The primary focus for Oilexco in the first quarter 2007 continued to be finishing final activities for the Company's flagship Brenda/Nicol development. Extremely harsh weather conditions continued to be the main factor delaying final development activities in the first quarter, which plagued not just Oilexco, but a number of Operators in the UK North Sea. Despite only having several days a month of weather that permitted contractors the ability to work, some key steps were completed in the first quarter, including the installation of risers to the Balmoral Floating Production Vessel (FPV). Subsequent to the end of the quarter, the umbilicals were laid to the ocean floor and hooked into the Brenda manifold and the Balmoral FPV, and at the time of writing, the equipment was in the final stage of being successfully commissioned thereby allowing production to begin within several days.
In January Oilexco completed initial appraisal drilling on its 100% owned Shelley oil accumulation located in Block 22/2b in the UK Central North Sea. This phase of appraisal drilling, which commenced in mid October, consisted of eight well penetrations from a single sub-sea well bore. The last well bore, an extended reach bore hole approximately 13,850 feet in length, was drill stem tested.
Oilexco's initial well cluster at Shelley 22/2b-13 was designed to appraise a 1984 Paleocene Forties sand oil discovery by the well 22/2-2, which drill stem tested 31º API oil at rate of 2,416 bbl/day. The Company's 22/2b-13 well cluster was successful in defining a broad low relief oil-bearing structure. The structure as currently defined by the 22/2b-13 well cluster is approximately seven square kilometers in size. Two additional appraisal wells are planned to be drilled in the second quarter to evaluate apparent north and south extensions of the structure. These areas could not be practically reached from the 22/2b-13 wells' surface location.
The last well bore of the cluster 22/2b-13t, an extended reach well drilled near the margin of the structure, was tested through 42 feet of perforations representing 18 true vertical feet of perforated reservoir from the top of 34 vertical feet of oil pay. Oil flow during the test was recorded at a maximum rate of 3,082 barrels per day, through a 36/64" choke, at 282 psi flowing pressure. The quality of the oil was 31º API, which is consistent with the test from the 22/2-2 well. No water or sand was produced throughout the test.
Also in January, Oilexco and its wholly owned subsidiary Oilexco North Sea Ltd entered into an agreement that will allow Oilexco to earn a 60% working interest in the undeveloped Ptarmigan oil discovery located in Block 15/29a in the UK Central North Sea.
The Company will earn its 60% equity interest in Ptarmigan by paying 100% of the costs to drill a three-leg appraisal well to original 15/29a-9 discovery well. Upon completion of the appraisal drilling program Oilexco's equity interest partners at Ptarmigan will be as follows: Chevron 28%; ConocoPhilips 10%; Gaz de France 2%. Oilexco will be named as operator of Ptarmigan upon completion of the program, subject to approval by the Department of Trade and Industry (DTI). Drilling operations at Ptarmigan are scheduled to commence in the second quarter.
The Ptarmigan oil accumulation is located 15 kilometers southwest of Oilexco's Brenda oil development. Once the appraisal drilling has been completed, Oilexco and its partners will explore all options for early field development including the option of a sub-sea tie-back to the production manifold at Brenda.
In February, Oilexco and Oilexco North Sea Ltd. entered into a letter of intent and interim agreement with Sevan Marine ASA for the charter of the Sevan 3 floating production unit, to be installed in 2008 on the Company's 100% owned Shelley oil development project located in Block 22/2b in the central UK North Sea.
The Sevan 3 is the fourth floating production unit to be contracted based on the Sevan 300 design. Three of these units will be based in the UK North Sea. The Seven 3 is intended to be contracted for a fixed term of five years, with extension options for an additional five years. The value of the contract for the fixed term is approximately $370 million US. The final specification of the processing plant is yet to be determined, but it is anticipated that it will have a minimum oil process capacity of 30,000 barrels/day and a water process capacity of 20,000 barrels/day.
In March Oilexco announced that it made an oil discovery in its 50% owned Kildare Prospect in Block 15/26b in the UK Central North Sea. Nexen Petroleum UK Ltd owns the remaining 50% interest in the block, which was awarded jointly to the two companies in the 23rd UK Offshore Licensing Round.
The 15/26b-9 well was drilled to a total depth of 14,330 feet. A significant reservoir section was encountered in the Upper Jurassic sand at a depth of 13,705 feet. A total of 91 feet of net pay from a gross section of 132 feet from the Upper Jurassic sand was penetrated by this well. Both well logs and wireline pressure measurements indicated that the entire Upper Jurassic reservoir sand was oil-bearing. No oil-water contact was intersected by the well. Oil samples were also successfully extracted from the wireline downhole sampler.
An Upper Jurassic sand interval of 125 feet was perforated and drill-stem tested. The test flowed oil at a rate of 4,216 Bbls/d and associated gas at a rate of 3.1 MMcf/d through a 64/64 inch choke with a flowing tubing pressure of 460 psia. There was no water or sand produced during the test. Oilexco and its partner are currently discussing when to return to Kildare in order to drill additional appraisal wells to determine the size of the oil accumulation.
The discovery in the Upper Jurassic sand is in addition to the oil-bearing Ettrick sand that was encountered with the 15/26b-9 well. Oil samples were recovered and reservoir pressures were successfully recorded that tied this sand with the Ettrick sand in the original 15/26b-5 find made in the block in 1988 by another operator. The original 15/26b-5 well flowed oil at a rate of 2,650 Bbls/day and associated gas at a rate of 3.5 MMcf/d from the Ettrick sand and is located approximately two kilometers north of the 15/26b-9 well drilled by Oilexco and its partner.
Oilexco and Oilexco North Sea Ltd. Announced that it had exercised the option in its contract with a subsidiary of Diamond Offshore Drilling, Inc. for the semi-submersible Ocean Guardian. Oilexco had contracted the Ocean Guardian in December of last year for a one year period commencing in May 2007, with an option to extend the contract for an additional year ending in May 2009. The contracted rig rate for the additional one year period is $350,000 per day. The total value of the contract extension is $127.75 million US.
Oilexco finished the first quarter in excellent financial condition. The Company had significant cash balances as at March 31, 2007 as a result of an equity financing that closed in March 2007. The Company raised gross proceeds of approximately $99.7 million by issuing 15,000,000 common shares. Subsequent to the end of the quarter, the lead underwriter exercised its over-allotment option of 2,225,000 shares resulting in additional gross proceeds of approximately $15.2 million. In addition to raising equity funds, the Company signed a pre-development credit facility for approximately $78.7 million (Pounds Sterling 40 million) in order to allow the Company to purchase equipment in advance of filing Field Development Plans. Capital assets increased to $522.3 million at March 31, 2007 compared to $467.7 million at December 31, 2006. The increase was the result of additional work completed on the Brenda/Nicol development, the purchase of equipment for future developments and from drilling exploration wells in the Kildare oil discovery and the Laurel Valley prospect.
Operating results for the first quarter 2007 were lower than the first quarter of 2006. While production of 192 BOE/day for the first quarter 2007 was higher than 106 BOE/day produced during the same period in 2006, a drop in the price of oil and reduced interest income compared to the same period in 2006 offset increases from additional production. Operating costs per barrel appear extremely high because a large portion of these are fixed costs in relation to the Balmoral FPV. Once production begins from the Brenda/Nicol Fields, operating costs per barrel are expected to drop significantly to approximately $5 per barrel based on 30,000 barrels per day production.
General and administrative expenses increased for the first quarter 2007 compared to the same period in 2006. The main reason for the increased costs was an increase in the staffing levels to 36 from 25 during the same period in 2006 in both the Company's head office in Calgary and its operational office in Aberdeen. A stock based compensation expense of approximately $2.6 million was realized in the first quarter of 2007 compared to the same period in 2006. The Company uses options to attract and retain a skilled and motivated workforce.
The Company experienced a net loss of approximately $5.3 million for the first quarter of 2007, compared to a loss of approximately $26.3 million during the same time period in 2006. The primary factors contributing to the decrease in loss during the first quarter of 2007 was the recognition of a future tax recovery of approximately $9.6 million, lower loss on derivative contracts of approximately $7.0 million and zero impairment of capital assets (approximately $12.5 million in 2006). These were partially offset by interest expense of approximately $5.8 million recognized in first quarter of 2007 and an increase in stock based compensation expenses by approximately $2.0 million compare to the first quarter of 2006.
Oilexco is an oil and gas exploration and production company active in the United Kingdom. Oilexco's producing properties and exploration activities are located in the UK Central North Sea, specifically in the Outer Moray Firth and Central Graben areas. The Company currently has one wholly owned subsidiary, Oilexco North Sea, a company registered under the laws of England and Wales.
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