The conversion of the floating production vessel for the Chinguetti field, offshore Mauritania, has been completed. It is on location at the field and the hook-up and installation is well underway. The project is over 95% completed, including all drilling, well-completion and clean-up. First production is on schedule for March 2006, building up to a 70-75,000 bpd peak within several months.
Sterling has an approximate 8% economic interest in the field. It also has a sliding scale royalty over 5.28% of the field which, at an oil price of $55/bbl, is worth approximately $6.9 per attributable barrel.
The commencement of production in Mauritania will mark a transformation in the level of Sterling's attributable production and cash flow.
In October, the adjacent Tevet-2 well discovered oil in its Miocene target. This helps to reconfirm Sterling's estimates of a field of 50 million barrels. If declared commercial, Sterling would benefit from its royalty interest and tariff income as production is expected to be transported through a tie-back to the Chinguetti facilities. The well also found a 6 meter oil column in the Cretaceous interval, which is encouraging for the other numerous such prospects as it proved a working hydrocarbon system and good quality sands.
The Labeidna well drilled in November was declared as a discovery and was logged. Thin oil bearing sands were encountered.
A further exploration well is expected by the end of the year and 4 - 5 further wells in 2006. Due to its royalty interest Sterling pays no costs for any of these wells.
Gulf of Mexico
Independent consulting engineers have upgraded Sterling's proven and probable US reserves by 5% to 58.3 bcfge as of September 1st. Of these 60% are in the proven category. There has also been an increase to $34 million in the borrowing base for the US bank loan at the recent review date. The facility is now to be extended by approximately 18 months to the end of 2009, subject to final approvals.
In common with other Gulf of Mexico operators, Sterling's production has been affected by Hurricane Rita although gas prices have since been markedly higher. On balance, Sterling has experienced a limited and short-term net financial impact.
Current production is approximately 7.5-8.0 mmcfged. Since Hurricane Rita in late September, production from the Sterling operated fields in the western Gulf has been maintained at approximately 5.0-5.5 mmcfged. Elsewhere, the High Island/Eugene Island areas have been affected. Although the physical damage to Sterling's platforms and its owned pipeline systems was very limited, the widespread damage to third party transmission systems through which product flows, has caused temporary production shut-in's. Production is expected to be fully restored towards mid/end of December.
Prices have been much higher as a result of the regional shut-in's following the hurricanes. In the Henry Hub area they are currently over $11/mcf, having peaked in excess of $13/mcf, although prices in the Western Gulf market have recently been some $2.50/mcf lower than this. These compare with Sterling's average realised prices in the first half of 2005 of $6.38/mcf. The lower priced forward sales for the July-December period covering approximately 3.3 mmcfgd at an average of $6.06/mcf have now all been closed-out. At present some 20% of current production is hedged for the January-March 2006 period at $8.84/mcf. Further hedges are expected to be taken out in order to reduce pricing risk into 2006.
Production from the Gryphon High Island 52 field (7.6% royalty interest) has, in the last two weeks, increased to a rate of 2.6 mmcfgd. This has risen from 0.5 mmcfgd when it restarted in early November and from 1.3 mmcfgd in mid-November as the production curtailments have gradually been reduced. During the downtime the C-1 well was acidised to stimulate production.
A new well is expected to be drilled by Gryphon in the first quarter of 2006 which is intended to double production. This is to be drilled at no cost to Sterling.
Eugene Island 268 remains shut-in awaiting completion of limited platform and third party pipeline repairs. Production is expected to restart in mid/late December.
The North Mustang Island and Sherman fields production were shut-in for four days in late November for recertification of the pipelines and also to complete the hook-up of new equipment to enable the Mustang line to carry more third party throughput and to reduce line pressure, thereby allowing the MU748-1 well to be brought back on-stream at a net rate of 0.6 mmcfgd, after a two months shut-in.
A liftboat has been provisionally secured to workover the MU904-5 well in mid-December, work which has been delayed due to widespread equipment shortages.
Sterling has commenced drilling the non-operated TB-2 well on GA Bay ST251. It has farmed into this for a 28% WI (20.5% NRI) with the target being a net 3-6 bcf prospect at 15,300 feet. Its net share of costs is estimated at $2.1 million. Drilling is estimated at 50 days.
Sterling was also successful in its 100% bid for the Mustang Island 749 S/2 NE/4 tract in its core area and on which it has identified a prospect at 9-10,000ft. State confirmation is awaited before further work on this drilling prospect is commenced. This is the first prospect to be derived from the 3D data acquired in mid-year.
In Madagascar, where Sterling has a 30% carried interest and remains as operator after farming-out to ExxonMobil, a 2,500+km 2-D seismic survey is expected to be brought forward by a year into 2006. This follows encouraging early reviews of the 34,000 sq km blocks.
In the Dome Flore license in AGC, in which Sterling has a 30% interest, the initial studies of the heavy oil prospect have identified the need for further appraisal work. Accordingly, the joint venture has agreed to enter the First Renewal Period on the permit. Under the terms of the farmout agreement signed earlier in the year, Sterling will be carried for the costs of a firm commitment well program in excess of $10 million gross. Whilst this is a large accumulation the prospects of commerciality at this stage still remains to be proven.
After detailed review of the prospectivity, a farmout program and in view of the likely extremely high drilling cost that Sterling would have to bear, notice has been given to the licensing authorities that the deepwater Croix Du Sud license in AGC will be allowed to lapse.
Sterling has increased it interest in the Iris Marin PSC in Gabon to 38.57% from 20.57%. This license, together with Ibekalia TEA and Themis Marin PSC areas are of great interest. A well is scheduled to be drilled on Themis Marin in the second half of 2006 with Sterling paying only 2.57% of the costs for its 20.57% interest. Work continues on the evaluation of the Iris Marin license following the Iris Iboga Marin-1 well earlier in the year.
The closure of the Perth office remains on track for the end of January 2006 and the offices have been sublet. An increasing emphasis is now being placed on new venture efforts in Africa and a new ventures team has now been assembled with the objective of increasing the pace of new licenses, drilling opportunities and of selective production opportunities following the upsurge in cash flow expected with the major rise in production in the first half of 2006. Whilst this has duplicated overhead costs in the short-term, financial and administrative benefits are soon expected to arise.
Chief Executive, Harry Wilson, said
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