Soco Looks to Expand Cabinda North Interest

LONDON, Jan 18, 2007 (Dow Jones Commodities News)

Soco International (SIA.LN) wants a greater share of the Cabinda North block than the 17% it expects the Angolan government to ratify by July this year, Chief Executive Ed Story told Dow Jones Newswires.

To obtain a greater portion of the block, Soco is willing to trade a stake in its 85%-owned Nganzi block in the Democratic Republic of Congo, Story said.

Roger Cagle, the company's chief financial officer, added: "We would hope to get between 20% and 25% (of Cabinda North). Above 20% is the minimum level we accept for ourselves but it is impossible to put a dollar value on this as we have not yet done any drilling."

Story said although the Cabinda block hasn't officially been awarded to Soco yet, the company believes a greater share in the field will lower its overall capital risk and exposure.

Cagle said the decision to give up part of the Nganzi block is justified because owning 85% of it is "a big bite to chew unless we are dead certain we will find oil. In our business, nothing is dead certain."

The CFO added that Soco wouldn't consider farming out its assets "simply to lower risk," and would need to find value for money in any transaction.

Despite the lack of modern seismic data, several tests by the then-giant U.S. oil company Gulf Oil in the 1960s showed the presence of a couple of thousand barrels of oil a day in the Cabinda North block, Cagle said.

Today, Soco hopes that test drilling - which is scheduled to start after the government ratifies the agreement - will show reserves of "a couple of hundred million" barrels of oil.

Soco is also planning a 30,000-square-kilometer aeromagnetic seismic survey, which indicates changes in rock type or thickness, on the Nganzi block this summer to help determine drilling locations.

Angolan state-owned oil company Sonangol has a 28% interest in the Cabinda North block and other partners include Occidental Petroleum Corp. (OXY) with a 23% stake, Teikoku Oil Co. Ltd of Japan with 17% and Angola Consulting Resources with the remaining 15%.

Also in Africa, Soco aims to start drilling in late 2007 at its 37.5% interest in Marine XI, the shallow offshore block in the Congo. Lundin Petroleum AB (LUPE.SK) and Raffia Oil SARL each have an 18.75% interest.

The company has 9.5 million barrels of proven oil reserves in the Congo and a further 23.8 million barrels of possible and probable reserves as at Dec. 31.

But Vietnam, where Soco has proven reserves of 30 million barrels of oil and 68.3 million barrels of possible and probable reserves as at Dec. 31, is where most of the company's current value lies.

The company's CEO said one of the biggest challenges for Soco in 2007 will be reacting quickly to well news and ensuring that it remains ahead of the rig schedule with "hardware in place to compete effectively."

With demand for rigs outstripping supply in 2006, the company has been forced to change its rig-hiring approach, Story said. It now commits to a year of drilling with the option to extend by a further one to two years, instead of simply committing to drill one or two wells as it would have a couple of years ago.

Story added that rig rental rates are stabilizing, particularly for jack-up rigs, as more rig providers enter the market to meet the supply shortfall.

In West Africa, where numerous companies are drilling, Story said the potential exists for sharing rigs, and one potential partner is Eni SpA (E), which Cagle said he believes is searching for partners.

No one at Eni was available to comment Thursday.

Rig-sharing programs are now common in the exploration business because of the supply shortfall.

"Without having done any drilling in Cabinda, we would not want to commit to more than a couple of wells initially," Cagle said. "However, hiring a rig for two or three wells only would mean a waiting a very long time to get hold of one. Sharing rigs allows us to drill sooner," he added.

Cagle said Soco has allowed for oil prices to fall to lows of $40 a barrel in 2007 as a worst-case estimate, aiming to prevent any impact of lower prices on its exploration or development.

However, Cagle said thanks to production-sharing agreements, the falling oil price would be offset by greater quantities of oil the company would receive from its fields. The process of recovering costs, however, will take longer the further prices fall.

Soco plans to spend a further $70 million on exploration in 2007, bringing the total budget for the year to $200 million, 54% higher than 2006.

Story said the increased exploration - the preferred option to grow the company rather than paying a dividend to shareholders in 2007 - will be funded from a $250 million convertible bond issue placed in 2006, which was six times oversubscribed.

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