The Seven Heads field has been Ramco's priority over much of the past year, but we have also been actively negotiating a series of farm-out agreements with the objective of reducing the Group's future capital expenditure requirements whilst retaining an interest in the exploration upside. During the first half of last year we announced the farm-out of a part of Ramco's interest in the Seven Heads oil potential and we have now concluded a farm-out deal over a part of our onshore interests in Bulgaria.
A comprehensive technical review of the geophysical, geological and recent production data from the Seven Heads gas field has been completed and assessed by the Seven Heads partners, RSHL's Bankers and the Petroleum Affairs Division of the Irish Government.
The key finding of the study is the Seven Heads reservoir is significantly more compartmentalized than had been anticipated and the production wells are connected to a smaller volume of gas bearing rock than had been expected. Consequently each well is draining a significantly smaller reservoir area than originally interpreted. It is believed this is a result of the presence of more severe faulting and stratigraphic compartmentalization than was apparent prior to development.
The original interpretation of the Seven Heads field was of a single gas accumulation in a structure completely filled to the "spill point". It was recognized there were highly permeable, good quality sands, and additional gas was present in lower permeability sands. This pre-development interpretation was supported by seismic maps, well logs, well tests, cores and pressure data obtained from six exploration and appraisal wells and was endorsed by several independent reservoir engineering companies.
New pressure data, collected during the development drilling program and production phase, has illustrated subtle pressure differences between some of the sands. This demonstrates the sands are isolated from one another. Analysis of production data confirms some of the gas in the lower permeability sands is being produced, but at rates significantly lower than anticipated by even our most cautious predictions. The technical review has concluded the water accumulation experienced in some of the well bores is the result of condensation of water vapor naturally contained in the gas. This only occurs because the gas is being produced at a much lower rate and pressure than had been expected, due to the greater compartmentalization. The water build up is being controlled by shutting in each well and allowing a pressure build up before reopening the well to unload the water.
The technical review has identified a number of sands in two of the existing wells which appear to contain gas and which are currently not open to the wells. We are therefore assessing the possibility of opening these sands for production by adding new perforations in these wells during 2005. The precise timing and the economic viability of such work depends on the availability of a suitable vessel. Options, including the use of a drilling rig or a dynamically positioned well intervention vessel, are currently being evaluated and discussed with partners. The earliest the work could be undertaken is May 2005.
The technical review has also indicated it is likely substantial additional gas may be present elsewhere in the field. However, this would require to be substantiated through acquisition of 3D seismic, which would also be critical to ensuring the optimal placement for drilling new wells.
Current Production and Gas Sales
Since the field first failed to produce sufficient gas to meet RSHL's obligations under its Gas Sales Agreement (GSA), RSHL has been suffering the additional cost burden of importing the shortfall quantities of gas from Scotland. This situation ended at the start of the new gas sales year on 1st October 2004. At that point our contractual commitments under our GSA with RWE Ireland Limited (RWE) changed and we are now nominating sales volumes that match field deliverability. The commercial arrangements necessary to enable us to sell the additional volumes of gas that we anticipate following the completion of the perforations during the current gas sales year are in place.
A further improvement in the commercial situation has been achieved through profiling the field's gas production. In order to maximize gas sales revenue, the production profile of the field is being managed to maximize production during the winter months when gas prices are normally highest. Currently the field is producing 12 mmscf/d and forecasts indicate that without the perforation program, the likely volume of production in the current gas sales year will be approximately 2 bcf.
As stated above, the technical report indicates the field is significantly more compartmentalized than originally anticipated and this obviously has a material impact on the field's recoverable reserves. It is currently Ramco's view that approximately 19 bcf is recoverable from the existing wells in addition to the 9 bcf produced to-date. If additional wells are successfully drilled and produced then the recoverable reserves figure could rise to approximately 83 bcf. Whilst extremely disappointing, these figures are within the range of downside possibilities identified in the original Plan of Development.
Ramco effectively wrote off its interest in the field when it made a substantial impairment provision in its 2003 accounts, the outcome of the technical review confirms that to be the appropriate treatment.
RSHL's bankers have temporarily waived certain rights under the banking agreements in order to allow RSHL to progress detailed negotiations with a number of third parties interested in providing the additional investment necessary to undertake both the perforation program and 3D seismic survey work. A separate announcement will be made once these arrangements are finalized.
Ramco also announces that its wholly owned subsidiary, Ramco Bulgaria Limited (RBL) and its partner Anschutz Bulgaria Limited (Anschutz) have agreed a farm-out with Chimimport JSC over their A-Lovech acreage onshore Bulgaria.
The ALovech block lies approximately 80 km to the north east of Sofia and covers 3,558 sq km. RBL (20%) and Anschutz (80%) have been working together on the acreage over the past three years and have agreed that Chimimport, a Bulgarian company with a subsidiary specializing in seismic acquisition, will join them for the next phase of exploration. Chimimport will earn a 45% interest in the acreage by completing 570 sq km of 3D seismic. Once completed, the farm-out will result in the group's interests being Chimimport 45%, Anschutz 44% and RBL 11%.
The seismic acquisition program will be aimed at multiple geological targets and is likely to be carried out between July and November 2005.
Ramco is also at an advanced stage of negotiations of other farm-out agreements over its exploration acreage. Further announcements will follow if these negotiations are concluded successfully.
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