The agreement relates to ultra-deep rights only. Novus remains committed to exploring the shallow and deep prospect inventory of the acreage at its 40% working interest level. While the ultra-deep section is considered by Novus to be very prospective for deep, high-pressure gas, potential drilling costs are high for a company of Novus' size. This farmout provides a way of Novus exploring the ultra-deep section without exposing an imprudent amount of its own capital. Without the farmout it is quite possible that the ultra-deep section would not be drilled prior to the expiry of the leases.
Novus first entered the Padre Island Joint Venture in May 2001 via a farm-in offer from BNP Petroleum. Shortly thereafter it was joined by MOEX Texas Oil & Gas LP (a Mitsui subsidiary) and Long Flat, Ltd. (formerly Golden Gate Resources, Ltd.). As part of this joint venture Novus has rights to the entire geological section in the group's Padre Island leases.
The main attraction to Novus at Padre Island was and remains the undrilled deeper sediments beneath the existing shallow shut-in fields. Recently acquired 3D seismic revealed a layer of undrilled prospectivity that could be drilled up from onshore locations for less than the cost of similar wells drilled in nearby offshore acreage. Depths for these prospects are roughly between 12,000 feet and 16,500 feet, with prospect sizes interpreted to be between 50 to several hundreds of bcf. Continued analysis of the 3D dataset has revealed the presence of a number of even deeper leads, of potentially even greater size.
The cost of drilling such ultra-deep targets is likely to be high, especially as they are expected to be highly pressured. At Novus' existing 40% paying interest this would consume an inappropriate proportion of its available funds. Despite the high drilling costs, the ultra-deep structures have the potential to be very attractive on a risked-return basis, due to the value of the prize should they be successful. There are similarities between these ultra-deep structures and some of the deepwater Gulf of Mexico fields that the majors are currently drilling.
The agreement between BP and the existing JV members was signed by Novus on March 20, 2003. The agreement gives BP nine months to complete a full technical study and to mature prospects to be drilled. An option payment is payable to the PIJV by BP on signature.
If BP elects to go beyond the nine month period, they will nominate ultra-deep prospects for drilling and make the existing JV payments in order to take up interests in the required leases covering the prospects.
Novus will retain an interest after payout equal to one-quarter of the carried interest, such that in prospects where Novus contributes its full 40% working interest, Novus would be entitled to a 10% working interest after payout. However, Novus has the option to retain up to an 8% paying interest in prospects deeper than 20,000 feet, and up to an 18% paying interest in certain defined prospect areas between 15,000 feet and 20,000 feet. In such cases, the remainder of the Novus 40% working interest would be carried by BP with one-quarter reverting to Novus after payout.
The PIJV including Novus has the rights to all the data and analysis from the farmin activity.
Dr Bob Williams, Managing Director of Novus, said: "Novus is very pleased to welcome BP into the exploration of the Padre Island. I am confident that input of their caliber will not only add value through what I aticipate will be the drilling of ultra-deep prospects, but that it will also have positive implications for our existing prospects.
"This deal is an excellent result for Novus' shareholders and greatly adds to the value of our Padre Island acreage. We have leveraged our acreage position so that we are able to participate in some potentially valuable prospects that otherwise probably would never have been explored by Novus."
The interests in the Padre Island Joint Venture are as follows: Novus Petroleum 40%; BNP Petroleum Corporation (Operator) 30%; MOEX Texas Oil & Gas LP 20%; Long Flat, Ltd (Golden Gate Resources) 10%.
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