assets. However, if the assets
are Australian
based with current or imminent reserves, production and revenue, we’d
be
interested, partly because of our Australian tax efficiency. Unfortunately,
as we’ve
stated on previous occasions, it’s hard to find the right opportunity
and we
routinely walk away from what we perceive are the wrong opportunities
for ROC.
We don’t exclude corporate activity but, quite frankly, the opportunities
that we’re
currently aware of and those that we think may potentially arise in 2003,
do not
appear to us to offer good value. Therefore, we have no current appetite
on the
corporate front, although we’ll continue to monitor various situations.
corporatefile.com.au
As you continue to seek new reserves through exploration, asset purchase
or
corporate acquisitions, have you considered non-conventional areas such
as coal
bed methane?
CEO John Doran
On occasions we’ve extended our search for new reserves to coal seam
gas
(“CSG”) or coal bed methane (“CBM”), as it’s
more commonly known. We’ve
been aware of this sub-set of our industry for more than a decade, particularly
in
the US, where two of our directors, both with considerable oil and gas
experience,
are based. In fact, if either of those gentlemen were living in Australia
they would
probably be regarded as CSG “experts”. One of them is currently
an active CSG
player in the US in his own right. Clearly, there are many situations
where money
can be made by extracting gas from coal seams. Over the last few years
we’ve
considered, to varying degrees, CSG projects in areas ranging from Australia
to
Botswana. If we found the right one for ROC we would give it a serious
look. So
far, we haven’t found the right one.
corporatefile.com.au
Following the discovery of the Cliff Head Oil Field in WA-286-P in the
offshore
Perth Basin, Western Australia, in the last days of 2001 you drilled a
successful
appraisal well one kilometre to the north of the original discovery well
which
encountered a 36 metre gross oil column. What is the assessment, so far,
of the
value of Cliff Head?
CEO John Doran
Today, Cliff Head’s value is a matter of pure speculation. It’s
only if/when a
declaration of commerciality is made that ROC would consider the field
as having
tangible value. Various analysts and other industry watchers have suggested
what
that value might be, but we prefer to wait and see what the next few wells
reveal.
If the next few wells are successful, then, not only will they define
the real value
of the Cliff Head Oil Field, but they’ll also upgrade the value of
the other
prospects and, in fact, the whole trend.
corporatefile.com.au
On several occasions in the recent past you’ve gone to some length
to emphasise
the need to appraise more fully the Cliff Head discovery to the point
where it
could be interpreted that you’re not as optimistic about the potential
development
as some of your co-venturers. Is that really the case? If it is, do you
think that that
is one of the reasons why ROC’s share price has effectively stayed
flat as the
drilling approaches, whereas many of your co-venturers have seen their
share
prices rise?
CEO John Doran
I certainly don’t have a full understanding of what drives the share
price of a small
oil stock in the current market climate, although I have some private
thoughts on
that topic. What I do know, however, is that when you’re coming into
a major
exploration and appraisal drilling programme you have to try to manage
expectations in a realistic manner, both within and beyond the company.
People
may have forgotten that twelve months ago this part of the offshore Perth
Basin
was undrilled and was perceived by many to be high risk with a likelihood
of poor
reservoir and the consensus view was that, if there were any hydrocarbons
to be
found, it would probably be gas, not oil. Lately, you could be forgiven
for thinking
that Cliff Head is a slam-dunk development just waiting to happen. The
reality is
that every exploration and appraisal drilling programme carries with it
a sizeable
amount of risk and you never want investors to lose sight of that fact.
Otherwise,
if the drilling results are disappointing, you’ll spend a long time
trying to lift
investors off the canvas and you’ll find it even more difficult to
persuade them to
stay in the ring for another round or two of investment.
corporatefile.com.au
In April 2002, ROC released information to ASX indicating that the net
present
value of the Saltfleetby Gas Field was about A$100 million, approximately
$0.92
per share. What’s your current estimate of the value of Saltfleetby?
CEO John Doran
We won’t be able to give a specific answer to that question until
our year end
reserves review has been completed. In a more general sense, if we look
at the gas
which has been produced since April, approximately 5.5 BCF, and the remaining
recoverable proven and probable initial reserves estimated as at the end
of last
year, then the net present value of Saltfleetby to ROC is in the order
of A$90
million (A$0.83/share).
corporatefile.com.au
During the September 2002 quarter, ROC temporarily shut-in production
at
Saltfleetby because of seasonal low prices. How have prices moved since
then and
what impact has your new contract, starting 1 October, had on your overall
price
received?
CEO John Doran
As expected, UK spot gas prices have strengthened lately with the onset
of the
British winter. They were recently around 20p/therm (A$6.00/MCF), more
than
twice what they were a few months ago and more lately they have spiked
above
30p/therm (A$9.00/MCF). That more than justifies our decision to shut-in
briefly
during the period of low summer prices. In December 2001 gas prices were
in the
region of 25p/therm.
The new contract gas price has had a definite positive impact upon ROC’s
revenue
base. In value terms the impact could be broadly regarded as being equivalent
to a
25% increase in overall production.
corporatefile.com.au
ROC brought Saltfleetby into production in December 1999. It has averaged
around 35 MMSCFD since then and was still producing at around 30 MMSCFD
in September 2002. How is the field operating now, particularly in terms
of
production and cash generation?
CEO John Doran
Saltfleetby continues to behave very well. As far as cash generation is
concerned,
the recent increase in contract gas prices means that the field is now
producing at
its most profitable level ever, on the basis of cash flow per MCF of gas.
In the resource business you usually get your fair share of operational
problems
and it is a rare project which performs as sweetly and smoothly as Saltfleetby
has
for the last three years. With each passing month our production database
is
developed further and it appears to be confirming our view that the field
is one of
those unassuming assets which outperforms expectations. Having said that,
we’re
not complacent as every field will eventually have some sort of operational
or
production hiccup – that’s just part and parcel of the business.
corporatefile.com.au
Your aim is to find another Saltfleetby in the South Humber Basin. What
progress
have you made with processing the 3D seismic and progressing regional
exploration?
CEO John Doran
3D seismic interpretation is progressing. First pass results should be
available by
the end of the year. It’s too early to comment in any detail other
than to say that
we expect a few attractive drill targets to emerge with oil and/or gas
potential. In
terms of barrels of oil equivalent, the typical target range might be
between 25%
and 50% of the Saltfleetby Field as we now know it – which is twice
the size we
attributed to it when it was first identified.
corporatefile.com.au
ROC owns 40 percent and is operator of Block 22/12 in the Beibu Gulf,
offshore
southern China. In March 2002 you announced an oil discovery to add to
the four
previous discoveries in the block. What progress have you made in evaluating
the
potential low cost, collective development or planning further exploration?
CEO John Doran
Considerable progress has been made. The 3D seismic has been acquired
and the
quality is good to excellent. We continue to be hopeful that the hi-tech
seismic
techniques we’ve used in deep water offshore West Africa will help
us to better
define the subtle drill targets in our acreage offshore China. The seismic
information is currently being interpreted with this degree of optimism,
although
we won’t know whether or not this positive expectation will prove
to be well
founded until early 2003. We continue to discuss with the relevant government
authorities the concept of the fast track, low cost, collective development
of one or
more of the oil discoveries which are known to exist in the block. So
far those
discussions have been very constructive. Naturally, there are still a
number of
issues that we haven’t yet had time to address so discussions will
resume early in
the New Year.
As previously foreshadowed, ROC’s drilling activities in the Beibu
Gulf will
probably slip into the fourth quarter of 2003, for a number of reasons,
including
likely rig availability. Coincidentally, that timing works well from the
point of
view of ROC’s company-wide drilling schedule because it leaves the
second and
third quarters of 2003 to be taken up with drilling onshore UK.
corporatefile.com.au
What progress has ROC made in processing and interpreting the 3D seismic
and
planning a drilling program for your blocks in the Rio Muni Basin, offshore
Equatorial Guinea?
CEO John Doran
We’re fine-tuning the 3D seismic interpretation. We’re also
making initial
preparations for the drilling of a deep water well in Equatorial Guinea,
probably in
2004. We’ve talked to a few large companies about the possibility
of farming out
part of the block and we’ve received and rejected a farm-in offer.
While some of
these farm-out discussions are expected to continue/resume during the
first quarter
of 2003 we suspect that ROC, and the rest of the industry, will monitor
drilling
results in and around the Rio Muni Basin over the next six months or so
before
finalising a detailed drilling/farmout strategy. One of the key things
to remember
in this regard is that there are several quite different play types recognised
within
our block in different water depths and at various drill depths. There
is no shortage
of variety in this part of the Rio Muni Basin.
corporatefile.com.au
You recently announced that as a result of exiting Senegal you expected
the 2002
accounts to show a write down of expenditure in the country in the order
of A$2.5
million. Please comment on why this figure seems low, given the 46.75%
equity
you had and the fact that you’ve been active in the country for a
long time?
CEO John Doran
You’re right, it is a low figure. It reflects a number of factors,
including ROC’s
cost efficient approach to operating which we’re increasingly coming
to regard as
a key ingredient in the Company armoury – particularly when we look
at the costs
incurred by larger operating companies.
The decision to leave Senegal was made all the more difficult because
we have a
high regard for the government authorities who we rate as being amongst
the best
we deal with anywhere in the world. However, if parts of your portfolio
are
performing in a way that demands more time, energy and money be devoted
to
them, a company of ROC’s size has no alternative but to swallow a
large reality
pill and remove other areas from the portfolio which, rightly or wrongly,
are
currently judged to be less attractive.
corporatefile.com.au
Along the same lines, you seem to be winding down your activities in Mongolia
through the farmout you announced last year to a Chinese oil company.
Could you
update us as to ROC’s current view of Mongolia?
CEO John Doran
It was the farmout of 50% of our interest in the East Gobi Basin that
allowed ROC
to remain in Mongolia for the last twelve months, otherwise we would have
exited
last year following more than five years of activity in that country.
The basic
rationale is the same as for Senegal: other parts of ROC’s portfolio
have
outperformed our perception of the potential for our acreage in Mongolia.
With
this in mind, ROC is currently talking to the relevant government authorities
in
Ulaanbaatar with a view to exiting the permits in good standing. Again,
just like
Senegal, the support which ROC has received from the government in Mongolia
has been terrific and that has made the decision to concentrate our activities
elsewhere in the world particularly difficult. Nothing would have given
us greater
pleasure than to have found significant oil in Mongolia because, not only
would
that have boosted ROC’s value, it would also have had a tangible
effect on the
economy of a country which seems to us to be largely composed of some
of the
nicest people on the planet.
corporatefile.com.au
You’ve also been in Mongolia for quite a long time and you’ve
been much more
active in that country than in Senegal, therefore, if you exit Mongolia
how much
would you expect to write off?
CEO John Doran
We’re fortunate in that we took a large write off on Mongolia some
time ago. Also
we’re in early stage discussions with regard to the possible sale
of a drilling rig
which we own in that country which would reduce the write off, at least
to some
extent. On this basis we would expect to be writing off about A$8 million
as a
result of exiting Mongolia.
corporatefile.com.au
So now that you’ve left Senegal and assuming you’ll leave Mongolia,
the
countries where ROC is active will reduce from eight to five plus Angola,
where
you hope to initiate activities. Does it worry you that you might be concentrating
too much effort on too few countries?
CEO John Doran
Not at all. Most investors, particularly institutions, would probably
be relieved to
know that ROC was continually high grading its portfolio with a commensurate
reduction in the number of countries where it was operating. We’re
certainly not
putting all of our eggs in one basket. We have a very good spread of project
risk
with active appraisal projects in Mauritania, Australia and China, continuing
production/development onshore UK and active exploration in all of those
countries, plus Equatorial Guinea and, hopefully, Angola. Most people
would
regard that as a reasonable amount of work to get through in any given
week! In
fact, we look at ROC’s workload in terms of weight of activities
rather than the
number of countries. The worst thing we could do is to defocus our efforts
by
retaining all the acreage we’ve historically acquired.
The whole process is like throwing seed across a field then waiting to
see which
areas start to sprout first. Initially you cover a relatively large area
with seed but
then, as the portfolio evolves, you see where the growth potential is
coming from
and you zero in on those areas.
corporatefile.com.au
Finally, within the last week you’ve received a little bit of radio
and television
coverage in the UK with the BBC news services commenting on local council
approval which has been granted to ROC that will allow the Company to
drill a
well near Hadrian’s Wall, a World Heritage site in the north of England.
Can you
give us some background to this application and the implications which
the
approval has for ROC and the local community?
CEO John Doran
When you explore for oil and gas onshore Britain you do so within a well-defined
and quite onerous regulatory framework largely designed to protect everybody’s
rights and entitlements – and that is exactly how it should be, particularly
on a
crowded island.
Amongst other things, UK legislation requires a company to apply to the
relevant
local government authority for planning permission to construct a drill
site.
Usually such applications are handled as a matter of routine. In this
case, it just so
happened that the relevant site was next to the World Heritage-listed
Hadrian’s
Wall, which the Romans built to keep the Scots out of England. Understandably,
that application generated more media interest than is usually the case.
ROC
welcomes the decision to approve the application but we’re also totally
sympathetic to the concerns of the people who live in the area. Naturally,
many of
them have little or no knowledge as to how ROC goes about its business;
perhaps
they may even have been influenced by popular media and movie portrayals
of
how a bog-standard, big, bad oil company might behave towards local
communities. They may not realise that ROC just isn’t that sort of
company.
The reality is that every oil company in the world is now acutely sensitive
to local
community and environmental issues. ROC is no exception. In fact, we spend
a
great deal of time handling these matters in an appropriate manner in
various parts
of the world. When we operate offshore Australia we go to great lengths
to take
into account the needs of the local lobster fishing industry while at
the same time
we gather extremely useful scientific data for people who are concerned
with
gaining a better understanding of the behaviour of the Humpback whales
which
migrate down the coast of Western Australia about this time each year.
In
Mongolia, we interacted with and assisted nomadic herdsmen when their
livelihood was threatened by an outbreak of foot and mouth disease a couple
of
years ago, while offshore China our seismic survey was conducted with
minimum
disruption to the local fishing community.
Quite simply: many of us got into this business because our love of Geology
which in many cases was the result of a genuine appreciation of the environment
–
at a time long before it became a cause celebre. Working in the oil industry
doesn’t require you to change your pro-environment outlook –
in fact, it puts you
in a better position to ensure that operations are conducted in a proper
and
practical manner which takes into account the interests of all concerned
parties. I
know that probably sounds like standard corporate-speak, but at ROC that
really is
how we try to conduct our business.
corporatefile.com.au
Thank you John.
Robert Gerrard
General Counsel & Company Secretary
E-mail: rgerrard@rocoil.com.au
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