Minority Galoc partners bail out

If you and your friends discover a treasure trove that could provide you long term income, what would you do?

Sell out to your friends.

At least that was what two of the Filipino minority partners—Alcorn Gold Resources (PSE:APM) and Petroenergy Resources (PSE:PERC)-- in the Galoc oil production field did. On June 24, the consortium operating the Galoc field off Palawan declared the “commerciality” of the resource. Two days later, the aforementioned minority partners sold their interests (at 1.53 and 1.03% interests, respectively) to unnamed consortium members at $800,000 per percentage point.

The other participants in the project with their corresponding interests are as follows: Galoc Production Co. W.L.L. (58.29%); Nido Petroleum Phils Pty Ltd (22.28%); Philodrill Corp. (7.02%); Philodrill Corp. (7.02%; PSE:OV); Oriental Petroleum and Minerals (7.58%; PSE:OPM); and Forum Energy (2.27).

The identical reason cited by the minority partners is that their respective interests are too small to obtain a significant revenue stream considering the risks involved. Which could also be interpreted that the resource is not as good as it is touted to be.

The total amount of oil lifted from the field since October of last year has already exceeded 1.3 million bbls of oil, which is really a decent amount. The Department of Energy has been trumpeting that the field should produce from 17,000 to 20,000 bopd (barrels of oil per day) which corresponds to 6% of the country’s daily demand, but the operators are more circumspect, saying that the average production should be around 12,000 to 14,000 bopd. Nido Petroleum, one of the consortium members, and its parent firm listed at the Australian Stock Exchange (ASX:NDO), has a broader range of production target at 10,000 to 15,000 bopd, for planning purposes.

Unlike our energy planners, investors have not really been giving standing ovation at the seemingly sweet smell of money wafting from the oil patch. From a high of A$ 0.46 near the start of production, NDO’s share prices plummeted down to A$ 0.06 before recovering to current prices of about A$0.13 – 0.14. Share prices of the Filipino partner firms, all of which are listed at the local bourse, have not really been influenced to a significant degree from Galoc announcements.

The bailout of the minority partners tells more about the prospect than the official news.

First, the amount involved.

According to a presentation made by Nido, the revenues to be expected depends on the price of oil as well as the amount of production sown on the plot below at production levels between 10,000 and 15,000 bopd.

At a projected average oil price of between $65 to $70/bbl for the year 2009 (The price has since dropped to about $62, from about a high of $73, but that is another story), Nido’s share of the revenues amounts to around $50 million (a conservative amount), which translates to about $220 million for the whole consortium. That means about $2.2 million per percentage point participation.

This is the amount of revenue expected by, say, PetroEnergy which has a 1.03% interest, for the whole of 2009. Compare this with its revenue of $1.8 million for the first quarter 2009 from its small interest in an oil field in Gabon, Africa, which could be annualized to $7.2 million assuming steady oil prices and production.

Now, according to the existing production sharing agreement, for every $100 oil revenue, $70 goes to cost recovery, $7.50 goes to so-called “Filipino participation incentive allowance"and $11.22 as production allowance to the operator. The rest is booked as profit, with $6.77 of it to the government and $4.51 to the investor participant.

Now, figure out the amount due to the minority participants.

Moneywise, there is a compelling reason to take the money today, and run, “considering the risks involved”, as the backtracking participants put it.

Second, the risks are real. Production has not been consistent, with the wells shut from December to February 25 this year due to technical problems. And lately, there has been an interruption “after the mooring and riser system was detached from its floating production storage and offloading facility”. In layman’s term, a technical problem.

Production wont be accelerated soon. At the moment the consortium is actively looking for a strategic partner to help foot the bill required for further development of the field.

We have also pointed out earlier that a potential field problem that could arise is sea water intrusion owing to the fractured geology of the area, as shown by the adjacent West Linapacan field which only produced a short time.

Bailing out early may prove to be a smart move for the minority participants.

Galoc gushes oil at 22,000 barrels a day--hold off the parties

The Galoc field off Palawan started producing oil at an initial rate of 22,000 barrels of oil per day (bopd) last October 9, Malacanang, as reported by Energy Secretary Angelo Reyes, gleefully announced during a news conference.

 The news comes at a time when the country is shrouded by a pall of gloom as a result of the financial meltdown currently experienced around the globe. It also comes on the heels of the spiraling fuel prices this past year before the price rally was abruptly stopped on its tracks by a looming global economic slowdown.

 The main operator said that the production could be in the vicinity of 20,000 bopd which is “equivalent to roughly six percent of the daily oil demand of the country,” Secretary Reyes said.

 The palace subalterns are quick to strut like peacocks as if the country has been resurrected from its economic grave.

 “The President is optimistic that this new development will positively impact on the administration’s efforts to reduce the country’s annual oil importation of $6 billion,” Presidential Executive Secretary Eduardo Ermita said. This would also translate to about $1.4 billion in foreign exchange savings for the country, for the oil well’s lifetime estimated at about three to five years, he added.

The oil field is developed by Galoc Production which is a joint venture owned by a subsidiary of the Vitol Group and Otto Energy Ltd. It formed a consortium composed of Nido Petroleum Pty Ltd., Oriental Petroleum and Minerals Corp., The Philodrill Corp., Forum Energy Philippines Corp., Alcorn Gold Resources Corp. and PetroEnergy Resources Corp.

GPC, which holds Service Contract 14C, owns 58.29 percent of SC 14, while Australia-based Nido Petroleum Ltd. owns 22.28 percent.

 So, is it now time to party as a thanksgiving to our new-found fortune?

 “We embrace this significant development as this will help immensely in our pursuit to be energy self-sufficient... We are on the right track in utilizing our indigenous sources,” Reyes said.

 Hold on. Before one gets drunk at the news, one should take a second look at the situation while still sober.

 The amount quoted was only obtained during initial flow tests which normally do not represent the long-term production potential of the well. At 2,200 meters, the reservoir will not be easily tapped, and at 320 m deep sea water, the location is not exactly shallow.

 Galoc’s crude, dubbed Palawan Light, contains undesirable high sulfur at 1.64% which makes it difficult to sell in the open market

 The Galoc field was discovered in 1981 by Philippine Cities Service Inc., a wildcatter, and initial oil production between 7,500-10,000 bopd per well was not deemed too attractive for full development due to the low oil prices at the time (about $20 per barrel) and perceived operational risks.

 The initial production value can easily sink to unprofitable levels if one studies the history of oil production in the area.

 Let us review the history of nearby West Linapacan field. Both fields are within the same service contract area.

 At a water depth of 350 m, West Linapacan is situated slightly deeper than Galoc. The field was discovered in October 1990 and was put into commercial production in May 1992.

 For the first well, the flow test recovered 2,900 bopd but actual initial production was at 1,700 bopd. Two more well were drilled and these initially produced oil at a total rate of 9,170 bopd. For the whole field the initial production was pegged at 18,700 bopd, which is slightly lower than the projected production of Galoc.

 But by December of the same year, the West Linapacan production dropped significantly. For the next few years, the field was just coasting along until 1996 when the field was shut down as production was no longer economical.

 The main culprit was inflow of sea water to the production well which makes extraction more difficult and costly. The Palawan oil reservoirs are in a fractured area and sea water contamination is to be expected. 

For Galoc, the oil-water interface is tagged at 2,100 m.

 The operator of the Malampaya gas field has had misgivings in extracting the oil portion beneath the gas reservoir precisely because of the risks involved which are similar to those at West Linapacan and Galoc.

 The delays in Galoc production, which was originally scheduled to start April, already bloated the cost from $86 million to over $210 million.

 If the government has readied the food and drinks for the Galoc coming out party, better hold off the corks and just donate the food to the needy.

 An unpleasant surprise from Galoc may be in the offing in the next few months.