# San Leon Energy plc Encouraged by Eroton

- Link: https://www.directorstalkinterviews.com/san-leon-energy-plc-encouraged-eroton/412727331
- Published: 2017-04-19T07:24:10+01:00
- Author: Giles Arbor

**San Leon Energy plc** (LON:SLE) the AIM listed company focused on oil and gas 
development and appraisal in Africa and Europe, have today provided an update on
operations and finances related to its initial indirect 9.72 per cent. interest 
in the OML 18 project, onshore Nigeria.

**OML 18 Operations Overview**

– Current oil production, including 50% of the Awoba field, is approximately 56,000
barrels of oil per day (“bopd”) before downtime and pipeline losses, up approximately
3,000 bopd since the operational update of 30 December 2016. OML 18, including 50%
of the Awoba field, produced 40,507 bopd before pipeline losses in 2016, or 48,768
bopd before pipeline losses on a producing day basis in 2016.

– Production at OML 18 has continued uninterrupted by any security issues in 2017.

– Current gas sales are 50 million standard cubic feet per day (“mmscf/d”). Gas 
sales averaged 41.6 mmscf/d, or approximately, 7,000 barrels of oil equivalent per
day (“boepd”) in 2016.

– The Krakama field was brought into production in January 2017, ahead of schedule.
The field is currently producing approximately 5,500 bbl oil per day (“bopd”) gross
from three producing wells. Planned workover activity on two further existing Krakama
wells is expected to increase production further.

– The Buguma Creek field is expected to go online during Q2 2017, with an Early 
Production Facility currently being constructed on site.

– A field development plan (“FDP”) for Akaso has been submitted to the Nigerian 
National Petroleum Company (“NNPC”) for approval. Further FDP’s are being generated
on Cawthorne Channel and Alakiri, with expected submittal to NNPC in Q2 2017.

– Eroton is currently working on an updated reserves report, with an expectation
of adding material oil and condensate volumes.

**OML 18 2016 Production Summary and Commentary**

– Average oil sales for 2016 were 30,969 bopd (after downtime and disputed pipeline
losses, including 50% of the Awoba field), compared with the initial CPR expectation(
set out in the admission document of San Leon dated 26 August 2016 (“Admission Document”))
of 47,058 bopd.

– The discrepancy between the sales and production numbers is largely attributable
to three main factors, each of which is already being addressed proactively by Eroton,
the operator of OML 18. These factors are workover/drilling progress; production
downtime; and estimated pipeline losses.

**Workover/drilling progress**

– Non-rig workovers performed during 2016 and 2017 have proceeded less quickly than
envisaged, principally due to delays in receiving partner permissions from NNPC,
but also certain downhole challenges which required more specialist equipment to
be mobilised. These issues have now largely been addressed and the Company has been
informed that drilling activities, including horizontal sidetracks and development
wells will commence in Q3 2017. To support the work program going forward, a well
services supervisor has been hired to work exclusively on such activity. It should
be noted this type of drilling activity has yielded material production gains in
similar fields elsewhere in Nigeria and the Company remains confident the work will
add further production to Eroton’s growing production base.

**Production downtime**

– Eroton is currently evaluating a number of independent alternative oil evacuation
routes that could both increase consistency of supply to the market and reduce costs
associated with current transportation tariffs and refining. The evaluation has 
been prompted following downtime caused by tank tops and cargo shipping delays at
the Bonny Terminal and some intermittent upstream outages on the Nembe Creek Trunk
Line pipeline (“NCTL”), the export pipeline used to transport OML 18 oil to the 
Bonny Terminal. Eroton has already identified one alternative route that could be
operational within 12 months.

– Any future NCTL outages are expected to be managed and mitigated from the second
half of 2017 by installing isolation valves and equipment between OML 18 and the
upstream section of the NCTL pipeline, which will allow OML 18 to continue to produce
and export oil, even if there are issues on the NCTL pipeline upstream of OML 18.

**Pipeline losses**

– Eroton is currently in discussion with the operator of the Bonny Terminal and 
the NCTL pipeline operator regarding allocation of pipeline losses between the various
producers during 2016 and 2017. In 2016, the Bonny Terminal operator installed new
Lease Automatic Custody Transfer (“LACT”) units on the NCTL line where crude enters
the Bonny Terminal, and has now allocated an average of 24% pipeline losses to all
operators using NCTL for 2016 (compared with 9% assumed in the Admission Document).
Eroton is disputing the allocation and has requested that the relevant regulatory
authorities investigate the allocation of losses with a view to reallocating losses
in Eroton’s favour (thereby boosting the 2016 sales numbers).

– To prevent any further discrepancies, LACT units have now been ordered for OML
18 and are anticipated to be operational in Q2 2017, thus reducing operating costs
by providing accurate measurements at the transfer point.

– These LACT units and alternative crude evacuation and storage facilities are anticipated
to realise significant advantages with respect to pipeline loss allocation and production
up-time – particularly given the short evacuation distance from OML 18.

**Services Update**

San Leon is in an advanced stage in setting up its services company structure.

A 3,000 HP drilling rig has been identified and approval processes with the Nigerian
exploration and production directorate, The National Petroleum Investment Management
Services (“NAPIMS”), are nearing completion for contract award.

San Leon anticipates the 3,000 HP drilling rig will form part of its services structure.

**Nigeria Financial**

In accordance with the terms of the $174.5 million loan note instruments held by
San Leon pursuant to the OML 18 assets, approximately $58 million of loan principal
and interest payments are now payable to San Leon as of 1 April 2017.

The Company is confident that Midwestern Leon Petroleum Limited (“MLPL”) will meet
its obligation upon receipt of dividends from Eroton. However, as outlined in the
Admission Document, San Leon has guarantees and a share pledge in place pursuant
to which certain parties, provided security for the first interest and capital repayment
occurring on or before 1 October 2017 if MLPL remained in default at that time.

The Reserves Based Lending (“RBL”) conditions required for the payment of dividends
by Eroton have been met, with the exception of satisfying the Debt Service Reserve
Account (“DSRA”) and the filing of the Eroton 2016 audited financial accounts. As
advised on 30 December 2016, and as continues to be the case, Eroton awaits repayment
of the majority of NNPC’s historic operational expenditure and capital expenditure
cash calls from 2015 and 2016. Encouragingly, NNPC has recommenced paying its 2017
cash calls promptly from January 2017, and continues to do so, whilst the Company
has also been advised that discussions regarding the payment of the outstanding 
operational expenditure and capital expenditure cash calls are also progressing.

To date San Leon has received $5 million from its Nigerian partners.

Company profits from Nigeria will be derived from OML 18 and the activities undertaken
by Eroton. Subsequent payment of dividends by Eroton, and receipt by MLPL, will 
be used to pay the principal and interest due on the loan notes, and to pay dividends
to San Leon. Accordingly, as previously outlined, whilst the delay in shareholder
distributions from Eroton and the lower than anticipated recent production is expected
to reduce San Leon’s cash receipts, the majority of expected Company profits from
Nigeria until the end of 2018 come from the aforementioned loan note interest receivable,
with a minority of the profit derived from the Company’s equity position in OML 
18.

Receipt of interest on the loan notes is being accrued by San Leon, and the Company
has various guarantees and a share pledge which provides security that first payment,
inclusive of a share of the principal, occurs on or before 1 October 2017. In effect,
the structure of the loan note and its safeguards result in a delay of the first
loan note payment to San Leon, not a reduction in expected loan note receipts.

**Nigeria Administrative**
 As provided for in the Shareholders Agreement with Midwestern
when San Leon purchased its interest in OML 18, San Leon has the right to nominate
people for appointment to the following positions within Eroton.

– Two Eroton Board members: Oisin Fanning already represents San Leon on the Eroton
Board, and Mr Mutiu Sunmonu (San Leon’s Non-Executive Chairman) will join the Eroton
Board at its next meeting, anticipated to take place in June 2016.

– The Chair of the Finance Committee: An appointee has been agreed with Eroton.

– A Senior Technical Manager who has extensive experience in Nigeria and similar
environments: An appointee has been agreed with Eroton and will be based in Nigeria.

**Non-Nigerian Assets**
 The Company continues to evaluate its non-Nigerian assets
with a view to monetisation and/or cost reduction.

**Corporate**

San Leon recently hosted senior management from Geron Energy Investment (“Geron”),
a party to the Offeror, on a field trip to OML 18 and the nearby Notore chemical
plant, as part of ongoing take-over discussions.

The Company has additionally signed confidentiality agreements with a further three
parties who have approached San Leon, subsequent to the Company’s announcements 
of 19 and 21 December 2016.

> **Oisin Fanning, San Leon Energy plc CEO, commented:** “San Leon has been part
> of OML 18 for effectively six months now and, notwithstanding a demanding operating
> environment in Nigeria and the challenges that Eroton has encountered, we are 
> encouraged by Eroton’s flexibility and implementation of activities to maximise
> cash flow from the world-class OML 18 asset. As explained, any issues encountered
> by Eroton are considered by both Eroton and San Leon to be temporary and are being
> addressed and overcome. Most importantly, these issues are not expected to affect,
> materially, the long-term field performance or indeed the long-term overall level
> of cashflows to San Leon, whilst in the shorter term San Leon has a number of 
> protections in place for receiving loan note repayments which constitute the large
> majority of expected cash flow from Nigeria until the end of 2018.
> Both Eroton and San Leon are continually looking to optimise the development of
> OML 18 and the appointment of a dedicated well services supervisor will be an 
> important factor in continuing to increase production. Further drilling and workovers
> this year are expected to add a major boost to production. Moreover, the location
> of OML 18, with direct access to a potential offshore storage system, provides
> for an alternative evacuation system for oil which would be entirely under Eroton’s
> control.
> We look forward to updating the market in due course on further progress.”

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