Group Production and Reserves
Average net daily production for 2006 was 44,706 barrels of oil equivalent per day ('boepd'), an increase of 50% over 2005. This increase resulted from new field developments coming on stream combined with good reservoir and well performance supported by improved levels of production facilities uptime. Venture's southern North Sea ('SNS') gas fields contributed 60% of total 2006 production, slightly higher than expectations, with the balance from Venture's central North Sea ('CNS') oil fields.
During the fourth quarter of 2006, despite difficult offshore operating conditions toward the end of the year, Venture's average production rate was approximately 54,000 boepd. As a consequence of natural field decline, planned and unplanned shut-downs and other operational factors, this rate is not representative of an expected average rate for the calendar year 2007.
At 31st December 2006, net proven and probable reserves are estimated to total 221.2 million barrels of oil equivalent ('MMboe'), a 37% increase over 2005. This growth reflects a reserve replacement ratio, including acquisitions, of approximately 468%, which has been achieved net of the sale of part of Venture's interest in the Ensign development during the year.
During the second half of 2006, Venture continued with the development of its North Sea asset base, participating in the drilling of eight new wells and working with partners to bring two new fields on stream. Overall, operational delivery has been on schedule and within budget for those activities under our direct control and, as we enter 2007, Venture currently has three operated drilling units in the North Sea. Total planned and unplanned downtime during the year was within management expectations. However, during the fourth quarter of 2006 and continuing into 2007, we have experienced unusually poor offshore weather conditions, in common with other North Sea operators. This impacted all of Venture's drilling operations during the period and has also resulted in a deferment of some GKA production due to the storage and offloading tanker being unable to stay on station during severe weather.
Strong production performance has continued from Venture's SNS 'A' Fields gas production hub and, in particular, from Annabel and Saturn.
The Ensign appraisal well (Venture operated - 50.0% net) was spudded in late September utilizing the Noble Julie Robertson ('NJR') jack-up drilling rig. The well was successfully drilled, hydraulically fractured and tested. The well tested at rates of 12-15 MMcfpd, towards the lower end of expectations. This is interpreted to be the result of a smaller than expected fracture as a result of operational issues rather than reservoir properties. The well is currently being suspended as a future production well and the well results are being evaluated and incorporated into our development planning including timing for first production. Upon completion of the Ensign well testing program the NJR will move to sidetrack the Amanda discovery well (Venture operated - 66.7% net).
During the second half of 2006, the Rhea production well was successfully brought on stream and is now contributing to production from the Saturn Unit (Venture - 22.0% net). In the fourth quarter the development well on the Mimas field (Venture - 15.0% net) was drilled and tested at a rate of 43 MMcfpd. The Mimas field is planned to be tied back to the Saturn production facilities and brought on stream during the first quarter of 2007.
Greater Markham Area ('GMA')
The acquisition of CH4 Energy Limited ('CH4') in August 2006 gave Venture a second SNS gas production hub. This new production hub has been named GMA and is centered upon the Venture operated Markham field which straddles the UK/Dutch median line.
During the second half of 2006, GMA development activity was focused on two key projects, the Markham compression tower ('CT') (Venture operated - 37.5% unitized) and the Chiswick field development (Venture operated - 95.0% net). Installation of the Markham CT is now complete and commissioning is ongoing. Markham field production performance during the period has been slightly ahead of expectations.
On the Chiswick field development the platform and inter-field pipeline to Markham have now been installed. The jack-up drilling rig, the Noble Kolskaya, was delayed in arriving from its previous operator until mid-December. As a result, drilling of the first Chiswick production well is slightly later than scheduled with first gas production from Chiswick now anticipated in May.
Greater Kittiwake Area ('GKA')
Strong production performance from all fields in the GKA production hub (Venture operated - 50.0% net) continued during the second half of 2006 and peak production rates reached record levels of around 16,500 boepd net to Venture during the fourth quarter. However, as noted earlier, actual production during the fourth quarter has been limited by significantly greater weather related downtime than normal and, to a lesser degree, by design limits on the processing capacity of the platform production facilities.
The second half of 2006 continued to be a period of intense development activity on GKA. In August the Goosander field was brought on stream and production performance has been significantly better than anticipated. In November, Venture announced the construction of a new 10' oil export pipeline linking GKA to the Forties Pipeline System. This pipeline is currently being manufactured and is scheduled to come on stream during the fourth quarter of 2007. Replacing the existing tanker based offloading system with the new pipeline is expected to result in significantly better operational uptime performance, particularly during poor weather.
'Trees' production (Venture - 100%) has been steady during the second half of 2006. During the fourth quarter, production from the central Sycamore production well, SP2, was restored after reservoir repressurization as a result of water injection and the well is producing steadily.
An exploration well to test the Ash prospect in the south of the 'Trees' block 16/12a is currently being drilled as an extended reach well from the Tiffany platform. Drilling of this well commenced in December, with results anticipated late in the first quarter of 2007.
Other Central North Sea
Development activity continued on the Chestnut field (Venture operated - 69.9% net) during the second half of the year. Construction of the Sevan 300 floating production unit continues at the shipyard in China and is scheduled for completion during the first quarter of 2007. The unit will then be moved to Rotterdam for installation of the processing equipment and commissioning prior to installation in the field. The project is on track for first oil production during the fourth quarter of 2007.
In late December 2006, Venture entered into an agreement giving it the option to use a second new-build Sevan 300 floating production unit as the development solution for the Pilot heavy oil field (Venture operated - 70.4% net). Venture is planning to drill an appraisal well on Pilot during the second quarter of 2007, subject to regulatory approval. Field development sanction for Pilot is then expected to be sought later in 2007 with first oil anticipated in 2009. Venture is also planning an appraisal well on the adjacent 28/2a-1 heavy oil discovery (Venture - 100%) during 2007.
In August 2006 Venture farmed into the Moonraker exploration prospect (Venture - 20.0% net) but an exploration well subsequently drilled on the prospect was unsuccessful. On Block 28/5a (Venture - 13.0% net), we participated in the drilling of an exploration well in September 2006. This well targeted the medium risk North Channel prospect but was unsuccessful. Total dry hole costs for both wells were limited to approximately £4 million pre-tax, within the limits on capital exposure to exploration risk that are appropriate for Venture's business model.
2006 was Venture's most active ever year for acquisitions. A total of six transactions completed including the recently announced Barbarossa (Venture operated - 90.0% net) farm-in. Of these, the most significant was the acquisition of CH4 for €224 million (£153 million), for which the consideration was satisfied partly in cash, partly in new Venture equity. This is the largest acquisition in our Company's history and the first corporate acquisition. CH4 has now been successfully integrated into the Venture business.
In early 2006, we announced the formation of North Sea Gas Partners ('NSGP'), a partnership between Venture and three financial institutions to jointly pursue large-scale SNS acquisition and development opportunities. During the second half of the year, we entered into agreements with NSGP to sell down part of our interest in the Ensign development and to farm-down a portion of our interest in the Amanda/Agatha drilling prospects to the partnership.
Financial Performance and Outlook
During 2006, Venture continued to benefit from relatively strong commodity prices for both oil and gas. However, these prices fell during the fourth quarter, particularly during November and December. This was partly as a result of unseasonably warm weather affecting UK demand for natural gas as well as the global decline in the price of crude oil. However, this reduction in realized sales price partially offset revenue realized from the record production rates delivered in the fourth quarter.
Overall, financial performance and costs remained in line with management expectations and during 2006 capital expenditure totaled approximately £148 million. The value of total acquisitions completed during 2006 amounted to £157 million, of which £70 million was satisfied by the issue of new Venture shares. These acquisitions added a total of 42.0 MMboe to proven and probable reserves. For the first full year in its history, Venture generated significant free cashflow after development capital expenditures.
Venture's effective tax rate for 2006 includes the impact of the increase in the UK North Sea tax rate from 40 to 50%. The 2006 tax charge is not expected to result in a cash tax charge at this time due to the utilization of capital allowances.
Commenting on the announcement, Mike Wagstaff, Chief Executive said:
"2006 was a record year for Venture, both operationally and financially and we have continued to make great progress in increasing both production and reserves. Whilst our earnings remain leveraged to commodity prices in the short term we continue to deliver increasing profitability underpinned by improving realized prices and effective cost control. As we enter 2007 activity is at record levels despite the tight market for equipment and services and we are confident that the momentum we have established will continue."
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