BPZ has provided an update to operations addressing reserves, production, capital expenditures (CAPEX), 2009 drilling plans, financing, and cost restructuring. The Company has made a decision to focus on oil development in the offshore Block Z-1 in northwest Peru with a goal of doubling production and reserves during 2009. With commodity prices at five year lows, the Company has made changes to its drilling plans for 2009 and has reduced operating as well as general and administrative expenses (G&A) in Peru and Houston, in an effort to optimize profits.
The Company announced on December 29, 2008 updated oil reserves from the Company’s Block Z-1 Corvina offshore field where it is important to highlight that the Proved reserves increased by 41% to 25 million barrels of oil (Mmbo). These reserves are based on definitions and guidelines set forth in the 1997 Petroleum Resources Management System approved by the Society of Petroleum Engineers (SPE), as mandated by Natixis and the International Finance Corporation (IFC). The Company is currently testing the CX11-15D well in Corvina which targets the area where the Probable oil reserves are estimated by Netherland Sewell & Associates (NSAI), the Company’s third party engineering firm, which could allow the Company to move some Probable reserves to Proved.
The Company is producing oil, under a long-term testing program, at the CX-11 platform in Corvina. Production for November and December 2008 was approximately 140,000 and 148,000 barrels of oil respectively. It is important to note that in November and December 2008 the Company was drilling the CX11-15D well which caused the Company to limit production during certain periods for safety reasons. The Company continues to ramp up production and in January 2009, with production not curbed due to drilling or testing, production has averaged approximately 5,950 bopd. The Company expects to continue ramping up production when the 15D well and future wells come online.
As announced last week, the Company has secured a long-term contract for oil sales of approximately 17 million barrels. The contract calls for the Company to deliver the oil to PetroPeru, the operator of the State-owned refinery in Talara. The press release dated January 9, 2009 is available at the Company’s web site www.bpzenergy.com.
Drilling Schedule and CAPEX
As previously stated the Company intends to focus its efforts on oil production in Block Z-1 by committing a majority of its capital expenditures budget to appraise and develop the oil in the Corvina and Albacora fields during 2009. Accordingly, management has decided to keep the rig currently drilling at the CX-11 platform in place to drill three additional oil development wells this year to maximize cash flow. Additionally, the recently contracted rig scheduled for onshore Block XIX, will instead be mobilized to the Albacora platform to drill two new wells beginning in the second quarter of this year. The goal for the Company under this development plan is to double production exiting 2009, at 12,000 bopd. Below is a summary of the total capital expenditures for 2009.
Given the flexibility of the license contracts in Peru, the Company intends to push the exploration of Block XIX to 2010. Management believes that the increased production from Corvina, combined with the cost restructuring, should allow the Company to be cash flow positive while drilling at Corvina and Albacora. The reserve based credit facility with IFC and Natixis is expected to provide the balance of the funds needed to meet the budget CAPEX.
The Company continues to work closely with IFC and Natixis on the reserve based revolver, which is expected to have a borrowing base sufficient that, when added to cash flow from expected Corvina and Albacora oil sales, should cover the capital expenditures noted above. Recently, the Company delivered the updated NSAI oil reserve report and the long-term oil sales contract to IFC Natixis and is working closely with the banks to finalize this debt facility.
Management has adjusted staffing in Houston and Lima, and senior management has accepted salary reductions up to 15% and will forego 2009 cash bonuses. The management team has reviewed most of the expense line items under G&A with the expectation that a reduction of 15 to 20% is achievable. Considering that G&A was expected to increase in 2009 by as much as 10%, these cuts result in an even greater realized savings to the Company. Leading the way, Dr. Fernando Zuniga y Rivero, Chairman of the Board, has agreed to forego his salary in 2009 and reduce his total compensation to $1 per year. The Company applauds his commitment to ensuring its success.
Under the ongoing cost restricting effort management also expects to reduce G&A and operating expenses by 15 to 20% in Peru. For example, the Company has recently begun using a newly refurbished dock in Caleta Cruz, which is being used to load supplies for the offshore drilling operations, that reduces the supply vessels travel time to the platforms by 90%. Overall, management expects to reduce operating costs by as much as $1 million per month.
Manolo Zuniga, President and Chief Executive Officer, stated, "The Company's management team has demonstrated the ability to be flexible as well as fiscally responsible. The growth we expect in 2009 is important to the net asset value of the Company and to achieve this growth, while at the same time reducing costs, is significant. Our plan is to double our reserves in 2009 by moving Probable reserves to Proved in Corvina and adding Albacora reserves to our portfolio.
"Our year-end 2008 production of approximately 6,000 bopd could grow to nearly 12,000 bopd with additional development in Corvina and drilling success in Albacora. In reality, we are not cutting our development plans in 2009, just re-assessing and redistributing where we can use the CAPEX to deliver production and cash flow to allow BPZ to succeed in a difficult credit and volatile commodity pricing environment. We have a solid team in place working on the financing needed to supplement our CAPEX for 2009 and we expect the credit facility to close and aid us in our efforts to build upon our recent successes in Block Z-1." Mr. Zuniga continued, "The steps we are taking are providing big results, growing production and reserves. We will continue building a world class energy company Step-by-Step."
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