Upstream segment strategic update
12/10/2012 2:28 AM EST
Alliance Oil Company Ltd
Company Announcement
Upstream segment strategic update
2012 Achievements:
-- Forecasted production of 19.7 mbbl, 10% growth year-on-year
-- Proven reserves (1P) increased by 14% to 353 mboe, Proven and Probable (2P)
by 17% to 760 mboe and Proven, Probable and Possible (3P) reserves by 26%
to 1,256 mboe
[1]
-- Segment EBITDA increased by 51% year-on-year to 396 MUSD in the first nine
months of 2012 with positive free cash flow
-- Kolvinskoye field evaluation and new geological model completed
-- Entered into the Russian gas market: 2 gas licenses with 2P reserves of 112
mboe
-- Expanded resource base: new exploration licenses with 500 mboe of resources
-- Formed joint venture
with Repsol for upstream development
Strategic outlook 2013-2015:
-- Target double digit growth of oil and gas production
-- Further organic development of current reserves
-- Gradual increase of production and exploration activity at the Kolvinskoye
field
-- Gas production to start in early 2013 and eventually account for about 20%
of total volumes
-- Strategic partnership with Repsol: new gas assets and acquisition
opportunities
-- Exploration of expanded resource base in the Timano-Pechora region
-- Lower CAPEX supported by developed infrastructure and facilities
-- Organic growth fully funded from operating cash flow
-- Increased profitability and efficiency
“Alliance Oil has historically been one of the most dynamic and efficient
midcap companies in Russian oil and gas. With the enlarged upstream portfolio
in Timano-Pechora, the recent successful entry into the rising Russian gas
market and the advancing strategic partnership with Repsol, we expect to keep
this title in coming years. As the joint venture gets completed and gas assets
commence production we are targeting double digit production and reserve growth
in the nearest future. In addition, the latest fiscal initiatives of the
Russian government may further improve the tax treatment for some of our
producing assets in 2013”, says Arsen Idrisov, Managing Director of Alliance
Oil Company Ltd.
2012 Achievements
In 2012, the Company’s growth pace continued to outperform the Russian oil
sector. Total production is forecasted at 54,000 barrels per day or 19.7 mbbl,
marking a 10% increase compared to 2011 and extending the Company’s continuous
record of reserve and production growth. Meanwhile MET exempt production
reached 50% in the first nine months of 2012. The upstream segment became free
cash flow positive in the first nine months of 2012.
The Company has expanded into the Russian gas business through the strategic
acquisition of two licenses with sizable 2P gas reserves and attractive
resource potential in the Tomsk region. Through the acquisition, Alliance Oil’s
2P reserves increased by 17% to 760 mboe and total 3P reserves reached 1,256
mboe. Moreover, the Company has added 6 new exploration licenses in the
Timano-Pechora region with prospective resources of about 500 mboe.
The Kolvinskoye field activity was reviewed to evaluate the field’s reserves
and potential, update the initial geological model and to prepare an updated
drilling and development plan for the field and new licenses. The new model was
prepared in cooperation with Schlumberger and with an independent assessment by
DeGolyer&McNaughton. The geology of the field appeared to be more complex than
initially anticipated. Based on the new 3D seismic data available and recent
drilling statistics from about 40 production wells and one exploration well, a
revision of reserves in the Devonian formation will be largely compensated by
reserve additions in the Permian and Silurian formations, with a possible
reduction in net 2P reserves of approximately 5%. The reserve revision is
expected to be reflected in the Independent Reserve Audit report for 2012 and
is not expected to affect the Company’s financial statements. The undeveloped
Permian and Silurian formations will be explored to support the gradual
production growth in coming years.
Strategic outlook 2013-2015:
In late 2008, Alliance Oil Company approved a three-year plan for its upstream
segment targeting more production, more reserves and more returns primarily
from the organic growth of existing assets under assumed market conditions and
forecasts. The recent macro developments in oil markets and Russian fiscal
incentives, completed infrastructure at the Kolvinskoye field, significant
exploration potential in Timano-Pechora with complex geology, the new strategic
joint venture with oil major Repsol and attractive gas business opportunities
in Russia with awaited export parity in the near future – these factors
initiated the review of the Company’s current portfolio and apparent growth
opportunities for the upstream segment in coming years.
The Upstream strategy for 2013-2015 will have four focus areas:
-- Growing reserves and production, realising exploration and development
potential in Timano-Pechora
-- Expanding in the highly attractive Russian gas industry
-- Growing the joint venture under the strategic partnership with Repsol
-- Improving the profitability with lower costs and greater contribution of
high-margin fields
The current production at the Kolvinskoye field stabilized at around 11,500
barrels per day. The Company has initiated a water-flooding program with three
wells converted into injectors so far and another two wells to be introduced
shortly. The focus in the Kolvinskoye field for the coming year would maintain
the lowered CAPEX to continue water-flooding program by converting another 3
wells into injectors and drilling 6-8 new intelligently placed production and
exploration wells in the northern and southern blocks. The detailed development
plan to unveil the production potential from the new blocks, including Permian
and Silurian formations, will be tested and verified by new drilling on a
permanent basis with necessary authorizations available within the coming year.
The production from the field is expected to gradually increase in coming
years.
The geological experience from the Kolvinskoye field, the development of the
Kharyaga licenses and recently completed infrastructure with a 146-km pipeline
and supporting facilities strengthened the Company’s commitment to the
Timano-Pechora region and offered strong competitive advantages in obtaining
new resources in the preferential tax environment. In the second half of 2012,
Alliance Oil acquired the exploration license for the West-Osoveiskoye block
and was awarded with 5 exploration licenses in Timano-Pechora region. The
license resources are estimated to hold over 410 million barrels of oil with
additional gas resources of 86 million barrels of oil equivalent under Russian
reserve classification (D1+D2). The combined area of the licenses amounts to
over 3.400 square kilometers. Following the launch of the Kolvinskoye field in
2011 and expansion of the resource base in the region, the Timano-Pechora is
expected to continue delivering production growth in coming years.
As part of the long-term growth strategy, Alliance Oil entered the Russian gas
market which presents attractive fundamentals. Russia holds the largest gas
reserves and is the second largest gas consumer in the world. The market
environment in Russian gas has been improving for the past 2-3 years, and the
sector offers exciting opportunities for value creation and returns going
forward. In 2012, Alliance Oil acquired two gas licenses with 2P reserves of
112 mboe and 3P reserves of 259 mboe in the Tomsk region. Alliance Oil
schedules to commence gas production with sales into the domestic market early
next year, subject to all necessary approvals. In coming years, natural gas is
expected to reach around 20% of the Company’s total production. Gas production
EBITDA margins are projected at approximately 65% in the first year, thus
exceeding oil production margins of 51% in the first nine months of 2012.
The JV with Repsol is expected to be fully completed before year end. The first
phase of the joint venture with Repsol was completed in August. As a result of
the second phase, Repsol will have contributed the Eurotek gas company, with 2P
gas reserves of approximately 115 mboe to the JV and paid total cash of about
115 MUSD to Alliance Oil. The Company in turn is going to contribute its
Tatarstan assets. Eurotek is expected to come on stream shortly with the
Syskonsyninskoye gas field. The Yuzhno-Khadyryakhinskoye gas field is expected
to be launched in 2016. Alliance Oil will record 51% of Eurotek gas reserves
and production.
The Upstream segment became free cash flow positive in the first nine months of
2012. Following the recent completion of the major infrastructure projects in
the Timano-Pechora and Tomsk regions, and in the current pricing environment,
upstream CAPEX for organic growth is expected to be further reduced and fully
funded from the segment’s operating cash flow. Up to 25% of next year CAPEX is
expected to be spent on exploration activity.
Upcoming information
An operational update for the fourth quarter 2012 is due on 11 January 2013. An
updated reserve report is expected to be published in February 2013.
Operational updates will be disclosed monthly.
For further information please contact:
Arsen Idrisov, Managing Director, Alliance Oil Company, Tel.: +7 495 777 18 08
Eric Forss, Chairman, Alliance Oil Company, Tel.: +46 8 611 49 90
Also visit www.allianceoilco.com
[1] evaluated by DeGolyer and MacNaughton under SPE Standards as of December
31, 2011 and February 29, 2012, not adjusted for 2012 production and revisions
Alliance Oil Company Ltd is a leading independent oil and gas company with
vertically integrated operations in Russia and Kazakhstan. Alliance Oil has
proved and probable reserves of 760 million barrels of oil equivalent and
downstream operations that includes the Khabarovsk refinery and the leading
network of gas stations and wholesale oil products terminals in the Russian Far
East. Alliance Oil's depository receipts are traded on the NASDAQ OMX Nordic
under the symbol AOIL.