The year under review, 2005, saw the Company continue on an aggressive path of acquisition of exciting exploration assets. In 2006, these efforts resulted in the Company acquiring a 30% interest in each of OPL 321 and OPL 323, highly sought after deepwater exploration permits, offshore Nigeria. In addition, the Company acquired a 9% interest in Block 2 of the Joint Development Zone ("JDZ") of Nigeria and Sao Tome and Principe. In the same year the Company commenced the development of the Bilabri Field and drilled an exploration well, Owanare 1, on OML 122 offshore Nigeria.
In spite of these positive developments, the second half of 2006 has been a difficult period for Equator, leading to a significant fall in the Company's share price. Although the Company was successful in confirming commercial volumes of oil in the Bilabri Field and in discovering new gas reserves in the Bilabri and Owanare Fields, the level of the reserves discovered has turned out to be less than anticipated.
Nevertheless, the Board believes that the acquisition of OPL's 321 and 323, Block 2 JDZ and OML 122 has laid a solid foundation for the future growth of the Company.
During 2006, the Company's operations have been focussed on Oil Mining Lease 122, offshore Nigeria, where it has a Finance and Service Agreement with the operator, Peak Petroleum Industries Nigeria Limited. Operations were completed on the exploration-appraisal well B-DX1 on 24 March 2006 after the well had successfully appraised the Bilabri-1 C2 Sand oil discovery. Additionally, the well confirmed gas in the Upper and Lower Gas Sands and discovered new gas resources in the Deep Sands A and B. After very high pressures were encountered, drilling operations were stopped, leaving the deep prospects below 3600 meters still to be explored. Two intervals were flow tested, with the C1 Sand flowing gas at 24 mmscf/d and the C2 Sand flowing 39 degree API oil at rates of up to 7,188 bopd. The well was suspended for use as a future producer.
Pressure data and 3D seismic evidence suggested that the proven oil in the C2 Sand would extend into the C1 Sand. In order to further evaluate the oil field, two appraisal wells, Bilabri D2 and D3 were drilled. The results indicated that:
During November, drilling operations continued with the Bilabri D4 well. The well will be suspended for completion as a horizontal oil producer. On 17 October 2006, a contract for a Floating Production Storage and Offloading vessel ("FPSO") was executed with BW Offshore Ltd. for a three year term with options to extend. The Bilabri Field development was scaled down to a three well scheme from the original concept of six wells. The Company has recruited an experienced project management team familiar with similar FPSO field developments in West Africa. The project, although smaller than originally expected, remains commercially attractive and subject to financing being secured, the project remains on schedule to achieve first oil in the second half of 2007.
Following the recent evaluation of the Bilabri D3 well, Netherland, Sewell and Associates are in the process of completing their independent reserves audit of the Bilabri oil field.
In the time period between the Bilabri DX1 and D2 wells, the Owanare 1 exploration well was drilled, also in OML 122. Although the objective of the well was to explore significant gas and oil prospective horizons, it was successful in only discovering two gas zones with an estimated 185 BCF of gas-in-place. It is considered that this gas resource could be developed as a satellite development to a future Bilabri gas development.
In March 2006, the Company successfully acquired a 30% interest in two world class deepwater blocks offshore Nigeria, OPL's 321 and 323. In June, an interim report identified five prospects, one very large prospect in OPL 321 and four prospects in OPL 323. It estimated unrisked contingent resources for these prospects at over 7 billion barrels best estimate recoverable volumes.
In July, the Company commissioned Netherland, Sewell and Associates (NSAI) to provide an audit of the prospective resources. NSAI have yet to finalize their report.
Equator is working closely with the operator, the Korean National Oil Company ("KNOC") on the preparations for the drilling campaign, expected to commence in 2008.
Adjacent to the south of OPL 323 are two large producing fields Bosi and Erha, operated by ExxonMobil. To the east on block OML 125 are the Abo Fields operated by Agip as well as the recent Okodo discovery where media and industry sources have reported that a well drilled in the first half of 2006 has encountered oil and gas thereby confirming the presence of hydrocarbons in this region and underpinning the potential of these assets.
JDZ Block 2
On 14 March 2006 the Company signed a PSC for Block 2 in the Joint Development Zone ("JDZ") between Nigeria and Sao Tome & Principe. Equator's interest in the block is 9%. The block which is operated by Sinopec is adjacent to OPL 246 which hosts the large Akpo field operated by Total and also adjacent to JDZ Block 1 with a successful discovery well drilled earlier this year. Recent drilling activity in the region has increased our confidence that Block 2 has the potential to contain significant reserves.
Sao Tome and Principe EEZ Options
The government of Sao Tome and Principe is progressing with the legal framework and the delineation of blocks for its Exclusive Economic Zone ("EEZ"). A 2D seismic program has been completed and interpreted by the Company. Upon completion of the block delineation, pursuant to its agreements with the government, the Company will exercise its options to acquire two of the newly delineated blocks. It is anticipated that the Production Sharing Contracts will be negotiated in the second half 2007.
The Company has adequate financial resources for its medium term commitments on OPL321, OPL323 and JDZ Block 2. However, with regard to the development of the Bilabri Field, additional funding will be required and the Company is actively exploring all available funding options. Discussions with financing institutions are in an advanced stage.
As previously announced, the Company appointed KBC Peel Hunt as Corporate Broker and NOMAD.
The Board has recognized that the Company needed additional expertise to execute its business model effectively. To that end the Board hired Jeffrey Auld as its Chief Financial Officer in August of 2006. Philip Rand, Vice President Finance, who has been with Equator since November 2005, and to whom the Board are grateful for his hard work and diligence, has set up a very effective financial controls system and will work closely with Jeffery. Together they will form a very strong financial management team to enhance the value in the company's assets and to effectively manage its liquidity needs. In June, the Company recruited Dr. Kenneth Seymour as General Manager in Nigeria. Kenneth has a broad experience of drilling operations, field developments and government relations in Africa. In September the Company hired Russ Guyatt as its Vice President - Technical. Russ is charged with running the Bilabri development and has ample experience in FPSO developments. Most recently the Company hired Nick Shepherd as its General Counsel and Company secretary. Nick brings a depth of oil and gas legal experience and most recently was employed by Paladin Resources.
As previously announced by the Board, the current CEO, Wade Cherwayko will become Vice-Chairman when a new CEO is appointed, expected to be early in 2007.
The Board is actively engaged in bringing highly qualified individuals to the Equator team, which will enhance the management capabilities of your business.
On behalf of the Board, I would like to thank James Ladner, one of the original Director's of the Company, who is retiring, for his dedication and support over the past five years.
As previously announced, the Company received an unsolicited approach which was announced on November 15, 2006. The Company engaged openly with the bidder and provided access to due diligence information in an attempt to advance the negotiations. However, as announced on November 29, these discussions have since terminated. Following the announcement of the unsolicited offer several additional expressions of interest were received by the Company. The Company is in active discussions with the entities that provided these expressions of interest with the aim of investigating all strategic alternatives available to the business. The Company has retained Goldman Sachs International to assist in the evaluation and consideration of the various strategic alternatives.
The Company remains positive about the inherent value of its assets, and its exposure to the hydrocarbon prospectivity found offshore West Africa. With the Company's diversified asset base and an experienced team being assembled at the senior management level, we look forward to strengthening the business.
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