The trading statement is in advance of the group's full-year results, which are scheduled for release on Wednesday, 21 March 2007. The information contained herein has not been audited and is subject to further review.
Aidan Heavey, Chief Executive of Tullow said:
"During 2006, we consistently demonstrated our ability to deliver focused growth from our portfolio with seven successful exploration wells, seven new exploration licenses, a major acquisition and a significant increase in annual production. The integration of the Hardman assets is progressing well and 2007 is expected to be a year of further progress, with strong production performance and three major drilling campaigns in Uganda, India and Namibia. We are continuing to build a substantial international oil and gas business."
Group working interest production for 2006 averaged 64,720 boepd, 11% higher than the 2005 average. Sales volumes for 2006 averaged 57,300 boepd. A further breakdown of these figures is provided in the Operational Update for each core area.
Production figures remain subject to final reconciliation and do not equate to sales volumes. This is due to variations in lifting schedules and because a portion of the production is delivered to host governments under the terms of Production Sharing Contracts.
Average working interest production for 2007 is expected to exceed 80,000 boepd.
Realized prices and oil discount
Average prices realized during 2006 were significantly higher than those for 2005. Realized oil price was approximately US$62/bbl (pre hedges) and US$53/bbl (post hedges) and realised UK gas price was approximately 46p/therm.
During 2006 the Group's oil production sold at an average discount of approximately 5% to Brent and this level of discount is expected to continue in 2007.
At 31 December 2006, Tullow was in a net overlift position amounting to an estimated 130,000 barrels. Such overlift positions are valued at market value and, combined with stock movements during the year, give rise to a charge of approximately £2.4 million to Cost of Sales.
Tullow's exploration write-off for 2006 is expected to be of the order of £30 million. This write-off is principally associated with unsuccessful exploration activities in the UK, Gabon, Pakistan and Angola and new ventures activity during the year.
During 2006 Tullow invested approximately £330 million in development and exploration activities. In addition, the Group acquired a package of assets in Gabon and purchased 4.25% of the share capital of Hardman Resources ahead of deal completion at a total cost for both transactions of approximately £40 million.
Based on current estimates and programs, total capital expenditure for 2007 is expected to amount to approximately £370 million.
Net Debt at 31 December 2006 was £169.1 million, exclusive of Hardman cash balances of $89.8 million (£45.8 million).
At 31 December 2006 the Group's derivative instruments had a net negative mark to market value of approximately £21.0 million.
Commodity Hedging< P> While all of the Group's commodity derivative instruments currently qualify for hedge accounting, a credit of approximately £9.8 million (£9.1 million after taxation) will be recognised in the income statement for 2006. Most of the credit relates to the improved effectiveness of the hedges, which is largely due to a better correlation between the underlying oil revenues and the hedges arising from factors such as narrower crude oil discounts to Brent and the timing of oil liftings.
Foreign Exchange Hedging
A credit of £5.9 million (£4.1 million after taxation) will be reflected in the income statement arising from the foreign exchange derivative instruments entered into in respect of the Hardman acquisition. The foreign exchange hedges do not qualify for hedge accounting under IAS39 and consequently the credit reflects the mark to market value of the foreign exchange hedges as at 31 December 2006.
Commodity Hedging Summary
At 26 January 2007 the Group's hedge position to the end of 2008 is as follows:
Oil 1H-07 2H-07 2008 Volume hedged (bopd) 12,000 12,000 8,000 Average price of hedged volumes ($/bbl) 48.6 49.7 44.9 Gas 1H-07 2H-07 2008 Volume hedged (mmscfd) 78.27 63.70 48.0 Average value hedged volumes (p/therm) 49.3 44.0 44.4
Acquisition of Hardman Resources Limited
On 25 September 2006, Tullow announced a proposal to acquire Hardman by way of a Scheme of Arrangement. Following the approval of the acquisition by Hardman shareholders and the Australian Courts, the Scheme became effective on 20 December 2006 and formal completion, which involved the payment of AUS$ 819.5 million and the issue of 65 million Tullow Shares, occurred on 10 January 2007. The integration of Hardman into the Tullow Group is progressing to plan and is expected to be substantially complete by the end of the first quarter of 2007.
Tullow assumed control of Hardman on 20 December 2006 and Hardman's business and assets will be consolidated in Tullow's accounts from that date. A fair value exercise will be undertaken to determine the values attributable to the acquired assets and liabilities within the Group's Balance Sheet as at 31 December 2006. Hardman's net cash balances at completion amounted to $89.8 million.
The reserves attributable to the Hardman assets will be reflected in Tullow's reserves statement at 31 December 2006. Tullow plans to undertake a comprehensive internal review of the Hardman reserve base, with particular reference to its Mauritanian interests, and this will take a number of months to complete.
1) NW EUROPE CORE AREA
Tullow's principal interests in NW Europe are in the Southern Gas Basin of the UK North Sea. In 2006 Tullow continued its high level of activity in the region, participating in three exploration discoveries and drilling four successful development wells. Production for 2006 averaged 29,530 boepd, 21% above 2005 levels.
Working interest production(1) 2006 Average (boepd) Current Production (boepd) CMS Area 16,380 21,000 Thames-Hewett Area 13,150 16,000 UK Total 29,530 37,000 (1) Includes condensate
The commercial environment for producers within the UK gas market remains positive despite recent falls in the gas price driven by unusually warm winter weather, high service costs and rig rates and the commissioning of new import infrastructure into the UK. For Tullow, this has resulted in a rebalancing of some short term discretionary investment away from the UK, however, longer term gas price fundamentals remain strong for indigenous producers and gas price seasonality continues to provide opportunities for Tullow to optimise production and maximise value.
NW Europe Production and Development
Growth in Tullow's UK production has been largely driven by the Schooner (Tullow 90.35%) and Ketch (Tullow 100%) redevelopment program. The Schooner-10 well came on line in May at 25 mmscfd and Ketch-7 commenced production in October at 50 mmscfd. The Ketch-8 production well was drilled in the fourth quarter of 2006 and encountered 830 ft of good quality gas-bearing reservoir sands. However, technical problems were encountered during the completion phase and the well has been temporarily suspended. Tullow spudded Ketch-9 in early January 2007 and production is scheduled to commence in May. At this time, remedial work on Ketch-8 will commence. Following completion of Ketch-8, the Ensco 101 rig will be released. The production capability of the Schooner and Ketch fields is currently of the order of 100 mmscfd and is expected to reach over 140 mmscfd during 2007.
Two projects, Thurne (Tullow 87%) and Kelvin (Tullow 22.5%), received development approval in October 2006. The Thurne field will be developed by sidetracking the Deben well, which has ceased production, and re-using the existing pipeline and Thames platform reception facilities. Drilling of the horizontal well is due to commence in early February, with first gas targeted for September 2007 at a gross plateau rate of 40 mmscfd. The Kelvin field will be developed with a single well and platform tied back to the CMS infrastructure. Platform fabrication is under way and the well is scheduled to spud in Q3 2007. First production is targeted for December 2007 at a gross rate of approximately 80mmscfd. Tullow is also considering a number of other fields for potential development.
NW Europe Exploration and New Ventures
Three gas discoveries in 2006, Humphrey, Cygnus and K4, further enhance Tullow's position in the CMS area. The 2007 program includes four Southern North Sea gas exploration wells in the Thames-Hewett and CMS areas, and two Central North Sea oil exploration wells, Acer and Peveril, which are scheduled to spud in February 2007.
Tullow has made applications for six Southern North Sea blocks in the UK 24th Licensing Round. The DTI has not yet announced the awards.
2) AFRICA CORE AREA
Tullow's African production and development interests are in Gabon, Cote d'Ivoire, Congo (Brazzaville), Equatorial Guinea, Mauritania and Namibia. Tullow also has exploration interests in Mauritania, Gabon, Senegal, Cameroon, Uganda, Equatorial Guinea, Angola, Tanzania, Madagascar, Ghana, Cote d'Ivoire and Congo (DRC). In 2006 Tullow continued to invest in its producing and development assets, which delivered strong production growth and performance whilst maintaining an active exploration and new ventures program across the region. With the Okume Complex on stream and with the addition of the Mauritanian production following the Hardman acquisition, Tullow's Africa production is expected to average over 40,000 boepd in 2007.
Working interest production 2006 Average (boepd) Current Production (boepd) Congo (Brazzaville) 6,170 5,600 Cote d'Ivoire 6,390 6,400 Equatorial Guinea 5,740 7,700 Mauritania Nil 4,100 Gabon Tchatamba 6,440 6,400 Niungo 5,060 5,900 Other Gabon 3,620 3,250 Africa Total 33,420 39,350
Africa Production and Development
The development and infill drilling program on the M'Boundi Field (Tullow 11%) continues and 58 wells are currently on stream. Average gross production for 2006 was 55,000 bopd. Water injection into the field commenced on 20 January 2007 and injection rates are expected to increase to 60,000 bwpd during the year. Once the initial results of the water injection project are assessed, it is anticipated that a decision will be made to extend water injection to 120,000 bwpd over the full field during 2008, thereby increasing the ultimate field recovery factor.
In 2006 three infill production wells and two water injection wells were drilled on the Ceiba field (Tullow 14.25%) bringing gross production to a 2006 average of 40,000 bopd and a current rate of 45,000 bopd. The 2007 infill drilling program, comprising three water injectors and three producers, is aimed at maintaining an average production rate of 40,000 bopd for the year.
First oil from the Okume Complex (Tullow 14.25%) was achieved in December. Drilling is currently in progress on the Oveng and Elon fields and will continue throughout 2007. In the second half of the year wells will also be drilled on the Okume and Ebano fields. Current production is in excess of 10,000 bopd from three wells and will increase steadily to a plateau of 60,000 bopd in 2008 as more wells are brought on stream.
Following the very successful East Espoir (Tullow 21.33%) infill drilling program, the rig moved to West Espoir (Tullow 21.33%) in mid 2006 and oil production from the field commenced on 26 July 2006. To date, three production wells and two water injection wells have been completed, resulting in average gross production in 2006 from the Espoir fields of 31,000 boepd. Six West Espoir production wells are planned for 2007 and drilling is expected to continue into 2008. These operations, and the onset of water injection are expected to increase gross Espoir production to a peak of 35,000 boepd in 2007.
The infill drilling program on the Chinguetti field (Tullow 19.01%) commenced on 29 December 2006 with the C-18 well in the south west of the field. The well has been drilled to a total depth of 2,883m and encountered a gross oil column of approximately 213m which is in line with expectations. The well also appears to be receiving pressure support from the C-8 water injection well. Following production optimisation work on the C-14 well, the C-18 well will be prepared for production and is forecast to come on stream in late February.
Four further infill wells are scheduled to commence during the third quarter. The final locations of the wells will be subject to the results of the high density 3D seismic and 4D seismic to be shot over the Chinguetti field in March 2007.
Production from Gabon in 2006 averaged 15,120 bopd. Activity during the year focused on optimization of the current producing assets, commercialization of undeveloped assets and the acquisition of additional license interests.
The new phase of appraisal and development drilling in the Niungo field (Tullow 40%) commenced in September 2006. The first appraisal well to the north of the field proved to be oil-bearing and delineates the northern limit of the field. Since then, three further successful development wells have been drilled and have assisted in increasing gross field production to over 15,000 bopd. This program is continuing with three further infill wells and will be followed by an exploration well along trend to the south of Niungo in the Nziembou License, which is expected to commence before the end of the first quarter.
Tchatamba (Tullow 25%) production was curtailed during the year due to down-hole pump failures in a number of wells and delays in obtaining services and supplies. However, gross production had recovered to close to 27,000 bopd in late December 2006 following workovers on three wells in November and December.
Development of the first Etame satellite, the Avouma field (Tullow 7.5%), was successfully completed in December 2006 with the installation of the platform and flowlines. First production commenced on 23 January 2007 and is now at a gross rate of over 5,000bopd. This will complement Etame Field production (Tullow 7.5%) which has been outperforming expectations. Detailed planning for a further Etame satellite, the Ebouri discovery (Tullow 7.5%), is under way with a view to first production during 2008.
Tullow has acquired a package of assets from the Gabonese Government through a 50:50 Joint Venture with AIC-Petrofi Limited. The package comprises interests in three producing fields and back-in rights to a further nine exploration licenses. Two additional fields are awaiting development approval and are expected on stream over the next 18 months. The acquisition increases Tullow's net production by approximately 350 boepd and is expected to contribute approximately 1,000 boepd by early 2008.
Africa Exploration and New Ventures
Uganda and Congo (DRC)
Tullow has the leading acreage position in the Albertine Basin, holding between 49 and 100% in five licenses in Uganda and Congo (DRC). Five successful exploration wells have been drilled on the Ugandan blocks since the beginning of 2006. Tullow consolidated this position with the acquisition of Hardman assuming operatorship of Block 2 in Uganda and increasing its interest in the Block to 100%. This enhanced position increases the Group's exposure to significant upside potential and also enables it to exercise greater operational control.
The most recent exploration well, Kingfisher-1, is currently drilling to a target depth of between 3,000 and 4,000 meters. To date the well has intersected two significant oil-bearing intervals. The first interval, with net pay of 10m, was encountered at 1,783m and was successfully tested in early November 2006 at a maximum flow rate of 4,120 bopd. The second interval, evidenced by wireline logging and formation pressure testing, with a net pay of approximately 40m, was encountered between 2,260m and 2,370m. It is planned to test this second interval following completion of the drilling operations.
In light of the drilling and testing results and the large upside potential associated with the Kingfisher, Ngassa and Pelican prospects, an aggressive exploration and appraisal program in Uganda and Congo (DRC) is planned. This program, which comprises 2D and 3D seismic and further exploration/appraisal drilling, will run into 2008 and probably beyond. In addition, the Group is reviewing the potential for an Early Production System and conceptual studies are ongoing.
The Kudu gas field (Tullow 90%) represents a major energy opportunity for Southern Africa and Tullow is focused on achieving significant technical and commercial progress during 2007.
Successful development of Phase I of Kudu has the potential to make a very important contribution to Namibia's long term power needs and Tullow places a high priority on achieving project sanction at the earliest opportunity. In addition, plans for a two well appraisal campaign to test the reserves upside of Kudu are progressing and drilling is scheduled to commence in April 2007.
In parallel with the ongoing technical work, Tullow is considering the introduction of a partner into the project. Strong interest has been shown and commercial negotiations are expected to be concluded over the coming months.
In 2006 Tullow was awarded operated interests in the Shallow Water Tano block (Tullow 85.5%) and the Deepwater Tano block (Tullow 49.95%) and farmed into the adjacent non-operated West Cape Three Points (Tullow 22.9%) license. The evaluation of the deep water acreage is progressing with the first exploration well on the Mahogany prospect planned for May 2007. In addition, the evaluation of the low impact undeveloped oil and gas discoveries in the Shallow Water Tano block is proceeding and an appraisal well on one of these accumulations is scheduled to spud in May 2007.
3) SOUTH ASIA CORE AREA
In South Asia, Tullow has exploration, development and production interests in Pakistan and Bangladesh and exploration interests in India. Development activities have progressed significantly, culminating in the declaration of commerciality on the Bangora/Lalmai field in Bangladesh on 3 December 2006. In India, an extensive seismic program has been completed on Block CB-ON/1 and planning has commenced for a multi-well drilling campaign in 2007.
Working interest production 2006 Average (boepd) Current Production (boepd) Pakistan 190 160 Bangladesh 1,580 3,000 South Asia Total 1,770 3,160
South Asia Production and Development
In 2006, the successful appraisal program for Bangora/Lalmai (Tullow 30%) continued with a 3D seismic survey and three new wells. The appraisal wells drilled to date have each encountered good quality reservoir and a further well, to the north of Bangora-1, was spudded in early January 2007. Combined production from Bangora-1 and Bangora-2 is currently 60 mmscfd.
Following the success of the appraisal program on the Bangora/Lalmai field, a Declaration of Commerciality was submitted to the Bangladesh authorities in 2006 and field development planning has commenced.
The development project on Chachar (Tullow 75%) is well advanced with two new development wells and the original discovery well prepared for production. Construction of the production facility is nearing completion and it is anticipated that production will commence in March 2007 at 20-25 mmscfd.
South Asia Exploration and New Ventures
A total of 311km of seismic data has been acquired on the Kohat (Tullow 40%) license. Data processing is ongoing and Tullow plans to spud the first well on this highly prospective block in the second half of 2007.
Exploration on Block CB-ON/1 (Tullow 50%) in the Cambay Basin is one of Tullow's three key campaigns for 2007. Significant progress has been made during the past year with a block wide, 1,500km 2D seismic acquisition program. Interpretation and integration of the data is in progress and there is already evidence of a diversity of play types including the stratigraphic sections which occur to the north in the Rajasthan fields and structures analogous to those in the oil fields to the south. Based on a growing inventory of leads and prospects, a multi-well drilling campaign is expected to commence during the second half of 2007.
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