The Saltfleetby Gas Field is Britain's largest onshore gas field. Since ROC brought the field on to production at the end of 1999 it has produced 54 billion cubic feet of gas ("BCF"), initially at a collective rate in excess of 50 million cubic feet per day ("MMSCFD") from four wells. Currently, the field is producing approximately 15 MMSCFD from three wells. Since start-up the field has also produced almost a million barrels of condensate ("MMBC") and current condensate production is about 240 BCPD.
Prior to first production the field's recoverable proved and probable (2P) gas reserves were independently estimated to be 43 BCF. During the last 5 years it has become increasingly apparent that this initial estimate was conservative and it is now independently calculated that the original 2P recoverable gas reserves were approximately 90 BCF of which 36 BCF are yet to be produced. Original condensate reserves were 1.26 MMBC of which about 0.33 MMBC are yet to be produced.
The field is largely developed but in order to access all of the remaining recoverable reserves, ROC would be required to further invest in the development of the field by drilling and completing additional wells.
WINGAS is a joint venture of Wintershall AG (65%), the largest German producer of oil and gas, and the Russian company, OAO Gazprom (35%), one of the largest gas companies in the world. The joint venture company has been active in the gas supply industry since 1990 and supplies natural gas to public utilities, major industrial enterprises and regional gas distribution companies in Germany and other European countries. In addition, WINGAS markets transport and storage capacities, as well as optical fibre capacity and is also active in the procurement of natural gas and the operation of pipelines and storage facilities.
The German-Russian joint venture has a modern infrastructure with a network of more than 2,000 kilometers of pipeline in Germany that connects the huge gas reserves in Siberia with the growing markets in Western Europe and which also provides WINGAS with access to the developing European spot markets. With its natural gas reservoir at Rehden, which has a working gas volume in excess of four billion cubic meters, WINGAS possesses about one-fifth of the total gas storage capacity available in Germany.
WINGAS has used the opportunities arising from the liberalization of the European natural gas market as the basis for further growth. The company has now secured a market share of more than 7% in Belgium. WINGAS has also started supplying initial customers in France and Austria. It has also stepped up its natural gas marketing activities in the United Kingdom by establishing the new joint venture HydroWingas with the Norwegian company Norsk Hydro.
ROC has entered into agreements for the sale to WINGAS of 100% of the share capital of one of ROC's wholly-owned subsidiaries, the principal asset of which is the PEDL 005 license which contains the Saltfleetby Gas Field. Subject to an effective date working capital adjustment, WINGAS will pay a £44 million cash consideration to ROC, equivalent to A$111 million.
The transaction is subject to satisfaction of normal industry terms and conditions precedent including the approval of the UK Department of Trade and Industry and the German merger authorities. The effective date of the sale will be 31 December 2004. ROC's expectation is that the conditions precedent will be fulfilled in a routine manner during early 2005.
FUTURE ACTIVITIES IN PEDL 005
Subject to the completion of the sale, WINGAS has advised ROC that it intends to continue to produce gas at Saltfleetby through most of 2005 in accordance with the existing gas sales contract between ROC and RWE Npower plc. In this event, there will not be any near term operational changes at the Saltfleetby Gas Field. ROC has agreed to provide transitional services for the continuing operation and administration of the Saltfleetby Gas Field. ROC will retain its existing workforce to enable it to provide such services.
Both WINGAS and ROC have also agreed that ROC will be able to continue to produce oil to its own account from the Keddington Field, located in PEDL 005, which produces approximately 50 barrels of oil per day from two wells. ROC will also retain all its other UK assets, including its interests in the UK North Sea where the Blane Field is being reviewed with the aim of establishing first production during the second half of 2006.
The sale is expected to generate a net after tax profit for ROC in the order of A$72 million which will be to be booked in Financial Year 2005 if as expected the conditions precedent for completion of the sale are satisfied in early 2005.
Upon completion of the sale and receipt of the sale proceeds ROC will have cash and receivables in the order of A$180 million (equivalent to A$1.02/share) and no debt.
The funds received from the sale will be used to finance ROC's current and imminent activities which may include part of ROC's share of the development of the Chinguetti Oil Field, offshore Mauritania and the Cliff Head Oil Field, offshore Western Australia, as well as carefully selected new venture activities.
As a result of the sale, ROC's 2P reserves will be reduced by approximately 6 million barrels of oil equivalent ("MMBOE") representing almost one third of the Company's currently booked 2P reserves. ROC expects, however, that the reduction in reserves will be more than offset by the 2P reserves that ROC will book if the Cliff Head Oil Field, offshore Western Australia, is subject to a Final Investment Decision at the end of January as presently scheduled. ROC's production will reduce by about 2,750 BOED to 50 BOPD. This reduction in production is also expected to be more than offset in just over a year's time if the Chinguetti Oil Field in Mauritania and the Cliff Head Oil Field are brought onto production as currently scheduled with ROC's net initial production from these two fields expected to total more than 7,500 BOPD.
ROC also has an active new venture program which may, partially or completely, offset the reduction in reserves and production that will result from the sale of the Saltfleetby Gas Field.
The proposed sale will not influence ROC's current drilling program in the UK which remains focused on testing large, high risk, gas prospects as illustrated by the well currently drilling at Errington in Northumberland and other wells which are scheduled for drilling and/or fraccing elsewhere in eastern England during 2005.
Neither will the sale affect ROC's participation in the Blane and Enoch fields in the UK North Sea where the company is continuing to work with the Operator and its co-venturers with a view to moving these fields towards first oil production during mid/late 2006.
Commenting upon the transaction with WINGAS, ROC's Chief Executive Officer, Dr John Doran, stated that:
"The development and production of the Saltfleetby Gas Field has been a wonderful - and very profitable - experience for ROC. The proposed sale provides ROC with an opportunity to immediately realize, on a no risk basis, a value for the field that, on a forward price curve basis, would take a very long time to replicate in terms of net operating cash flow from pure gas and condensate production.
As the Saltfleetby Gas Field moved into the mature phase of its productive life ROC has focused increasingly on how best to maximize the value of the field. During 2004, it became increasingly clear that any value maximization exercise would be enhanced if it contained an element of gas storage. However, after reviewing gas storage in a UK context, ROC decided that it did not want to become a gas storage company because its upstream skill set and corporate strategy were inappropriate for life as an owner and operator of a gas storage facility.
In the context of small independent oil companies, ROC's balance sheet has been historically strong. With the proceeds of this sale it will now be quite exceptional. Fortunately, the Board and Senior Management Team at ROC have seen enough industry downturns to ensure that the money will not burn a hole in its corporate pocket but will rather be deployed judiciously on current and new ventures as and when appropriate.
The sale is a good example of ROC's sensibly contrary strategy and the Company's approach of actively managing its portfolio of assets. It takes a certain amount of corporate confidence – and a very compelling offer – to sell virtually all of a company's, albeit modest, production and one third of its equally modest reserves. If we thought we couldn't replicate a Saltfleetby-type experience in the future we wouldn't be selling it now. A number of ROC's directors have been here before in previous corporate lives, including agreeing to sell the former Command Petroleum's 20% stake in the South East Gobe discovery in the highlands of Papua New Guinea for A$20 million in the early '90s. That move effectively recapitalised that company and allowed it to invest approximately A$1 million into work that led to the acquisition of the Ravva Oil and Gas Field offshore India which went on to totally transform Command.
Given the difference in size of the WINGAS co-venturers and ROC and the different positions they occupy within the oil and gas business it is a tribute to all parties that the documents have been finalized within a relatively short period."
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