Roc Oil to Buy Apache's China Assets

Zhao Dong Block
(Click to Enlarge)
ROC has agreed to acquire a 24.5% operated interest in the Zhao Dong Block in the Bohai Bay, offshore China, for a cash consideration of US$260 million/A$354 million. The acquisition is via the purchase of 100% of the shares of Apache China Corporation LDC a wholly owned subsidiary of Apache Corporation, headquartered in Houston.

The Block is part of a prolific producing petroleum province which offers considerable upside potential. Gross production from the two producing fields in the Block is in the order of 30,000 barrels of oil per day (net ACC working interest: 7,300 BOPD) and gross proved and probable remaining reserves are approximately 61 MMBO (net ACC working interest: 15 MMBO).

Subject to completion, the acquisition will deliver a number of technical, commercial and strategic benefits which will have a very positive impact on ROC. Specifically:

  • Net proved and probable oil reserves will double from 15 MMBO to 30 MMBO.
  • Production will increase by more than 150% from about 4,500 BOPD to about 12,000 BOPD. Exposure to very significant upside potential has already been identified and/or inferred, in the form of more or less continuous appraisal, development and close-in exploration drilling opportunities through to 2011 and beyond.
  • Production diversification whereby during 2H 2006, ROC will be producing oil from four fields, three of which it will operate, in three different countries. By 2Q 2007, when ROC's two non-operated oilfields in the North Sea will have come on stream, the Company will have oil production from six fields in four countries.
  • ROC's operating profile will be significantly increased. The Company will be operating approximately 40,000 BOPD gross joint venture production offshore Australia and China. The Company will also be operating an additional oilfield development and a separate oilfield appraisal program, both offshore China and its other exploration operations elsewhere in the world. In an operated gross production sense, ROC will be the third largest foreign operator in China.

ROC will finance the purchase via a 12 month loan provided by the Commonwealth Bank of Australia ("CBA"). At CBA's request, an independent engineering review of the assets was undertaken by Australian-based RISC Pty Ltd.

Subsequent to completion, ROC, which is currently debt free, will have a Debt to Total Assets ratio in the order of 0.5 and a Debt to current Market Capitalization ratio in the order of 0.4.

ROC expects to put a suitable oil price hedging arrangement in place that will reflect the magnitude of the transaction as well as the need to protect the downside oil price risk while at the same time retaining an appropriate amount of exposure to the oil price upside.

The transaction has an effective date of 1 July 2006 and is expected to close in 2H 2006, after satisfaction of a number of conditions precedent, which reflect normal government and industry practices.

The Block, which covers 27.5 sq kms, is located in very shallow water close to shore in the Bohai Bay, offshore China, approximately 200 km southeast of Beijing.

Within the Block there are two producing oil fields (C and D) and part of a third field (C4) which is due to be developed in 2007 and come on to production in 2008. ACC operates the planned C4 development in which it has an 11.575% unitized interest.

Since production commenced in 2003, towards 20 MMBO has been produced from the C and D fields and there is an estimated 61 MMBO of gross proved and probable reserves yet to be produced. Production, which is currently through 26 wells, will be augmented by a multi-well drilling program, targeting appraisal, development, extended reach and close-in exploration opportunities, which is underway and expected to continue over the next several years. Operating, development and drilling costs are reasonable, partly because of the facilities' proximity to shore and the size and established nature of the operation which provides economies of scale.

The offshore facilities comprise two, bridge-linked platforms, one of which is dedicated to drilling and accommodation while the other is used for production and processing. An integral part of the oil production operation is the simultaneous production of a significant amount of associated water which is reinjected into the reservoir. The facilities have been designed accordingly, with 12 water injectors and four water source wells supporting the current oil production.

An indication of the quality of the petroleum system is provided by the fact that, within the Block, 27 different stratigraphic levels, ranging in age from Palaeozoic to Tertiary, are known to contain oil. Sixteen of these stratigraphic intervals are currently productive. Between 1994 and first production, 11 exploration wells were drilled in the Block of which eight (73%) encountered significant oil.

Reservoir quality is good to excellent, particularly in the shallower parts of the section where permeabilities are measured in Darcys and porosities range above 30%. The source rock is rich and generative. Oil gravities range from 18 to 38 API with the higher gravity (lighter) oil being in the deeper part of the section. The oil, which is waxy with a low pour point and a low acid content is currently sold into the export market. Zhao Dong oil bears comparison with Indonesian Duri crude which recently traded at a discount of approximately US$5.50/bbl to West Texas Intermediate.

The Block is administered under the terms of a standard Petroleum Sharing Contract the other parties to which are PetroChina Company Limited (51%) and New XCL-China, LLC (24.5%).

Commenting on the transaction, ROC's CEO Dr John Doran stated that:

"When completed, the acquisition, which ROC first identified in 2001, will have a profound effect on the Company.

The transaction is a great example of the efficiency of the industry food chain. For Apache, with its US$20 billion market capitalization and two billion barrels of proved reserves, the asset may have become less material. For ROC, a much smaller company, the transaction will provide a substantial boost to its reserve and production trajectory.

For ROC, this is also the next logical growth step. Quite apart from the fundamental quality and upside promise of the assets, the deal delivers a number of other benefits ranging from reserve and production growth in a designated core area to increased technical and operating mass.

Apache has been an outstanding operator of the Zhao Dong Block and ROC will be looking to deliver more of the same by retaining the existing operating structure. The acquisition will complement ROC's other operations at the Cliff Head Oil Field Development, offshore Western Australia, which is just being completed, and in the Beibu Gulf, offshore China, where ROC has just started an aggressive appraisal program relating to its recent oil discovery. With this operating capacity being an important component of the transaction, the timing of the Zhao Dong deal could hardly have been better.

Placing the acquisition in an Australian industry context is an interesting exercise. Market-watchers in Australia are increasingly talking about a potential consolidation of the independent oil and gas sector. However, if you were to rummage through corporate Australia you would find it very difficult to acquire the same amount of proved and probable oil reserves for the same price. Then, if you added the requirement that those reserves must come complete with the upside potential that an exceptionally well endowed petroleum system provides, the task would move from being very difficult to totally impossible. This broader access to global opportunities is one of the benefits which ROC shareholders derive from the Company's long established focus on international oil and gas operations.

Since 1998, ROC has enjoyed working with various Chinese oil companies and in this context it looks forward to expanding these relationships by working with PetroChina, the largest interest holder in the Zhao Dong Block."


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