--20% increase in proven and probable reserves (greater than 40% increase in Vietnam and 30% in Yemen); --34% increase in revenue to $76.5 million (2005 $57.2 million); --Increase of 43% in pre-tax profits to $48.2 million (2005 $33.7million); --70% exploration and appraisal drilling success rate during the year; --19% increase in production; --Pilot development plan approved on Block 9-2 in Vietnam with first oil expected in 2008; --Extensive pre-drill activity across the West Africa portfolio; --Convertible bonds issue netted the Group $243 million; --Acquisition of additional 2% working interest in Block 16-1 Vietnam; --Accelerated development in Thailand associated with farm-out.
Ed Story, Chief Executive Officer, commented:
"There is no question that 2006 was a banner year for the Company. However, the 2007 drilling program in Vietnam alone will expose the Company to unrisked recoverable resource potential of 2.5 billion barrels of crude equivalent."
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
The past 12 months have been a watershed year for SOCO. Our hugely successful Vietnam project has evolved from pure exploration to development, appraisal and exploration; the potential of our Yemen project has been increasingly realized through Basement development drilling and increased facilities capacity and our West Africa portfolio has been expanded to increase the potential to repeat these successes. The Company has successfully de-risked its chances of long term success whilst maintaining significant upside that offers plenty of opportunity for exponential future growth.
We have again been very successful with the drill bit with our exploration and appraisal drilling success in Vietnam exceeding 70%. This coupled with the successful infill/injector drilling in Yemen has led to an increase in 2P reserves net to our working interest of 32.4 million barrels and 9.4 million barrels in Vietnam and Yemen, respectively. Before factoring in the reserve reduction associated with farming out half of our Marine XI interest in the Republic of Congo (Brazzaville), 2P reserves increased to 172.5 million barrels in 2006. Following the farm-out, 2P reserves at the end of 2006 equaled 160.6 million barrels.
FINANCIAL AND OPERATING RESULTS
After tax profit from continuing operations hit a record high of $29.1 million in 2006 exceeding that of the previous year that totaled $20.3 million. Largely as a result of the ongoing facilities expansion and infill drilling program at the Karri field in Yemen, production net to the Company's working interest increased, rising to 6,766 barrels of oil per day (BOPD) in 2006 from 5,684 BOPD the prior year.
The Group had its highest ever capital expenditures during the year with an extensive exploration/appraisal drilling program in Vietnam, significant facilities expansion and development drilling in Yemen and its initial 3D seismic acquisition in Congo (Brazzaville). In order to bridge the period prior to translating its successes into operating cash flow, the Company guaranteed a convertible bonds issue of $250 million in May. Capital expenditure on operational activities rose to $114.3 million in 2006 from $76.2 million in 2005. With net proceeds from the issue of convertible bonds equaling $243.0 million and cash generated by operations of $53.0 million, the cash balance rose by $136.8 million to $187.8 million at year end 2006.
2006 OPERATIONS REVIEW
The year got off to an impressive start when the second well drilled in the same fault block as the initial 2005 discovery well on the Te Giac Trang (TGT) structure, the TGT-2X, tested at a total combined flow rate of approximately 17,500 barrels of oil equivalent per day (BOEPD) from the Miocene Lower Bach Ho 5.2 (LBH 5.2) and Oligocene "C" intervals. The good news continued when the rig moved to a location on the fourth fault block on the TGT structure and the TGT-3X tested at a combined maximum rate of 9,908 BOEPD.
Buoyed by so much early success on the TGT structure, the rig moved approximately 30 kilometers south of the TGT-3X discovery to spud the initial well on the "L" prospect, the Te Giac Vang (TGV) 1X well. The TGV structure was a priority not only because of an apparent large shallow structure with good Miocene potential, but also because success here would hold the rights for the apparently even larger high potential Basement/Oligocene structure. Enthusiasm was tempered by realism as the TGV-1X intersected poorly developed reservoir sands in the primary targeted Clastic sequence at the LBH 5.2 horizon. The well did have good oil shows in several Oligocene sands when the well was deepened. However, after analysis of the logs, it appeared that these lacked sufficient permeability.
Following the TGV well, the rig was moved to drill the sidetrack to the Ca Ngu Vang (CNV) 4X well on Block 9-2 that was temporarily suspended late in 2005 after encountering unexpected high pressures in the Oligocene sequence above the Basement. We were back on track when the sidetrack of the appraisal well, CNV-4XST, tested at 7,050 BOEPD from Basement. This result provided final confirmation that CNV was ready to move into development. All regulatory approvals were received and the pilot development plan was approved in December 2006. From that point forward, Petrovietnam has funded its full share of costs on Block 9-2.
With a new rig, activity once again focused on Block 16-1. The third 2006 appraisal well on the TGT structure, the TGT-4X, was drilled on the H3 fault block between the initial discovery well, TGT-1X, and the TGT-3X. The primary target, a lower Miocene trap, was breached due to late movement on a fault located south of the TGT-4X well. The Oligocene "D" interval, a new reservoir on the TGT structure, flowed at a rate slightly over 600 BOPD on a short test.
The rig then moved to drill the first exploration well on the Te Giac Xang (TGX) structure on Prospect "K", approximately 15 kilometers west of the TGT structure. Although the TGX-1X encountered reservoir sands, it was abandoned after initial analysis indicated that it was not drilled within structural closure.
To close out the 2006 drilling campaign, the rig moved back to drill the fifth well on the TGT structure as a final prelude to seeking a declaration of commerciality on the field. The TGT-5X had a total combined maximum flow rate of approximately 16,430 BOEPD from the LBH 5.2 and Oligocene "C" intervals.
Thus, sandwiched between clear success with the TGT appraisal program, there were inconclusive results when looking for repeatability on the Clastics fairway elsewhere on Block 16-1. The 3D seismic acquired during the year is expected to be a critical tool in leading to drilling success in 2007 outside the proven TGT structure.
During 2006, the East Shabwa Block 10 consortium continued its program to further appraise the Karri field and increase production capacity from the Block. Drilling results and the addition of a self-contained production facility enabled the fields to exceed all previous production records averaging more than 40,000 BOPD.
A number of successful development wells were drilled in the Karri field (KHA) during 2006. These include the KHA-1-12 well in the western part of the structure, the KHA-1-14 well in the southern flank of the structure, the KHA-1-07.G1 sidetrack, which was drilled as a water injection well but completed as a producer based on drilling results and the KHA-1-16 drilled on the last 3D line on the eastern extension of the field. These wells are all connected to the production facilities and were tested at rates between 5,500 and 8,400 BOPD. Significantly, the highest rate was from the eastern extension well. This portends further extension of the field in that direction.
The consortium also had a very active exploration program in the northern part of the Block that yielded one discovery, but overall proved inconclusive as to the additional potential in that area.
The Group added to its West Africa portfolio when its 85% owned subsidiary acquired an 85% working interest in the 800 square kilometer Nganzi Block, onshore the Democratic Republic of Congo (Kinshasa). As operator, the Group carried out a reconnaissance aeromagnetic and gravity survey over the onshore extension of the coastal basin in order to delineate prospective areas for hydrocarbon generation and migration delineating several leads, interpreted as large horst blocks.
In September, the Group's 85% owned subsidiary signed an agreement to farm-out a 37.5% interest in the Marine XI Block, offshore the Republic of Congo (Brazzaville), whilst retaining a 37.5% working interest. As operator, the Group began evaluation of the Marine XI Block when it acquired an approximate 1,200 square kilometer 3D seismic program in the fourth quarter of 2006.
In April, the Group's Thai subsidiary signed a Participation Agreement that could accelerate the development of the project in the Bualuang field in the Gulf of Thailand and provide meaningful production as early as the first half of 2008.
The assignment of interest, predicated on meeting certain work requirements and subject to the appropriate regulatory approval by the Government of Thailand, enables the Farmee to earn up to a 60% working interest, whilst allowing the Group to focus resources on higher profile projects in Vietnam and Yemen.
Primarily to fund the impending development of its Vietnam projects, in May of 2006, the Company was the guarantor of an offering of $250 million in guaranteed bonds convertible into preference shares of the issuing subsidiary (Bonds), which are exchangeable for fully paid ordinary shares of SOCO. The size of the offering was increased from $200 million due to strong institutional demand, but was still six times oversubscribed upon issue. The Bonds will pay a coupon of 4.50% per annum and will initially be convertible into an aggregate of approximately 6.238 million ordinary shares. The initial conversion price is £21.847 per ordinary share, a premium of 42%. The Bonds will be repaid at 100% of their principal amount on 16 May 2013 unless previously converted or redeemed.
INCREASE IN VIETNAM INTERESTS
In June, the Group seized the opportunity to increase its interest in the promising Clastics play in the Cuu Long Basin of Vietnam by acquiring OPECO Vietnam Ltd., which holds a direct 2% interest in Block 16-1. The purchase price was $22 million.
In December, the Company's Non-Executive Chairman, Patrick Maugein, died after a long illness. Patrick was a friend, a tireless worker on behalf of SOCO and a champion of the Company. The Company benefited significantly through its relationship with Patrick and he will be missed. At the December Directors' meeting, the Board voted unanimously to accept the Nominations Committee recommendation to appoint Rui de Sousa to succeed Patrick.
As active as we were in 2006, we will be even busier on the operations front in 2007. The development program on Block 9-2 in Vietnam will be in full swing leading up to expected first oil in 2008. With only the rest of this year before license expiry to explore Block 16-1 in Vietnam, barring an extension, we expect to drill up to eight exploration wells. We have prioritized an exploration well on a TGT "look-a-like" structure, Prospect "S", identified from the 2006 3D seismic program. This is expected to be followed by a high potential Oligocene/Basement target in the deep "E" prospect that essentially underlies the shallower "L" prospect. A declaration of commerciality on the TGT field is imminent.
We should see the initial results from the water flooding that began last year in the Karri field in Yemen. The combination of the water flood, additional infill drilling and expanded production capacity should allow considerable growth in oil sales in Yemen, albeit after an early 2007 cutback due to additional facilities installation.
While evaluation of our West Africa portfolio is in its infancy, indeed, even the portfolio itself is evolving, 2007 will be a busy year in terms of pre-drilling activity. We are processing and will soon be interpreting the 3D seismic acquired last year on Marine XI offshore Republic of Congo (Brazzaville). It is conceivable that we could be ready to drill in the latter part of the year, but more likely in 2008. We expect to be acquiring 2D seismic on the Democratic Republic of Congo (Kinshasa) Nganzi Block.
We know that not every well drilled in 2007 will be a success. We understand that even on the highly prospective Vietnam Block 16-1 Clastics play, the chances of drilling success are only in the 25% range. However, we have positive indications for further good news from the Vietnam exploration program. There certainly will be an abundance of news. We trust that you share our enthusiasm for what is in store.
SOCO is an international oil and gas exploration and production company, headquartered in London, traded on the London Stock Exchange and a constituent of the FTSE 250 Index. The Company has interests in Vietnam, Yemen, Thailand, the Republic of Congo (Brazzaville) and the Democratic Republic of Congo (Kinshasa) with production operations in Yemen.
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