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Merrion Stockbrokers 8
Opportunities beyond Algeria
Besides Algeria, Petroceltic’s other significant assets are the Rovasenda prospect in Italy’s
Po Valley and the Elsa project off the Adriatic Coast.
Rovasenda is a Triassic exploration prospect estimated to have unrisked gross resources of
270MMbbls. It is located close to the Villafortuna oil field which has been in production for
decades. Petroceltic initially owned 95% of the prospect but it farmed out 47.5% of this,
with operatorship, to ENI in exchange for 2D seismic data for the Carisio permit area as
well as the adjacent Ronscecco permit area of which Petroceltic owns 100%.
Exploration drilling is expected to commence in the first half of 2012. Should initial
hydrocarbon estimates be confirmed, the prospect would add significant value to
Petroceltic. We believe that Petroceltic is likely to announce a farm out prior to the
commencement of the drilling programme. This may include a cash payment to Petroceltic
as well as funding its share of the exploration cost.
The Elsa prospect in the Adriatic coast is estimated at 34 – 187MMBoe. It was initially
drilled in 1992 and encountered an oil column of 65 meters in the Lower Cretaceous at a
depth of approximately 4500 meters. But ENI then decided it uneconomical to proceed.
Peteroceltic’s reinterpretation of 3D seismic is that it may contain light oil. Drlling was
scheduled for September 2010 but was suspended due to changes in Italy’s environmental
regulations. Petroceltic and other Enegry producers are seeking ways of resolving this.
Advancing the Algerian project to development stage and possible surrender of
operatorship to a major player should give management the time and resources to address
what we believe to be Petroceltic’s major weakness: the lack of a defined exploration
project pipeline. The hiring of Tom Hickey, ex CFO at Tullow Oil, as director suggests that
the company is trying to address this issue. We believe that management has the expertise
to identify and evaluate these opportunities. Initial focus will be on the Mediterranean and
North Africa (MENA) region. However, opportunities elsewhere may be pursued.
Key Challenges
Petroceltic faces regulatory and other challenges that may prevent near term attainment of
its full valuation. These include bureaucratic delays in obtaining approvals in Algeria, the
funding structure for its gas development in Algeria and the lack of an exploration project
pipeline.
Bureaucratic delays in Algeria
The timing of official approvals from Algerian authorities is highly uncertain, posing
operational challenges for the company. The ENEL transaction took months to approve and
may take months more to be ratified. Over the next year, further official approval will be
required for:
the final discovery report prior to commencement of gas development
a further farm out agreement
The uncertainty with the timing of these regulatory approvals is uncertain and may affect
the company’s operations.
Funding Structure for gas development
In terms of is PSC agreement with the Algerian government, Petroceltic is not permitted to
decrease its holding below 51% of its original holding before first gas. As such, it must
carry its working interest through the development stage. Following further farm out,
Petroceltic will be responsible for approximately 38% of the development expenditure,
estimated at $1.5bn to $2bn in total.
We believe that Petroceltic does not have the operational capability or financial capacity to
undertake the development. As such, the issue of funding for the development must be
addressed. A possible solution could be to enter into an agreement with a more
experienced operator to acquire a majority interest at first gas, similar to the transaction
between Anadarko and Lasmo. Another possible solution is a takeover of Petroceltic itself.