RocOil: Quartely Report

REPORT TO THE AUSTRALIAN STOCK EXCHANGE (ASX)
Activities for the Quarter Ended 30 September 1999

Listing	Roc Oil Company Limited ("ROC" or "the Company") was publicly listed on ASX on 5 August 1999.
Funding	Of the $150 million raised by the Company through its Initial Public Offering ("IPO") $117.5 million was used to fund the acquisition of the UK assets of Morrison Middlefield Resources Limited ("MMRL") and to pay fees associated with that transaction and other costs related to the IPO process.
Context	The quarterly results presented in this review include the results from ROC’s UK assets for the 63 days from the date of their acquisition, 29 July 1999, to Quarter-end, as well as the results for the full three month period for ROC’s other assets. As a result of the timing of the MMRL transaction and the IPO, it is very difficult to make meaningful comparisons between the results for the Quarter under review and previous quarters. However, shareholders may find it useful if comparisons are drawn between the Quarterly figures presented herein and the internal estimates and Independent Experts’ predictions used to construct the forecasts referred to in ROC’s Prospectus dated 21 June 1999. Therefore, wherever practical, these comparisons are highlighted in this Quarterly Report. It should be emphasised that the level of internal forecast detail referred to in this report is much greater than the details provided in the Prospectus which could only present a summary of the detailed internal forecast upon which the published forecasts were based.
Total Sales Revenue	Total Gross Sales Revenue for the Quarter was $4.9 million which is $1.1 million (30%) more than the internal estimates used to derive the Prospectus forecast. The better than forecast result is largely because the figure for the Quarter under review includes $1.1 million from the sale and export to China of test oil produced by ROC in Mongolia. When the Prospectus was prepared the timing of the Mongolian sales export process was unclear and, therefore, no provisions were made for the receipt of revenue from such activities.
UK Sales Revenue	The Gross UK Sales Revenue for the Quarter was $3.7 million. This is in line with the internal predictions upon which the Prospectus forecast was based. For reasons referred to below, UK oil revenues were marginally ($200,000) down on expectations as a result of lower production. However, this slight shortfall was effectively offset by higher than forecast oil prices and increased revenue from third party tariffs and electricity sales.
UK Production	UK oil production for the Quarter was 156,000 bbls (2,476 BOPD), 36,700 bbls (583 BOPD/19%) lower than the forecasts upon which the Prospectus was based. There are two main reasons for this variance. Two onshore wells, Keddington-1 and Cold Hanworth-1, had mechanical and/or water-production problems. Also, the start of an anticipated appraisal and development drilling program was deferred pending the results of ROC’s detailed technical reviews of the Welton, Cold Hanworth and Keddington fields.
Hedging	As detailed in the Prospectus, prior to the sale of its UK assets to ROC, MMRL put in place an oil hedging program. As a result, 2,000 BOPD of ROC’s oil production was effectively forward sold from April 1999 to end 1999 at a Brent oil price of US$13.00/bbl (approximately equivalent to US$14.50/bbl WTI at the time). This price does not include the small premium received for ROC’s onshore UK oil production due to a quality differential in relation to Brent marker crude. The balance of ROC’s UK oil production above 2,000 BOPD has been sold on the spot market at an average price for the Quarter of US$22.45/bbl excluding the premium. This spot sale price is about US$10.00/bbl higher than the US$12.50/bbl August to December oil price forecast used as the basis for the ROC Prospectus and this has helped to offset the impact of the lower than expected oil production.
Other UK Revenue	Revenue received from electricity generation and sales and from the processing of third party crude oil in the UK during the Quarter totalled $0.45 million, $170,000 (63%) above the internal estimates used to derive the Prospectus forecast.
Mongolian Production	During the Quarter ROC continued to intermittently produce test oil from the East Gobi Basin in Mongolia and to periodically export this oil to China. In this context, approximately 41,000 bbls were exported to China from 1999 test production and existing inventory. The US dollar sale price was calculated with reference to prevailing international oil prices. The total revenue received from oil export to China is relatively modest ($1.4 million anticipated for calendar 1999) but the process clearly demonstrates that ROC has established a successful oil sale and export system between Mongolia and China which has been characterised by timely payment in US dollars by the Chinese purchasers of ROC’s oil.
Expenditure	ROC’s net expenditure on exploration and development work programmes during the Quarter totalled $10.7 million divided almost equally between the two different types of activities. Development expenditure was entirely related to the Saltfleetby Gas Field Project, whilst most of the exploration expenditure related to a large seismic survey in Mongolia.
Working Capital	As of 30 September 1999 ROC’s working capital was $37.1 million (representing current assets less current liabilities) including cash and short term deposits of $44.3 million. As of Quarter-end total external debt for the Company was US$46.0 million drawn against the Barclays Capital non-current loan facility.
Saltfleetby Development	The Company’s core development project, the 100%-owned Saltfleetby Gas Field, proceeded essentially on budget and on schedule. First gas is expected to flow from the field during November1999, generally in line with the Prospectus forecast.
Saltfleetby Drilling	Saltfleetby-4 commenced drilling on 4 July 1999 and reached a total depth of 3,168 m (2,303 m true vertical depth) including a 300 m horizontal section through the gas reservoir. The well was completed as a future gas producer. Drilling results were in line with expectations.
Saltfleetby Testing	All four Saltfleetby gas wells were tested during the Quarter in preparation for full scale gas production in November. On 4 July Saltfleetby-3 flowed gas on a short duration test at a surface-facility-constrained rate of up to 16 mmscf/d and 517 barrels of condensate per day (BCPD) through a 36/64 inch choke. On 12 September Saltfleetby-2 flowed gas at a rate of 10.1 mmscf/d with 319 BCPD on a 32/64 inch choke. In late September Saltfleetby-1U tested gas at a rate of 13.5 mmscf/d and 490 BCPD on a 36/64 inch choke. Also, in late September, Saltfleetby-4, the most recent well drilled in the field, but previously untested, flowed gas at rates in the order of 15 mmscf/d and 445 BCPD on a 40/64 inch choke. Flow rates from all four wells were in line with expectations.
UK 3D Seismic	The 55 sq km 3D Salteast Seismic Survey located immediately east of the Saltfleetby Gas Field, was acquired during September.
UK 2D Seismic	The 30 km 2D Bag Enderby Seismic Survey commenced in late September and was completed after Quarter-end. The Bag Enderby lead lies approximately 18 km southwest of the Saltfleetby Gas Field.
Kyle Field Development	Construction and commissioning problems at the Banff Ramform Floating Production and Storage Facility (Banff FPSO), managed by PGS Floating Production (UK) Limited ("PGS") on behalf of the Banff Joint Venture which is operated by Conoco (UK) Ltd ("Conoco"), had a knock-on effect with regard to the likely timing of first oil from the Kyle Oilfield in which ROC holds a 12.5% interest. First oil had been expected to flow through the Banff FPSO in December 1999, but, although the situation remains fluid, currently available information suggests to ROC that, for purposes of its 2000 Budget, the Company would be prudent to assume that, contrary to the Prospectus forecast, first oil will not flow from Kyle before late 2000.
Kyle Field Upside	A continuing integrated subsurface review of the Kyle Field by the Joint Venture operator, Ranger Oil (UK) Limited ("Ranger"), has highlighted the potential for the recoverable oil reserves at Kyle to be greater than the Independent Expert’s estimate upon which the ROC Prospectus was based. In order to determine whether or not this upside potential is real, and also to optimise development planning, the Kyle Joint Venture is considering drilling, in early 2000, an appraisal well on the northeastern side of the Kyle structure although the Joint Venture is yet to approve this drilling strategy.
Mongolian Seismic	The 1,035 km Jochi Seismic Survey in Mongolia commenced acquisition on 19 August 1999 and was completed after Quarter-end with record acquisition rates up to 27 km/day being achieved. A preliminary review of the early, field processed, data suggests that the survey will achieve its objective of better defining leads identified by ROC from its 1998 regional seismic survey and pre-existing seismic data.
Board	As part of ROC’s transition from an unlisted public company to a publicly listed company three Board changes were announced during the Quarter. Douglas Manner, Chief Operating Officer with Gulf Canada Resources Limited ("Gulf Canada") stepped down from the Board because of his need to focus on his executive duties with Gulf Canada. Mr Bob Boyson stepped down from the Board in order to take up the position of Technical Adviser to ROC’s Board. Mr Bun Hung, ROC’s General Manager Legal & Administration, was appointed to the Board on 23 September 1999.

For the UK assets the figures are based on the 63 day period from the UK asset acquisition date of 29 July 1999 to Quarter-end.
Excludes Mongolian test oil production.

For the UK assets the figures are based on the 63 day period from the UK asset acquisition date of 29 July 1999 to Quarter-end. For ROC’s other assets the figures are for the full three month period.
Revenue from Mongolian test oil production is credited to turnover, but an amount based on such revenue is charged to cost of sales and credited against exploration costs so as to record a zero net margin on such production.

1.4 Drilling Activity
During the Quarter ROC successfully drilled, completed and tested Saltfleetby-4 and also successfully tested the three other wells in the Saltfleetby Gas Field. Details are provided elsewhere in this report.

1.5 Seismic Activity
During the Quarter ROC conducted three seismic surveys: a 30 km 2D survey and a 55 sq.km 3D survey, both onshore UK, and a 1035 km 2D survey in Mongolia. All three surveys were completed on schedule and within budget as detailed elsewhere in this report.

ROC’s UK production for the Quarter was 156,000 bbls (2,476 BOPD), 36,700 bbls (583 BOPD/19%) lower than the forecast upon which the Prospectus was based.

The reasons for the production shortfall has been highlighted in a number of ROC’s weekly releases to ASX although, for completeness and ease of shareholder reference, background details are reiterated below.

Production from Keddington-1 was disrupted by an unscheduled workover when the Electric Submersible Pump ("ESP") became blocked with sand from a reservoir stimulation operation undertaken prior to ROC’s acquisition of the asset. The Keddington well has since been returned to production and, subsequent to Quarter-end, it has been producing at a rate of approximately 110 BOPD. The current production rate at Keddington is still less than Prospectus forecast due to increased water cut. An engineering study was carried out which concluded that the most likely cause of the increased water production is communication being established between the fractures caused by the March 1998 fracture stimulation and a natural fracture system associated with a nearby fault. Consideration is being given to increasing oil production from the Keddington Field by drilling a side-track from the existing well to a new horizontal well location nearer the crest of the Keddington structure. The precise timing of this well will depend upon the rate of production decline at Keddington-1.

Following removal of an ESP, which had become blocked by formation water scale, Cold Hanworth-1 experienced a further increase in water cut to 70% during the Quarter. Average field production was approximately 20 BOPD which is 100 BOPD (83%) less than the Independent Expert’s forecast upon which the Prospectus was based. Further development of the field has been deferred pending receipt of additional information regarding the water encroachment mechanism.

In the Prospectus the Independent Expert took the view that it was likely that additional wells would be drilled at Keddington and Cold Hanworth in the near term as a consequence of which production from those fields was expected to progressively increase during 3Q99 to a level in the order of 1,000 BOPD. The mechanical and/or production problems encountered at both Keddington-1 and Cold Hanworth-1 have not encouraged ROC to implement the appraisal and development drilling program because the Company prefers to gain a better insight into the fields and their potential before progressing the development. As a result of this decision production from Keddington and Cold Hanworth for the balance of 1999 and 2000 is now expected to be below the Prospectus forecast and, as a consequence of this, the associated level of capital expenditure is also expected to be correspondingly lower.

Production from the onshore Welton Field declined during the Quarter by approximately 150 BOPD (6%) due to natural decline and ROC’s decision to defer the implementation of a program of workovers designed to increase oil production, pending receipt of the results of a detailed engineering review which is expected to be completed during 4Q99.

The net contribution to ROC's oil production from its UK North Sea fields was 10,584 bbls (168 BOPD), approximately 800 bbls (13 BOPD/7.5%) below the Independent Expert’s estimate upon which the Prospectus forecast was based. Production from the Claymore Field, representing more than 90% of ROC’s total North Sea production for the Quarter, exhibited very little decline. Production from the Blenheim Field has continued to decline throughout 1999. As expected, the Blenheim Field is approaching abandonment although ROC’s 0.341% interest in the field means that the Company’s exposure to abandonment costs is very limited.

With the exception of gas associated with oil production, the Company did not produce any gas during the Quarter under review. The associated gas produced was used to generate electricity at the Welton Gathering Centre. This is consistent with ROC’s Prospectus forecast that first gas would not flow from the Saltfleetby Gas Field prior to November 1999.

During the Quarter development of the Saltfleetby Gas Field proceeded according to schedule and budget. Details have been provided in ROC’s weekly releases to ASX. First gas is still expected to flow during November compared to the Prospectus forecast of 1 November 1999.

The Saltfleetby-4 development well commenced drilling on 4 July 1999 and was completed on schedule and budget on 6 September. The well incorporated a 300 m horizontal gas reservoir section. In late September Saltfleetby-4 tested gas at rates in the order of 15 mmscf/d and 445 BCPD on a 40/64 inch choke. Also, on 4 July Saltfleetby-3 flowed gas on a short duration test at a rate, constrained by surface facilities, up to 16 mmscf/d and 517 BCPD through a 36/64 inch choke. On 12 September Saltfleetby-2 flowed gas at a rate of 10.1 mmscf/d with 319 BCPD per day on a 32/64 inch choke. In late September Saltfleetby-1U tested gas at a rate of 13.5 mmscf/d and 490 BCPD on a 36/64 inch choke. Flow rates from all four wells were in line with expectations.

The construction of the 8 km, 10 inch diameter pipeline connecting the Saltfleetby Field to the Theddlethorpe Gas Terminal and the 6 inch diameter in-field pipelines, were completed during September, approximately two weeks ahead of schedule. By the end of September, prefabricated process skids had been delivered to the Saltfleetby well sites and hook-up and commissioning activities had started. Construction work on the reception facilities within the gas terminal has also proceeded on schedule.

Various commercial options for the possible early exploitation of the gas reserves were reviewed by a third party consulting company. The review concluded that, subject to reservoir performance, commercialisation of the reserves may be achieved by direct sale of gas into the local pipeline network or by the generation and sale of electricity. Both options require a lead time of up to 12 to 18 months. It was also concluded that a short term production test would be essential in order for ROC to better understand potential reservoir deliverability and that no further financial commitment to development should be made until the results of that test are known. Detailed discussions with the local National Park Authority, concerning the scope of the possible development and its environmental impact, were also considered to be essential prior to any investment in a development well. ROC’s Prospectus did not anticipate any production from Eskdale in 1999 or 2000.

During 2Q99, the Kyle Joint Venture, led by its operator Ranger, continued to work towards first oil from Phase I of the two-stage development by late 1999 via the installation of subsea flowlines and umbilicals to be tied into the nearby Banff Field. This development plan included a planned tie back in July 1999 of the Kyle production riser to the Banff FPSO which is managed by PGS on behalf of the Banff Group, operated by Conoco.

However, during July, PGS indicated that work on board the Banff FPSO was subject to delay due to construction and commissioning problems at the Banff facilities. Consequently, the installation of the Kyle production riser was deferred. During August, discussions with PGS, and engineering planning by Ranger, indicated that the most likely first oil date for Kyle production via Banff would be in 2000.

When it became apparent that the development of the Kyle Field via the Banff FPSO could be delayed into 2000, the Kyle Joint Venture began to review alternative development schemes which would still allow production to be achieved by the end of 1999. These schemes included early production systems which did not depend on access to the Banff FPSO. By end September, a screening study had been completed and detailed studies of two possible options were being progressed. Concurrently, Ranger continued discussions with PGS and Conoco, aimed at facilitating an early entry to Banff.

5. POST QUARTER EVENTS

5.1 Saltfleetby Development

As of end-October the Saltfleetby Development Project was essentially complete, as detailed in ROC’s latest release to ASX dated 27 October 1999. Prior to soil settlement causing a minor misalignment of pipework within the Theddlethorpe Gas Plant, ROC had been advised by the Contractor that first gas could flow during late October, slightly ahead of the 1 November date referred to in ROC’s Prospectus. However, as a consequence of the settlement and the likely timing of the remedial work, it is now anticipated that first gas will not flow from the Saltfleetby Field until late November.

5.2 North Sea Fields (ROC 4.2%-15.2%)

In late October, a series of Joint Venture meetings took place with regard to three of ROC’s North Sea Oil Fields: Kyle, Ettrick and Blane. Relevant details have been provided in ROC’s latest release to ASX dated 27 October 1999 but, for convenience and ease of shareholder reference, a summary of the key points is provided below:

5.2.1 The Kyle Oil Field (ROC 12.5%)

Confirmation was received that if the Kyle Oil Field is produced via the Banff FPSO, first oil production will be delayed into 2000, possibly late 2000. Because of the requirement for contractual agreements and Government approvals for an alternative development plan, and also for reasons relating to logistics and weather windows, it is ROC’s view that even if an early production system is utilised at Kyle it would not be prudent for the Company to expect first oil to flow before 2Q2000. A continuing technical review of the Kyle Field by the Joint Venture operator, Ranger, has illustrated the possibility that the field’s recoverable oil reserves may be larger than previously indicated. The key step towards determining whether this larger reserve scenario is real would be the drilling of a well on the northeastern flank of the Kyle structure which is an area to which no reserves were ascribed by the Independent Expert’s report in the Prospectus. ROC’s current view is that the northeastern well should be drilled as soon as practical, preferably during 1Q2000, although the Kyle Joint Venture is yet to agree on a forward drilling strategy.

5.2.2 The Blane Oil Field (ROC 15.2%)

A continuing technical review of the Blane Field has highlighted the possibility that it may have a tilted oil-water contact ("OWC") in which case the field’s reserves could be larger and the potential field development could be simpler than was envisaged by the Independent Expert’s report in ROC’s Prospectus. That report invoked the - then consensus - view that separate OWCs exist within the Blane Field as a result of reservoir compartmentalisation. Subject to the results of the continuing review, the Blane Joint Venture may consider drilling another well in the field within the next 18 months rather than in 2005 which was the assumption used in ROC’s Prospectus.

Following the initiation of a detailed review of the subsurface database by the operator of the Ettrick Joint Venture, ROC has formed the view that it would not be prudent for the Company to assume an extended well test will be undertaken at Ettrick prior to the end of next year. If this revised schedule eventuates it will represent a variance from the Independent Expert’s forecast in the Prospectus which envisaged an EWT at Ettrick in 2000.

5.3 Senegal (ROC 92.5%)

On 22 October ROC executed an agreement with the Government of Senegal whereby it acquired a 92.5% interest in an offshore Production Sharing Contract (PSC) in which the Government holds the balance of equity. Relevant details were provided in ROC’s most recent release to ASX on 27 October but, again for shareholder convenience, a synopsis is provided below:

On 22 October 1999 ROC’s representatives executed a Production Sharing Contract (PSC) with the Government of Senegal, subject to formal ratification by the President of Senegal which is expected to be received prior to year end. The PSC covers an area in excess of 8,000 sq.km extending about 100 km offshore from the Senegalese coast. The Senegalese fiscal regime and the PSC terms are very attractive. The area is considered to be prospective for a number of reasons, not least of which is its proximity to known oil accumulations which are thought to be geologically analogous to structures recognised within ROC’s PSC.

5.4 Offshore Perth Basin Farmouts (ROC Farmin Options)

Following the execution of a Farmin Agreement with Premier Oil on 11 October 1999 ROC has held discussions with two Perth-based companies with regard to constructing an optimum Joint Venture for exploring the relevant areas in the offshore Perth Basin. Again, details have been provided in ROC’s latest release to ASX dated 27 October 1999. Therefore, the following comments represent only a summary of the key points of the transactions:

Through their separate agreements with ROC, Woodside Energy Limited ("Woodside") and Arc Energy NL ("Arc") will each acquire an option over WA-286-P and, in Arc’s case, TP/15. The commercial terms of the transactions between ROC and Woodside and ROC and Arc are essentially similar and both are comparable to the farmin agreement between ROC and Premier Oil. All three transactions are part of ROC’s strategy whereby the Company, in conjunction with Premier Oil, wishes to construct a well-balanced joint venture for discovering and, hopefully, developing fields in this part of the Perth Basin.

5.5 Legal

At the time of the acquisition of MMRL’s UK assets MMRL disclosed that one of its subsidiaries, Candecca Resources Limited (now renamed Roc Oil UK Limited (ROC UK)), had issued a writ against Patria Resources Limited ("Patria"), a Canadian-based company. The writ claimed that invoices totalling £73,312.56 remained unpaid from a contract under which ROC UK had provided drilling services to Patria with regard to that company's Cropwell Butler-1 well. On 11 October 1999, in response to an application by ROC UK to have Patria’s defence struck out, Patria gave notice of its intention to file an amended defence and counter claim in the sum of £581,062.25 for alleged misrepresentation and breach of contract and/or negligence. On 13 October 1999 the English court ruled that before Patria is permitted to file its proposed amended defence and counter claim it must pay into the court, prior to 29 October 1999, an amount equivalent to the full amount of ROC’s claim. If such amount is paid by Patria, the court will then hold a case management conference and set a timetable and directions for the trial. ROC believes that should a counter claim be lodged by Patria it will be without foundation and ROC would oppose any such counter claim with all vigour whilst continuing to pursue its original claim against Patria with equal vigor.

5.6 Website

During late October, as part of its continuing effort to improve communications to and from shareholders, ROC established a website (www.rocoil.com.au). This facility should ensure that all shareholders are fully informed of the company’s activities in a timely manner. For example, ROC will post all of its public announcements on the website immediately after they have been released into the public domain by ASX. The website will also provide a medium for Shareholders to communicate more easily with the company.

6. CEO’S REPORT

During the 12 weeks which have elapsed since ROC publicly listed on the Australian Stock Exchange (ASX) and the date of this report (28 October 1999) the Company has had a mixture of good, bad and indifferent news. This is not an uncommon experience for active resource stocks. Generally, in such circumstances, it is the bad news that grabs the attention. In ROC’s case, the bad news has fallen into the three categories.

	Sept ’99 Qtr
OIL	BBLS
UK — Onshore	145,416
UK — Offshore	10,584
Total	156,000
Average Production (bbl/day)	2,476

	Sept ’99 Qtr
Sales Revenue	$,000
UK	3,297
Other UK Revenue	449
Mongolian Test Production	1,123
Total	4,869

	Sept ’99 Qtr $,000
Exploration: mainly Mongolian Seismic	5,408
Development: mainly Saltfleetby Project	5,336
Total	10,744

"bbls"	means barrels
"BOPD"	means barrels of oil per day
"BCPD"	means barrels of condensate per day
"mmscf/d"	means million standard cubic feet per day
"mmbo"	means one million barrels of oil
"OWC"	means oil-water contact
"Quarter"	means the period from 1 July 1999 to 30 September 1999
"ROC"	means Roc Oil Company Limited