Joe Darby, Chairman of Faroe Petroleum, commented: "2006 was a significant year for Faroe Petroleum as we rapidly build and diversify the portfolio and strengthen the Company. Significant achievements included: doubling the number of licenses, securing our first near-term production assets, raising finance for our portfolio program and a timely and successful entry into Norway. We did not strike commercial oil with our two wells, however, we have a substantial portfolio drilling program ahead, with many exciting prospects."
Chairman's and Chief Executive's Review
We are pleased to announce the results for Faroe Petroleum plc for the year 2006. The Company had a very active year combining exploration activity and portfolio growth. Two wildcat exploration wells were drilled and although no discoveries were made the wells provided valuable new information, data and experience which will enhance significantly Faroe Petroleum's potential in both the Faroes and the Outer Moray Firth of the North Sea.
Excellent progress was made in securing new assets across the spectrum of exploration, appraisal and development, with a total of 18 new licenses, eleven secured through license round applications in 2006 (awarded 2007) and seven acquisitions, increasing the portfolio size from 15 to 33, an increase of 120% on the year.
In line with our objective of diversifying, de-risking and strengthening the portfolio, we are very pleased to have secured our entry into Norway. Norway was highlighted some years ago as a highly attractive oil and gas region, with its favourable tax regime, offering an excellent strategic fit for Faroe Petroleum. The Company's entry was achieved by appointing the successful former Paladin Resources Norway team in Stavanger, following the sale of Paladin Resources to Talisman in late 2005. In April 2006 the Company satisfied the stringent pre-qualification process demanded by the Norwegian authorities to become an approved licensee in Norway. This allowed the Company to participate in the 2006 APA (Awards in Predefined Areas) Licensing Round, which offered licenses near to existing infrastructure for exploration and appraisal. Faroe Petroleum was rewarded in January 2007 with six new licenses in a number of strong partnerships with the large oil companies ConocoPhillips, Centrica and Petro-Canada, as well as the independent Norwegian companies Noreco, Revus and Pertra. Faroe Petroleum has committed one appraisal well and a number of new and reprocessed seismic surveys on these licenses, and work has already commenced. This licensing success puts the Company in an excellent position to build a new and diversified portfolio complementing existing licenses in the Atlantic Margin and North Sea.
In the 2006 UK 24th Licensing Round, Faroe Petroleum was awarded five new licenses through awards in 2007, further consolidating its positions. In the West of Shetlands the Company was awarded two licenses, each benefiting from nearby discoveries and where it now holds a total of eight licenses. In the Moray Firth area it was awarded three prospective licenses, totalling seven licenses in the area, one with a discovery. The Company has also commenced building a position in the Southern Gas Basin, through acquisitions of interests in four gas discoveries, with good scope for near term development. Acquisitions were undertaken during the year of interests in the Breagh, Orca and Minke fields, acquired from Sterling Resources and ConocoPhillips respectively. These projects benefit from active work programs within acceptable investment levels for the Company, and are expected to see the Company participate in 2007 in one appraisal well on Breagh and a single well sub-sea tie-back development of the Minke Main Field. If successful, the Breagh gas discovery provides a low risk opportunity for a near-term gas field development. Once the Minke Main field has been developed, with first gas expected in Q2 2007, it is anticipated that development focus will move to the nearby Minke Graben and significantly larger Orca gas fields, which together complete the package acquired from ConocoPhillips in 2006. These new near-term, lower cost exploration and appraisal opportunities provide scope for early development via existing infrastructure, and cash flow. This enhanced portfolio offers scope for a more active drilling program with a good spread of risk and reward.
To enhance its portfolio further, the Company created a new exclusive strategic joint venture with a subsidiary of the US insurer, Liberty Mutual Group, in order to acquire and exploit proven undeveloped discoveries in the UK North Sea. Liberty has a successful track record in upstream oil and gas investments in North America, and intends to expand its operations into the UK North Sea. This innovative investment model is designed to benefit both parties and to improve their competitiveness in securing acquisition opportunities.
The financial position of the Company was further strengthened through a successful fund-raising, in order to put the Company in a strong position to meet its existing commitments and initiate further development of the business. The work obligations under the new licenses are relatively modest, and the Company is well financed going forward.
Faroe Petroleum's primary objective is to create substantial shareholder value through the commercial exploitation of exploration, appraisal and development interests in the Atlantic Margin, the UK North Sea and Norway. Portfolio exploration and appraisal drilling continues to be the main driver for value creation in the Company. Faroe Petroleum also plans to continue the broadening of its interests through acquisition of appraisal and development opportunities to provide a better overall risk/reward balance. Faroe Petroleum aims to retain significant equity participations in an active drilling program, targeting material opportunities, and it will where appropriate farm-out well costs to ensure its investment exposure is within acceptable project investment levels. Faroe Petroleum is also focused upon improving balance in its portfolio as regards risk-reward and drilling timetable. This objective is making good progress through the introduction of new core areas with good strategic fit, namely the North Sea and Norway.
The Company's portfolio therefore spans three main regions: the Atlantic Margin; the North Sea; and Norway. In broad terms, the Atlantic Margin and Norway offer materiality with many very large prospects and leads, while the North Sea offers the attraction of smaller and lower cost opportunities in close proximity to infrastructure with greater potential for generating near-term cash flow. Such cash flow will in turn provide a tax efficient means of underpinning the financing of the exploration and appraisal program going forward. With its highly experienced team managing the portfolio in this way, the Company aims to mitigate risk, participate in an active and material drilling and work program, access a broad group of potential farminees (oil company investors in wells) and create substantial shareholder value.
In their continuous search for new reserves, oil and gas companies are increasingly attracted to the potential of the Atlantic Margin of Europe. An established core area for Faroe Petroleum, this region is known for its high impact opportunities, which have led to the developments of Foinaven, Schiehallion and Clair, which collectively produce some 200,000 barrels of oil per day. The region also holds lower risk / lower reward opportunities, many of which have relatively small discoveries, and several of these are attractive in the present oil price environment. Recent activity in the area has centred around the extensions of the Foinaven and Schiehallion oil fields (BP), the development and further appraisal of the Clair oil field (BP), the pre-development activities relating to the Laggan gas field (Total), appraisal of the Rosebank / Lochnagar oil field (Chevron) and Cambo oil field (Hess), and exploration of sub-basalt prospects including the Brugdan wildcat prospect in the Faroes (Statoil). This momentum continues to build, and considerable industry attention is being paid in particular to the ongoing appraisal of Chevron's Rosebank / Lochnagar discovery, which, if successful, is expected to lead to rapid development and an accompanying significant increase in exploration activity on the Corona Ridge in particular.
The Company has built a strong strategic position in the Atlantic Margin, which would be virtually impossible to replicate today. Faroe Petroleum now holds 13 licenses here with significant equity positions; eight in the UK West of Shetlands and five in the Faroes. The Company holds most of its high risk / high reward licenses in partnerships with such companies as BP, Chevron, Eni, Shell and Statoil. Prospects on the Corona Ridge, targeted by Chevron, show significant promise for substantial discoveries, and Faroe Petroleum holds five licenses on this play. Faroe Petroleum's strategy of building a strong strategic Atlantic Margin portfolio of quality acreage, with material stakes and in partnership with some of the most successful major oil companies in the world, puts the Company in an excellent position to benefit from the substantial exploration investment being made in this area. The Company's Atlantic Margin portfolio is now maturing to the point where several high impact exploration wells are being prepared for drilling over the coming years.
In order to provide upcoming, lower cost exploration and appraisal opportunities with scope for near-term development via existing infrastructure, the Company commenced building its position in the North Sea in 2005 through the acquisition from ExxonMobil and Shell of the North Halibut license in the Outer Moray Firth. Since then, several licenses in this prospective area have been won through license rounds, and Faroe Petroleum is now a significant player here, with seven licenses extending over some 2,250 square kilometers, having consolidated its position through the 24th UK Licensing Round. The Company's licenses in this area hold many significant leads and prospects in shallow water near to existing infrastructure, the latter including the Claymore, Piper and Blake oil fields. The licenses are a combination of Promote and Traditional, and as they already benefit from considerable well, seismic and other data, have the advantage of a low cost work program with no firm well obligations, thereby affording good opportunity for farm-out from a high equity position. The Company's move into the Southern Gas Basin in 2006 followed an extensive lower risk appraisal and development project screening exercise. This yielded interests in a number of exciting yet low risk gas appraisal and development projects in the Southern Gas Basin, known as Breagh, Orca and Minke, which, if successful, will add reserves and generate tax efficient revenues, to help underpin the Company's ongoing activity.
As a new strategic area of focus to complement the Company's Atlantic Margin and North Sea portfolios, it was decided in 2005 to build a position in Norway. The attractiveness of Norway relates principally to its vast untapped resource potential, its relatively high exploration success rate and the fact that it remains very much an under-explored province. Norway ranks as the world's third largest exporter of oil and gas with oil and gas production of approximately 2.8 million barrels per day and 3.1 trillion cubic feet per year respectively in 2006. The first exploration well was drilled in 1966 and only approximately 1,100 exploration wells have been drilled (less than half the number drilled to date on the UKCS), proving 50 billion barrels of oil equivalent of recoverable resources.
Norway recently implemented a favourable tax structure designed to encourage exploration. Under this scheme, exploration-focused companies such as Faroe Petroleum can recover 78% of exploration related expenditure in the following tax year. The tax rebate for expenditure in Norway in 2006 is expected to be £1,052,000 and will be paid to the Company by the end of 2007. In February 2006 the Company recruited the highly respected former Paladin Resources Norway team. This team has worked together for several years on the Norwegian Continental Shelf generating an outstanding track record and reputation spanning exploration, development and production with several oil companies in Norway, including Paladin, Enterprise, Shell and Statoil.
In April 2006, the Company pre-qualified as a licensee, by meeting stringent requirements regarding resources, competence and systems. This achievement allowed Faroe Petroleum to participate in the highly competitive 2006 APA Licensing Round. The Company played a lead role in forming bidding groups with ConocoPhillips, Centrica, Petro-Canada, Noreco and Pertra, and in preparing several of the 2006 APA applications, drawing on the considerable knowledge and expertise of its in-house sub-surface team. These submissions were rewarded in January 2007 with six licenses on a variety of prospective plays in both the Norwegian North Sea and the Norwegian Sea, spanning low risk appraisal to high risk / high reward exploration with equity interests between 20% and 30%. The work program commits Faroe Petroleum and its license partners to drill one well, acquire one new 3D survey and reprocess five existing seismic surveys.
This early accomplishment in Norway puts the Company in an excellent position to progress its objectives of diversifying and balancing the portfolio and its work program. Work is underway both on these new licenses and in pursuit of further suitable opportunities. Faroe Petroleum is currently in the process of putting in place a credit facility with a major oil and gas lending bank to finance the portion of expenditure to be reimbursed by the Norwegian Government under the new tax regime. This financing will further increase the attractiveness of exploring in Norway.
The Company has now also made its mark as a front-runner in the specialised field of sub-basalt exploration, which is becoming an increasingly important aspect of deeper water exploration, requiring the use of new and highly specialised technologies to identify and test prospects beneath this challenging rock type. Faroe Petroleum has, together with its joint venture partners, pioneered the application of long-offset, "over-under" seismic, electromagnetic (EM) survey techniques and most recently sub-basalt drilling. Such skills and experience will be beneficial in exploiting the Company's Atlantic Margin portfolio.
Mr Helge Hammer has been appointed to the board of the Company effective today as an executive director, and this appointment will be subject to a shareholder resolution at the forthcoming Annual General Meeting. Mr Hammer is the Managing Director of the Company's subsidiary Faroe Petroleum Norge AS, based in Stavanger. He joined Faroe Petroleum from Paladin Resources Norway where he was Deputy Managing Director, after a very successful international career with Shell. Results
In April the Company undertook an institutional equity-placing of 18,382,353 new ordinary shares at 136 pence per share to raise £25.0 million (£23.5 million net of expenses). The Group had cash reserves of £33.0 million at 31 December 2006 (2005: £22.9 million) in addition to £2.1m, held in escrow, classified as debtors in respect of development activities on the Minke Main gas field. The Company has adequate funds to meet all firm work program commitments. These funds are expected to give Faroe Petroleum sufficient capital to invest in its first phase of drilling over the coming years.
The Group made a small loss of £1.6 million in the period (2005 restated: £0.5 million) reflecting increased activity and unrealised foreign exchange losses of £0.8 million (2005: £nil). Capital expenditure during the year was £9.5 million (2005: £2.7 million). The Company has a tax receivable at the end of the year of £1.1 million (2005: £nil) being 78% of exploration expenditure in Norway in 2006 that will be paid to the Company within the year. The net assets of Faroe Petroleum increased during the period to £57.7 million (2005: £33.6 million). The Group has adequate funds to meet all its current obligations. The Board of Directors does not recommend the payment of a dividend.
Review of activities
Faroe Petroleum has built a substantial acreage position of scale in three key areas, the Atlantic Margin, the North Sea and Norway, now holding a total of 33 licenses, covering some 13,550 square kilometers. The work programs undertaken during 2006 included the drilling of two exploration wells, the acquisition of one new Faroe Petroleum operated seismic survey and one electromagnetic (EM) survey, together with considerable geological and geophysical work. The Company participated in two high risk / high reward wildcat exploration wells during the year, and made significant advances in preparing for drilling decisions on several other licenses. The year was particularly active and very successful in securing new opportunities through license rounds and acquisitions. This activity put significant demands on the technical teams which, in addition to progressing existing operated licenses and screening new opportunities, also undertook a substantial amount of original license application work. This was carried out both on behalf of Faroe Petroleum as operator in two licenses and also on behalf of several joint bidding groups, in both the UK and Norway, where the Company played a leading role in several successful applications.
Atlantic Margin - Faroes< P> License 002 (Faroe 100%) – Operator Føroya Kolvetni p/f
License 002 is located close to the major producing Foinaven and Schiehallion oil fields as well as the undeveloped Suilven discovery. In addition to the potential extension of the Marjun discovery from the adjacent License 001, License 002 contains a promising structural lead, Orodruin, with significant reserve potential. The license benefits from both 2D and 3D seismic coverage as well as considerable data generated from the 2003 Marimas well. The Company has until August 2008 to re-process the 3D seismic and undertake a full technical review with the intention of maturing a prospect for drilling.
License 005 (Faroe 25%) – Operator Eni Denmark BV
This undrilled license, located close to the Faroes/UK territorial boundary offers considerable potential, and is a direct analogue to the Cambo (Amerada Hess - 2002) and the Rosebank Lochnagar (Chevron - 2004) oil discoveries. Located 10 kilometers to the east is Cambo which encountered up to 50 meters of gross oil column in the prospective Paleocene Rosebank interval, was successfully appraised in 2004 by the Lindisfarne well. It is believed that there are plans for further appraisal in 2008 prior to a possible development decision. License 005 also lies some 45 kilometers south west of the significant Chevron-operated Rosebank Lochnagar discovery which is being appraised at present by three wells scheduled to complete in Q2 2007. Ann Marie is the most mature of several large structural prospects on License 005, located in a prominent structural trend offsetting the Corona Ridge, and in the former "white zone" area. The work program during 2006 focused on the final mapping and interpretation of all available data, which confirmed the presence of a Rosebank Lochnagar analogue structure with giant potential. The joint venture subsequently committed to a firm well on License 005 to drill the Ann Marie prospect before August 2009.
License 006 Brugdan (Faroe 4%) - Operator Statoil Færoyene AS
The Company acquired Petro-Canada's 4% working interest in License 006 on attractive terms and participated in the key sub-basalt Brugdan well drilled by Statoil in the summer of 2006, testing a very large high risk / high reward prospect. This well did not encounter commercial hydrocarbons, but the gas shows and other geological data obtained are invaluable for continuing sub-basalt exploration in the area. This is the first sub-basalt well to be drilled in a province noted for widespread presence of basalt, which due to its physical properties has made seismic interpretation particularly challenging. The well data is consequently very important to future Faroes exploration and to enhance understanding of the sub-basalt geology in neighboring License 009 and un-tested prospects on License 006.
License 009 Sildrekin (Faroe 10%) - Operator Statoil Færoyene AS
This license contains a very large lead in 250 meters of water and is situated in an attractive new exploration province on the western edge of the Faroe Platform. The 2006 work program, consisting of new seismic and other data acquisition and processing has been executed. Geological and geophysical interpretation of these new data incorporating the Brugdan well results is being undertaken.
License 012 Rannva (Faroe 100%) - Operator Foroya Kolvetni p/f
This license, which is located in 500 meters water depth some 170 kilometers west of the BP-operated Schiehallion oil field, contains a very large lead along the axis of the Wyville-Thomson Ridge - the largest un-drilled anticline in northwest Europe. The work program of processing the new seismic data acquired in 2005 was successfully undertaken in 2006 by Faroe Petroleum. The high quality seismic is being evaluated and discussions are being held with several potential partners with a view to farming out a joint work program to further de-risk the prospect, prior to a well commitment being made.
Atlantic Margin - United Kingdom
Freya (Faroe 100%) – Operator Faroe Petroleum (U.K.) Limited
This Frontier license, awarded in 2004, and located in 140 meters of water includes the discovery made in 1980 by Mobil. The work program of high technology seismic acquisition and processing was successfully undertaken in 2006 by Faroe Petroleum. The Company wishes to proceed with an appraisal well and drill stem test to determine commerciality of the discovery. To that end, a farm-out is being progressed with a view to securing a drilling rig and drilling as early as possible.
Seonaid (Faroe 100%) – Operator Faroe Petroleum (U.K.) Limited
This Frontier License, awarded in 2004, and located in 140 meters of water has an oil discovery made in 1974 by Elf and a number of promising structural leads. Existing seismic data has been reprocessed to high-grade and re-map the prospects, and a farm down process has commenced to attract potential joint venture partners in order to secure a commitment before end 2007 to drill a well on the license.
Tornado (Faroe 20%) – Operator OMV (U.K.) Limited
This Traditional License, awarded in 2004 in a location between the undeveloped Suilven discovery and Faroese License 002, contains the Tornado prospect within tie-back distance of Schiehallion. The work program, consisting of the acquisition, processing and interpretation of seismic and electromagnetic (EM) surveys was completed in 2006, and the license is currently being marketed for farm out with a view to attracting a joint venture partner to share in Faroe Petroleum's cost prior to a well commitment decision, expected in 2007.
Lagavulin (Faroe 20%) and Talisker (Faroe 25%) – Operator Chevron North Sea Limited
Awarded in 2004, these licenses have very substantial prospectivity and are located on a northern extension of the Corona Ridge. The operator Chevron successfully undertook the processing and interpretation of an extensive state of the art, over-under long-offset 2D seismic survey acquired in 2005, and this new data is now being evaluated to identify optimal drilling locations, in advance of drill or drop decisions in 2008 and 2010 respectively.
Cardhu (Faroe 10%) – Operator Shell U.K. Limited
This license, awarded in 2004, has substantial prospectivity and is located on the prospective Corona Ridge trend, some 50 kilometers north east of Chevron's analogous Rosebank Lochnagar discovery made in the same year. The operator has completed the reprocessing of 2,000 square kilometers of 3D seismic data as well as the geological and geophysical interpretation, to prepare a potential drilling location in advance of a drill or drop decision in 2008.
Glenshee (Blocks 217/21, 22, 26 & 216/30) (Faroe 30%) - Operator Chevron North Sea Limited
The Company has continued its long term deep water exploration relationship with Chevron in securing the Glenshee license in the UK 24th Licensing Round announced in January 2007. This Traditional License covers 800 square kilometers on the highly prospective Corona Ridge trend currently being appraised by three Rosebank Lochnagar wells, and is immediately adjacent to the Tobermory gas discovery made by Mobil in 1998. With very significant resource potential, the license work program consists of a high technology EM survey and seismic re processing, to re-map the Glenshee lead, and de-risking prior to making a drill or drop decision by the end of 2010.
Marjun UK (Blocks 204/16, 17, 21, 22) (Faroe 100%) – Operator Faroe Petroleum (U.K.) Limited
This 280 square kilometer Promote License was awarded 100% to Faroe Petroleum in the UK 24th Licensing Round, and contains the 204/16-1 gas discovery with 30 meters of hydrocarbon column, and is on the same trend as the Marjun oil discovery drilled by Amerada Hess in 2001, which encountered 160 meters of hydrocarbon column. The work program consists of 3D seismic re-processing to re-map the extent of the hydrocarbon column, and geological studies to understand the reservoir potential, in order to identify a possible appraisal drilling location in advance of a drill or drop decision by the beginning of 2009.
North Halibut (Blocks 14/21a, 22a) (Faroe 45%) – Operated by Oilexco (U.K.) Limited
Acquired from Shell and ExxonMobil in 2005, this license is located in shallow water near to the giant producing Piper and Claymore oil fields. Following successful farm-out in January 2006, Oilexco drilled the Halibut play's first exploration well (14/21a-1) in 2006, meeting 80% of the cost. The well encountered gas shows and significant reservoir, but no commercial hydrocarbons. With the benefit of the 14/21a-1 well data, the joint venture has since re-mapped the area, and an attractive prospect has been identified in contiguous block 14/22a, which is a potential candidate for drilling in 2008.
East Halibut (Faroe 100%) & West Halibut (Faroe 50%), Olivia (Faroe 100%) – Operator Faroe Petroleum (U.K.) Limited
Awarded under the UK 23rd Licensing Round, these three Promote Licenses contain several attractive large structures with significant potential. They each lie in shallow water within tie-back distance of several platforms. The work programs to acquire 3D and 2D seismic data, carry out reprocessing and undertake geological modeling to identify suitable drilling locations, are now complete. Ahead of drill or drop decisions at the end of 2007, the Company is pursuing farm-outs to attract funds for drilling.
Lead A - Blocks 14/16, 17, 13/20 and 14/21b,22b (Faroe 45%) - Operator Oilexco North Sea Ltd
Awarded in the UK 24th Licensing Round in February 2007, following a regional study of the Halibut play, the joint venture applied for this 600 square kilometer Traditional License which contains an attractive prospect to be surveyed with new 2D seismic in 2007. This prospect is a potential candidate for joint venture partner Oilexco's drilling program in 2008, for which it has a drilling rig on long term contract. Lead A lies adjacent to the Wytch Ground Graben oil source kitchen, is a four-way dip structure at Jurassic levels and has significant oil resource potential.
Blocks 13/14,15 (Faroe 45%) – Operator Oilexco North Sea Ltd
Awarded in the UK 24th Licensing Round in February 2007, this 400 square kilometer Promote License contains several promising exploration leads which will be analyzed and the seismic data over the leads reprocessed in 2007, prior to a drill or drop decision by the beginning of 2009.
Keira 12/29 (Faroe 100%) - Operator Faroe Petroleum (U.K.) Limited
This Traditional License, awarded in the UK 24th Licensing Round in February 2007, and located immediately North of the Olivia License (Blocks 18/3, 4), covers approximately 200 square kilometers and contains the 12/29-1 oil discovery, which tested 38 degree API oil (Beatrice type) from the Jurassic reservoir. In addition, there are attractive exploration prospects up-dip from this discovery well, and an appraisal well will be planned up-dip from the discovery to test both the Jurassic oil column and the exploration potential in the deeper Devonian reservoirs. The work program consists of high technology seismic acquisition, and geological studies in the first two years to identify a drilling location and to screen the entire area for prospectivity in advance of a drill or drop decision.
Breagh (Faroe 10%) – Operator Sterling Resources (UK) Limited
In June 2006 the Company acquired a 10.0% equity stake in Blocks 42/13 and 42/12 (operated by Sterling), which contain the Breagh gas discovery as well as un-drilled leads with good upside potential. This is a very attractive project, with an appraisal well planned to be drilled adjacent to the discovery well 43/13-2, in order to establish commercial reserves which if successful would lead to early development.
Orca and Minke (Faroe 5.9%) – Operator GDF Britain Ltd
In August 2006 Faroe Petroleum acquired from ConocoPhillips an equity stake in a package of three undeveloped gas field discoveries: Minke Main field, which is under development, together with the nearby Minke Graben and Orca gas fields upon which development decisions are anticipated. Minke Main is scheduled to come on production during Q2 2007. The assets are situated in UK Blocks 44/24a, 29b and 30, approximately 25 kilometers east of the producing Caister-Murdoch gas fields and 13 kilometers south west of the D15 platform in the Dutch sector. Exploration potential also exists within Dutch Block D18a (Faroe 2.5%).
The following licenses were awarded in January 2007:
Halten Terrace Area
The Company was awarded two licenses in the prolific Halten Terrace hydrocarbon province of the Norwegian Sea. These licenses offer excellent exploration and appraisal opportunities in an area that is in active development.
Fogelberg, Halten Terrace Area Part blocks 6506/9&12 (Faroe 30%) – Operator Centrica Resources Norge AS
This license covers approximately 80 square kilometers and contains a very appealing prospect some eight kilometers to the north of the producing Smorbukk oil field. The structure is similar to the recent Morvin oil and gas discovery made 10 kilometers to the southwest, which was successfully appraised in 2006. Additional 3D seismic data will be acquired over the structure to define a location for the committed exploration well to be drilled on the prospect within the next four years. License partners are Centrica (operator) and Petro-Canada Norge AS.
Halten Terrace Area Part blocks 6506/12, 6406/2&3 (Faroe 30%) – Operator Centrica Resources Norge AS
This license covers approximately 240 square kilometers and represents an excellent opportunity to appraise an existing discovery in the Lower Cretaceous. The discovery lies between the 'Smorbukk and 'Smorbukk Sor fields and already has proven hydrocarbons in two wells. The work program involves the reprocessing of existing 3D seismic data to better define the distribution of the potential reserves, prior to a decision being taken within two years on whether to drill an appraisal well. License partners are Centrica (operator) and Petro-Canada.
Marulk Basin Area Part blocks 33/2,3&6, 34/1&4 (Faroe 20%) – Operator Norske ConocoPhillips Norge AS
This license in the Marulk Basin Area, lies within a prolific oil-source kitchen area located just to the north of the Tampen Spur hydrocarbon province, which includes the Snorre Field. The license offers an excellent exploration opportunity in an area that is under-explored. Spanning approximately 700 square kilometers, in terms of structural and depositional setting, the prospects identified in the license are analogous to some of the largest fields found in the North Sea. The resource potential of this license is significant and will be clarified by the forward work program, which involves obtaining and reprocessing 3D seismic data and a drill or drop decision within two years. Partners are ConocoPhillips (operator), Revus and Petro-Canada.
Utsira High - Part blocks 25/3,5&6 (Faroe 20%) – Operator Pertra ASA
Located to the east of the Frigg Field, this license is in a mature oil and gas province, with discoveries and production from many stratigraphic levels. The license covers approximately 570 square kilometers, and comprises several prospects at Jurassic and Paleocene levels. The Jurassic structures are adjacent and analogous to the abandoned Froy Field, which the operator (Pertra) is planning to redevelop. The work program includes reprocessing of existing 3D seismic data prior to a decision being taken to drill an exploration well within two years. Partners are Pertra (operator), Noreco and PA Resources.
East of Ula Part blocks 7/9&12, 8/7,8,10&11 (Faroe 30%) – Operator Centrica Resources Norge AS
This license is located on the flank of the prolific Central Graben, approximately 15 kilometers east of the Ula and Gyda Jurassic oil fields, and offers an excellent exploration opportunity in an area which is under-explored. The license covers approximately 650 square kilometers, and the identified prospectivity is located adjacent to an untested salt diapir which has many analogues in the Central Graben. The work program involves reprocessing of existing 2D and 3D seismic data, with a drill or drop decision within two years. Partners are Centrica (operator) and Petro-Canada.
35/8 Area Part block 35/8 (Faroe 30%) – Operator Petro-Canada Norge AS
This license is located in the vicinity of the Fram/Gjoa fields, in the northern part of the Norwegian North Sea. The license covers approximately 175 square kilometers, is located in the Sogn Graben, eight kilometers to the northeast of the 35/8-1 Vega discovery, and contains a number of interesting leads in more unconventional plays. There are a number of prospective levels in the license and existing 3D seismic data will be reprocessed and evaluated prior to a drill or drop decision within two years. Partners are Petro-Canada (operator) and Centrica.
Forward Drilling Program
The Company has been very active in moving forward its pre-drilling work programs to the point where several significant wells are expected to be drilled over the coming years. The Company has assembled a very promising portfolio of projects with a good balance of risk and reward and material equity stakes and has raised finance during the period to support its drilling program. The Company has also secured a participation in the Breagh gas appraisal well planned for drilling in 2007. Coupled with the execution of successful acquisitions in the Southern Gas Basin, which has secured an active new program of field appraisal and development, drilling and seismic acquisition activity will build pace over the coming years.
In addition to advancing the exploration and appraisal drilling program, the Company is focusing on commercial opportunities to strengthen the Company further, and Faroe Petroleum's ability to create substantial value for shareholders. In line with the Company's objective to improve portfolio balance in respect of risk / reward and drilling timetable, Faroe Petroleum is looking to identify further lower risk, and nearer term opportunities to complement the high risk / high reward activities in the Atlantic Margin.
Notably all new licenses from the UK and Norway Rounds were secured with relatively low work program commitments, thus providing the Company with considerable flexibility as regards financing and timing. Further, due to Norway's very attractive fiscal regime, emphasis will be given to participation in drilling opportunities in Norway which can be financed in part through a credit facility currently under negotiation, substantially reducing the equity contributions needed. Progress is expected to be reported through the year regarding an active farm-out process to secure financing partners for a number of wells in the drilling program.
The outlook for the Company is bright. Oil and gas prices have remained high throughout 2006 and look set to continue to be strong for the foreseeable future. We have an excellent portfolio with many high potential drilling opportunities being advanced, we are well financed, we have near-term expectation of revenues from the Minke Main development, and we have an outstanding and motivated team.
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