Harvest Natural Resources President and Chief Executive Officer, Dr. Peter J. Hill, said, "We are very pleased to finalize this agreement with PDVSA. In 1992, we were one of the first independent oil and gas companies to invest in Venezuela's oil industry and now 10 years later we are the first US independent oil and gas company to participate in the emerging Venezuela domestic natural gas market. Based on expected production levels and anticipated operating costs, natural gas sales are expected to increase the Company's annual EBITDA in the range of $18 million to $24 million, or $0.50 to $0.70 per share, beginning in 2004. The additional cash flow and earnings anticipated from this contract reduces our dependence on oil prices, increases our financial flexibility and positions us to execute a wider range of strategic growth opportunities."
An initial capital investment of approximately $25 million will be required in 2003 to build a 54 mile pipeline to deliver the natural gas to the PDVSA sales point, modify the Uracoa Field processing plant and for other infrastructure needs. Banco Mercantil, C. A. (Banco Universal), one of Venezuela's leading commercial banks, will provide $15.5 million of financing to fund construction of the pipeline. The remaining $9.5 million capital investment is expected to be funded with internally generated funds. Natural gas sales are expected to commence at a rate of 40 to 50 million cubic feet per day (MMcfpd) in fourth quarter of 2003 and gradually increase up to 70 MMcfpd in 12 to 18 months.
Initial gas production will come from the Company's Uracoa Field where approximately 100 wells have been drilled through the natural gas cap. Currently the field is producing about 40 MMcfpd of associated natural gas that is being injected back into the reservoir. Additional oil production will initially come from the 10 to 12 Uracoa Field oil wells presently shut-in due to their high gas-to-oil ratio. The Company expects further increases of oil production from the planned drilling of infill wells, which can now be placed in more optimal locations.
The Company expects to invest an additional $21 million starting in 2004 for a natural gas pipeline, infrastructure and drilling in the Company's Bombal Field to sustain the gas production profile to the end of the contract.
Hill continued, "This natural gas contract will also allow us to lower overall unit operating costs due to a higher product throughput and the elimination of expenses associated with re-injection and other natural gas handling costs. Additionally, we will be able to efficiently accelerate oil production without concern for producing excess natural gas."
Production of the natural gas cap is projected to provide incremental oil volumes. As a result of this expected increase, the Company has agreed to sell 4.5 million barrels of oil to PDVSA over the term of the natural gas contract at a price of $7.00 per barrel. The Company will continue to sell its remaining oil production to PDVSA at a price based on five crude oil indexes, which has averaged approximately 48 percent of West Texas Intermediate since 1992.
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