Otto Farms Out Turkish Licenses

Incremental Petroleum has agreed to pay Otto Energy Limited US$5.5 million for an additional 30% working interest in the Edirne License and has also farmed into Otto's Catalco & Ortakoy Licenses in the Thrace Basin, Turkey.


--Incremental will pay Otto a cash consideration of US$5.5 million for a further 30% legal and beneficial interest in the Edirne License, and 60% beneficial and legal interest in Otto's Catalca and Ortakoy Licenses.
--Incremental will continue with the existing farm in to earn 15% in the Edirne License by spending a total of A$3 million. There is approximately A$1.5 million left to spend in this program before the earn-in is complete. The A$1.5 million will meet the costs of the upcoming drilling and testing program for Yagci-, the re-entry and testing of Umur-1 and part of the drilling costs of the Arpaci-2 well.
--This additional farmout to Incremental boosts Otto's cash position to approximately A$15 million after receipt of funds from this transaction and the recent placement.
--After conclusion of the farm out arrangements, Otto will retain a 35% working interest in the Edirne License and a 20% interest in the Catalca and Ortakoy Licenses. The local partners Merty & Petrako will retain 10% each in each of the three licenses.
--There is potential to use an Incremental rig for a sustained drilling program over the winter months from November to February.

Strategic Fit

This deal is a strategic fit for both Otto and Incremental. Otto has now secured sufficient funds to develop the company's discovered gas fields in Turkey and to support a comprehensive exploration, appraisal and development program that will see the project comfortably through to first gas sales and a net positive cash flow, whilst retaining a working interest that is within the companies preferred range of between 30 and 40% equity after development.

Otto's strategy is to start with high equity positions in projects and farm down at appropriate times to realize value in the licenses and balance the asset portfolio, by retaining approximately a 30-40% interest in the final development / production position. Otto intends to reach similar positions through farm out in its Philippines projects by the end of 2007, which will see Otto substantially carried through the major funding requirements for exploration and development in its three offshore Filipino blocks.

The synergies in operational aspects in Turkey are also a key benefit to both parties. Incremental can potentially deploy one of their rigs to the Thrace Basin during the winter months for a sustained drilling campaign. Winter conditions are generally milder in Thrace compared to the Selmo region where the harsher winter conditions limit the ability for Incremental to always use the rig efficiently. Assuming approximately a 3 month program for the Incremental rig, between 4-7 exploration, appraisal and development wells could be drilled in the Thrace permits in winter. Incremental have stated a desire to expand their portfolio in the region and balance their portfolio with gas production as well as oil and this additional farmin is in line with that strategy.


Otto listed on the ASX in December 2004 with 80% in each of the three Thrace Basin Licenses of Edirne, Catalca & Ortakoy. In the Edirne License, a program of over 385km of 2D seismic and the drilling of 3 exploration wells funded substantially through the initial farm out to Incremental and topped up with Otto's corporate funds, has discovered sufficient gas reserves for the joint venture to consider field development. The future cash flow from this development and the funds from this additional farm out to Incremental will be used to fund an aggressive exploration program with extensive 3D seismic in 2007 and follow up exploration drilling in 2007/2008.

In January Otto announced the discovery of gas at Koyustu-1 and the successful testing of Koyustu-1 and Bati Umur-1 which flowed at stabilised rates of 2MMscf/d and 3.6 MMscf/d respectively. The JV is planning to drill a new exploration well Yagci-1 and re-enter Umur-1 for flow testing in the next few months. Development planning for the discoveries is ongoing and should be finalized in the next couple of months.

A 2D seismic and possibly a Geochem work program is planned for the Catalca and Ortakoy Licenses this year to identify targets for exploration drilling in 2008.

"This is an excellent deal for both Otto and Incremental; both companies are committed to establishing production as quickly as possible and an aggressive follow up exploration campaign to add further value to the project," said Alex Parks, Otto's CEO. "It also gives Otto a healthy A$15 million in available cash to fund its exciting work programs across the entire asset portfolio in 2007."

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