"2005 was a year of consolidation for Indago, putting the pieces in place for the coming year, and culminated in the company's IPO on AIM in December.
Indago has an excellent portfolio of assets with a high quality, fully funded drilling program in place. With the prospect of further development at West Bukha as well as the opportunities that may arise from our new ventures, we are confident that the Company is ideally placed as it enters this next exciting phase of its development."
The industry environment remains very positive, especially where Indago is active. Oil prices have held very firm, much higher than that assumed at the time of our IPO in December 2005. Our target gas market in the U.A.E and Sultanate of Oman is forecast to have significant supply shortfalls, which can only be met through imports or discovery of new reserves. This increases our ability to commercialize discoveries we make and adds value to any reserve additions in our existing discoveries.
Much of our industry is finding it difficult to source equipment and services, especially rigs and casing. Through judicious planning, Indago has managed to secure those items necessary for delivery of the promised work program. Similarly, I am confident that we will be able to build rapidly on successful outcomes from the high impact exploration wells we are drilling in 2006 and 2007.
Exploration drilling carries risk, as we found when drilling Hagil-1, our first well following the IPO. It is the risk / reward ratio that is important in assessing projects. Our acreage position has been deliberately located in a highly petroliferous region, which is attracting very large companies and our next exploration projects have attractive risk/reward attributes. Indago has been building a portfolio over the last 7 years and already has additional new venture opportunities identified, of varying levels of maturity. The Company is confident that our prospect inventory will grow in 2006 as further, commercially interesting opportunities are added to the existing base.
The prospects for Indago are bright; we have:
Chief Executive's Review
The Company's financial performance during 2005 was an operating loss of $15.2 million (compared to a loss of $2.3 million in the prior year) which was significantly influenced by two factors:
- Only one lifting of oil condensate in 2005, compared to two in 2004, and an absence of recoverable costs reduced turnover to $3.8 million from $15.8 million, and
-The write-off of $11.9 million of intangible assets associated with an unsuccessful well (Hagil-1).
In 2005 there was only one sale of oil condensate and therefore the Group's turnover figure was lower compared to the previous year. This is partly the result of a timing difference, as a significant lifting (sale) took place in the early part of 2006. The other main influence was the absence of capital expenditure in 2005. Under the cost-recovery formula in the EPSA, 92% (in 2005 it was 100%) of capital expenditure can be recovered out of income before the profits are shared. Both these situations are reversed in 2006, when multiple liftings are planned and the West Bukha appraisal / development expenditure will provide maximum cost recoveries.
Production was steady during the year, with a daily average of 1,285 barrels of oil condensate and 770 boe of LPG. The forecast for the first half of 2006 was 1,091 barrels of oil condensate and 635 boe of LPG per day. As we approach the half-year, this forecast remains unchanged. The oil price has been buoyant and the condensate has recently commanded a premium price over Brent.
After the year-end, the results of the Hagil-1 well project came through. The well proved not to be commercially viable and therefore the costs associated with the project that had been capitalised were all written off in the 2005 results. These totaled $11.9 million.
The Company had $ 81m of cash at the year-end and has forecast headroom in excess of $10m to complete its program to 2008.
Production and Development
Block 8 (Indago share 40%)
This asset is the source of our existing cash flow and constitutes our next field development.
Bukha is an offshore gas-condensate field which has been producing since 1994. Its Proved plus Probable remaining reserves as of 31 December 2005*, stand at 54 Bcf of residue gas and 3.7 million bbl of condensate plus LPG. Total field production during 2005 averaged 2055 bbl/d of condensate and LPG, and 30 MMscf/d of gas. Budgeted production for the first half of 2006, which is currently forecast to be met or marginally exceeded, is 1726 bbl/d of condensate and LPG, and 25 MMscf/d of gas.
Indago (through its subsidiary IOL) has a 40% participating interest in these total field remaining reserves and production volumes.
On May 23rd of this year, Indago, as the operator of the Bukha Joint Venture (BJV), spudded the West Bukha-2 appraisal/development well. This targets Cretaceous-age carbonates (the same formations as at Bukha) in a large, gas-condensate accumulation straddling the Oman-Iran border. The BJV has been granted permission to develop the reserves which lie on the Omani side of the field. Facilities design work has already begun and, once commerciality has been assessed through the testing of West Bukha-2, if successful, the BJV will install a platform and pipeline to deliver the petroleum fluids to markets in Ras Al Khaimah via the Bukha system.
West Bukha gas is rich in condensates. Testing on the structure's discovery well yielded more than 200 bbls for each million cubic feet of gas. In the success case, the forecast initial production rate for the field from a single well of 30 million scf/d, would also provide more than 6,000 bbls/d of condensate. Six drilling slots are available on the platform, and Bukha condensate has recently sold for a higher price than has the Brent crude marker. Thus, success would produce a strong and growing cash-flow from the field from the outset of production in the early months of 2008.
Reserves Evaluation, Block 8: Report by PGS Reservoir in January 2006.
In the face of a very tight market, Indago have contracted a rig for all three wells to carry out our next onshore drilling program. The rig is being newly assembled in Dubai for delivery to our operational group in June. Once executed, between July 2006 and June 2007, this campaign - targeting more than 1 billion barrels of oil equivalent in total (using a conversion of 6000 cu. ft of gas to 1 bbl of oil) - has the potential of adding significant value to our asset base.
Our existing contracts, equipment inventory and cash reserves should allow us to roll immediately into the appraisal of any discoveries which are made during the exploration program. This strong position is crucial to our continued growth and development. Future upside is also possible from our portfolio of leads which, following our seismic program in 2006 and 2007 should be ready for drilling in 2008.
Block 31 (Indago share 100%)
Indago technical staff have identified and defined a large, drillable prospect in this block, the Al Jariya Well on the Jebel Hafit Prospect. If this prospect is successful, it has the potential of being a very large gas and condensate field.
The Jebel Hafit prospect straddles the border between the Sultanate of Oman and the Emirate of Abu Dhabi. It is programmed as the third well in the onshore Oman sequence.
There is a key pipeline within 25 km of the structure which carries gas both to Sohar, a site of major industry development in Oman, and into the United Arab Emirates.
Further leads exist. Qumairah had new seismic shot in 2004 which is currently being processed. We expect to mature the structure to drillable status later in 2006. Also, Jebel Wabah is a large surface lead, and will be covered by new seismic between late 2006 and early 2007.
Block 47 (Indago share 100%)
Two wells, Hawamel and Zad will the drilled on the Izz and Adam prospects, respectively and will be drilled in the second half of 2006. Also, several leads are targeted for promotion to drillable status.
These prospects are fully independent, targeting different reservoirs dependent on differing petroleum systems. Both have nearby analogue discoveries, and so the necessary elements for success are present in the area.
Site construction on Hawamel has been completed, and work has switched to the Zad site. The drilling rig will be under contract in June for the start of drilling on Hawamel in July. Drilling of Zad is expected to commence in September, following the results of Hawamel.
The Dham and Sadood leads, together with the Kabshat prospect, represent further upside in Block 47, ranging from 50 Bscf to 500 Bscf potential reserves in each. Dham is a surface lead. However, some seismic covers Sadood, while Khabshat is almost completely covered by our 2003 2D seismic program. In 2006 and 2007, we will obtain approximately 240 km of further 2D seismic, to mature all these structures into prospects ready for drilling in 2008. Seismic contractor bids have been received, and award is forecast for early June.
The commercialization of any discovery is enhanced by the proximity of the major pipeline which runs through our block to Muscat, the capital and largest population centre of Oman. The pipeline cuts between Zad and Hawamel, both of which are located within 10 km of this line.
Block 30 (Indago share 100%)
There are four existing gas discoveries in Block 30 which have flowed at commercial rates.
The commercialization of this block has proved difficult due to variable gas quality and uncertainty in the reserve base. This may be resolved through one or more courses of action. A possible solution lies in the agglomeration of the Block 30 reserves with a discovery in Block 47. Another solution lies in the appraisal of the Hamrat Duru structure which tested gas in the Natih reservoir, but has not been tested in the Shuaiba reservoir. The Hamrat Duru structure extends into Block 47 as the undrilled Khabshat prospect. A third possibility concerns the successful exploration of one or more structures (e.g. Harran or Prospect 'C') which have been identified by Indago. Finally, such issues may be resolved through changes to the input gas specification in the nearby pipeline (~ 10 km from the block boundary).
In anticipation of the results from Hawamel and Zad, we are completing our technical evaluation of the existing discoveries and exploration prospects, for integration into a wider Block 30 / Block 47 exploitation program. The outcome of that program will depend on discussions with the government of the Sultanate of Oman.
Onshore Ras Al Khaimah (Indago share 100%)
Block 17 (Indago share 40% - Musandam, Sultanate of Oman)
The first well of the onshore exploration program, Hagil-1, was plugged and abandoned in January 2006.
Prior to drilling, the major risk on the structure working was considered to be the ability of the caprock (seal) to retain its integrity. Indeed, it soon became apparent that although the structure had been gas charged, the hydrocarbons had leaked to surface during relatively recent uplift which was probably the result of a rupture of the seal. The impact of Hagil-1 on the nearby Ash Sham prospect is currently being assessed, with possible outcomes including reducing our equity in the well.
This result has no negative impact on the remaining prospects further south in Oman. The petroleum system elements in the northern part of this fairway segment are different to those which control hydrocarbon occurrences in the south. Hagil-1 is also over 200km from the Jebel Hafit prospect, and there are numerous major discoveries between the two.
The Hagil-1 well demonstrates the existence of good reservoirs in the lower Jurassic and Triassic carbonates. This information is being assessed and applied to remaining potential in Block 17 Oman, and in deeper potential in the Tibat discovery, also located in Block 17.
RAK B (Indago share 40%)
In May 2005, Indago announced the award of a new Petroleum Concession Agreement with the government of Ras Al Khaimah, as part of a joint venture with the Ras Al Khaimah Gas Commission ("Rakgas"), a governmental company.
The concession area encompasses an offshore oil and gas field, named RAK B, which was discovered in 1976 by Vitol. The RAK B-1 well tested at rates of around 6-7MMscf/d of gas and 1800-2200 bbls/d of condensate from the Thamama reservoir, and around 3000 bbls/d of oil from the Ilam reservoir. The tested reservoirs are located in the same formations present at Bukha and West Bukha, both of which are discovered fields operated by Indago.
Two later wells (B-2 in 1977 and B-3 in 1978) failed to find productive hydrocarbons. However, they were all based on low resolution 2D seismic data. More recently, a 3D seismic survey has been shot and will be processed by Indago. We expect considerable differences between the 2D and 3D surveys, which could prove significant. In addition to this data, since discovery, there have been advances in drilling and completion techniques, along with the installation of the gas processing plant, onshore Ras Al Khaimah, operated by our partner, which should greatly assist in reducing the threshold for commercial reserves.
We intend to leverage off Indago's regional oil and gas experience and Rakgas' local infrastructure and gas processing/marketing skills, to create an appraisal and development plan for RAK B. An existing platform at B-1 will be the subject of an inspection for potential use in a future development. Over the next twelve to eighteen months, the Joint Venture will carry out the technical and commercial analysis necessary to determine whether further drilling and/or facilities installation is justified.
The recruitment of Martin Groak as a full time Chief Financial Officer and director of the Company has also done much to strengthen our position organizationally. He replaces Miguel Soto, who filled the post on a temporary basis, loaned to us by our major shareholder, until Indago had recruited a suitable candidate. The Company would like to extend its thanks and appreciation to Miguel for his outstanding diligence and contribution during the IPO process.
Having raised $120 million during an IPO in December 2005, we remain fully funded for the forecast firm program. In the same way as our existing business has been the result of many years of careful building and planning, Indago has identified incremental, complementary new ventures. The recent award of the RAK-B Concession was one, and others are close to maturity. If executed as planned, these will provide further avenues for the growth of Indago Petroleum.
It is the Company's firm belief that with existing production, near-term development, high quality drilling prospects, current leads and identified new ventures, Indago is exceptionally well-positioned for the future.
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