Since completing its initial capital raising and becoming operational at the end of June 2004, the Company achieved the following milestones in 2004 and the subsequent period up to February 22, 2005:
Drilled two wells in France in the fourth quarter of 2004. These included a step-out exploratory well at St. Lazare 2H in the Paris Basin and an infill well at Parentis 222H in the Aquitaine Basin in southwest France. Both wells will be tested in the first quarter of 2005. Verenex holds a 95% participating interest in the wells with Vermilion Energy Trust holding the remaining 5% interest.
Entered into a Letter of Intent to award a contract for a new 3-D and 2-D seismic acquisition program over the 1,200 square kilometer Aquitaine Maritime permit in the Bay of Biscay, offshore southwest France. Verenex and Vermilion are partners on the permit and will each fund 50% of the costs. The seismic acquisition program is planned for the third quarter of 2005, subject to government approvals. Existing 2-D seismic data, that has identified a number of large structural leads, is also being reprocessed. If a suitable prospect is confirmed, an exploratory well could be drilled in 2006.
Prepared corporate qualification documents and engaged in extensive discussions with government officials, national oil companies (NOC's) and oil and gas participants in North Africa.
Qualified to bid in the upcoming Sixth Bid Round in Algeria, with bids due in late March 2005. The Company has purchased data from Sonatrach on a number of blocks of interest and expects to bid on one or more blocks.
On January 30, 2005, Verenex announced that it had been selected as a successful bidder in Libya's Bid Round 1 for an Exploration and Production Sharing Agreement ("EPSA"). Subject to Libyan National Oil Company ("NOC") and government approvals, Verenex expects to have the right to explore for oil and gas in Area 47, a 6,182 square kilometer area in the Ghadames Basin in northwest Libya.
The bid for Area 47 was submitted by Verenex, as Operator, with a 50% interest and its partner PT Medco Energi Internasional Tbk ("Medco"), which holds the remaining 50% interest. Medco is an Indonesian-based public integrated energy company.
Area 47 Work Program Commitments
The EPSA sets out the required minimum work program during the initial 5-year exploration and appraisal period and defines the terms for development, during a 25-year exploitation period, of any commercial discoveries made during the initial 5-year period.
Under the terms of the EPSA for Area 47, Verenex and Medco are required to acquire new seismic, including 1,000 kilometers of 2-D and 200 square kilometers of 3-D, and drill three exploration wells during the 5-year exploration and appraisal period. The cost of this minimum commitment program and any additional seismic and exploratory or appraisal drilling carried out in this initial 5-year period, will be borne 100% by Verenex and Medco. Estimated costs for the minimum commitment program are approximately US $20 million gross (US $10 million net to Verenex).
Subject to the ratification timeline for the EPSA, initiation of the seismic acquisition program is planned for late 2005 or early 2006, with first exploratory drilling in 2006.
Winning Bid Parameters
This First Bid Round attracted strong interest from the international petroleum industry, with 120 companies applying to the Libyan National Oil Corporation ("NOC") to bid on the 15 areas offered. The NOC qualified 63 companies to bid, including major producing companies from the US and around the world. Four Canadian companies qualified including Verenex. The winning bid for Area 47 was based on a Production Allocation ("PA") to the contractor group (Verenex and Medco) of 13.7% and a signature bonus of US $250,000. Nine consortia bid on Area 47.
The PA is the share of any future production from the area that is allocated to the contractor group (free of all taxes and royalties) from which it recovers its share of all capital and operating costs and receives its return on investment. Recoverable costs include the 100% funded exploration and appraisal costs and share of future development costs under the EPSA terms. The signature bonus is payable when the EPSA is approved and is not cost recoverable.
To put this winning bid for Area 47 in context, three of the 15 areas were won with more aggressive PA bids of 10.8%, 12.4% and 13.3%, all by US major producers. Another six blocks were won with PA bids in the range of 14.6% to 19.8%. In total more than US $132 million was pledged in signature bonuses, ranging from zero to US $25.6 million per area. Bonuses on nine of the 15 areas were in excess of US $5 million each.
Development of Commercial Discoveries
If a discovery is made on the block and the Parties (the NOC and the contractor group) unanimously agree that it is commercial, a joint operating company would be established to operate the discovery. Development capital expenditures would be shared 50% by the contractor group and 50% by the NOC. Operating costs would be shared on the basis of the PA split, with the contractor group paying 13.7% of these costs and the NOC 86.3%. The NOC pays 100% of all royalties and Libyan taxes incurred on each discovery, including the contractor group share.
After the contractor group recovers all of its costs on a cumulative basis from the PA, as calculated annually, excess cash flow from the PA is shared between the contractor group and the NOC based on defined production and investment return criteria.
The next step is for the NOC, Verenex and Medco to sign the EPSA. Terms of the EPSA have already been agreed and initialed by the Parties in advance of submitting the bid. Once the EPSA is signed, it will be forwarded by the NOC to the Government of Libya for final ratification.
Jim McFarland, President and CEO of Verenex said, "We are extremely pleased and excited to be selected as the winning bidder for Area 47. We have defined a robust inventory of exploration prospects and leads and several appraisal drilling opportunities on existing oil discoveries in Area 47."
"We are also delighted to be partnering with Medco, an Indonesian-based integrated energy company that is active in exploring for oil and gas internationally and which produces more than 95,000 barrels of oil equivalent per day from assets in Indonesia, Oman and the United States," said Mr. McFarland.
"Winning this bid is a significant step in our strategy to build a long-term business in North Africa and complements our efforts to capture other development opportunities in the region through farm-ins and acquisitions," said Fadi Nammour, Manager of Business Development and Operations for Verenex.
Messrs. McFarland and Nammour were in Tripoli to participate in the bid opening ceremony that was witnessed by the Libyan Prime Minister, officials from the government and NOC and representatives from all of the bidding companies, of which 12 were successful in winning an interest in one or more blocks.
Verenex has an active capital investment program planned for France in 2005, in part contingent on the production test results for its first two wells, St. Lazare 2H and Parentis 222H, which were drilled in the fourth quarter of 2004. If the St. Lazare 2H well test results are positive, up to two additional potential drilling locations have been identified on the St. Lazare structure, which could be drilled in 2005 and 2006. If the Parentis 222H well is successful, a second horizontal infill well on an adjacent spacing unit, Parentis 221H, could be drilled in 2005 or 2006 under the drilling rights granted by Vermilion in the Parentis concession. Verenex would have a 95% participating interest in each of these potential follow-up wells, with Vermilion holding 5%.
In February 2005, Verenex and its 50% partner Vermilion entered into a Letter of Intent to award a contract for a new 3-D and 2-D seismic acquisition program over the offshore Aquitaine Maritime exploratory permit in the Bay of Biscay, approximately 45 kilometers off the coast of southwest France. Fieldwork is expected to commence during the third quarter of 2005, subject to regulatory approvals. The new seismic is designed to better image structural characteristics and trap configuration on the large structural exploration leads that have been identified from existing seismic.
The Aquitaine Maritime permit is located on the same exploration fairway as the onshore Parentis Basin in which the Parentis oil field is located. Much of the permit lies in water depths of 80-120 meters, which is shallow enough to drill with a jack-up rig.
The Company will continue to invest time and capital in enhancing its knowledge base of the North African region and in identifying exploration, development and acquisition opportunities.
In Libya, subject to final government approvals, Verenex and Medco expect to be given the right under the EPSA terms to acquire new seismic and to drill for oil and gas in Area 47, a 6,182 square kilometer area. If government approvals are received before mid-year, the Company could be shooting initial seismic in late 2005 or early 2006 and drilling the first well in 2006. Verenex has identified a robust inventory of exploration prospects and leads and several appraisal-drilling opportunities on existing discoveries, which should be sufficient to allow Verenex and Medco to meet the 5-year seismic acquisition and drilling commitments under the EPSA.
Verenex is also planning to participate in other exploration bid rounds and to pursue development opportunities through farm-ins and acquisitions in Libya, Algeria, Egypt and Tunisia. The next opportunity is the sixth Bid Round in Algeria, which closes in late-March 2005. Verenex has qualified to participate in this bid round.
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