20th Jan 2009 07:00
20 January 2009
DRAGON OIL plc
("Dragon Oil" or the "Company")
Trading and Operational Update
Dragon Oil (DGO) issued the following trading and operational update for the year ended 31 December 2008. All information referred to in this update is unaudited and subject to further review. Dragon Oil expects to publish its 2008 preliminary financial results on 4 March 2009.
Highlights
Growing Production
Achieved a 28% increase in 2008 gross production with an average daily rate of 40,992 barrels of oil per day ("bopd") compared to 31,997 bopd in 2007
Exit production of 45,600 bopd at the end of 2008 (2007: 40,048 bopd)
Completed nine development wells during 2008 compared to seven in 2007
CIS 1 rig now being mobilised to Dzheitune (Lam) Platform 28
Iran Khazar rig currently undergoing scheduled maintenance to be completed by March 2009
Dragon Oil's own refurbished Rig 40 spud its first well on 11 January 2009
Strengthening Infrastructure
Construction of 30 inch, 40 km oil and gas trunkline project underway
Phase 2 expansion of Central Processing Facility (CPF) to handle 100,000 barrels of total liquid per day and up to 220 mmscfd of gas per day under construction
Completed phase 2 upgrade of export facility in 2008 increasing loading capability
Stable Financial Position
Year end cash and cash equivalents, together with term deposits, was US$867 million (2007: US$543 million)
Capital expenditure for the year was US$307 million (2007: US$228 million)
Fair value charge in 2008 from derivative financial instruments was US$21 million (2007: US$15 million)
Focused Strategy
Deploy three full time rigs in 2009
Drilling programme expected to spud thirteen wells, ten of which will be completed by year end
Target a 15% increase in the average daily production rate for 2009
Capital expenditure for 2009 estimated at up to US$600 million
Accelerate commercialisation of the gas resources
Take advantage of low asset valuations to diversify the portfolio focusing on quality
Abdul Jaleel Al Khalifa, CEO, commented:
"Dragon Oil has continued to deliver good growth, with a 28% increase in average daily production for the full year period compared with 2007. Although the industry is presently contending with a lower oil price than experienced recently, we are confident that our forward thinking, proactive nature and strong cashflows will stand us in good stead, enabling Dragon Oil to mitigate the impact. Furthermore the Company continues to enjoy a good working relationship with the Government of Turkmenistan. Our commitment to commercialising the Cheleken gas resources and diversifying the asset portfolio remain key components of our strategy to deliver long-term sustainable growth and returns for our shareholders."
Trading and Operational update
Production and Marketing
Gross production during the year reflected a 28% increase over the previous year. Total 2008 gross field production from the Cheleken Contract Area was 15 million barrels of oil with an average daily gross production rate of 40,992 bopd. This compares to 11.7 million barrels of oil in 2007 and an average daily gross production rate of 31,997 bopd. Dragon Oil's entitlement barrels are dependent amongst other factors on operating and development expenditures and realised crude oil prices. As a result of the fiscal terms of the Production Sharing Agreement, Dragon Oil's entitlement barrels in the current period were about 58% (2007: 68%) of the gross field production.
Dragon Oil sold 7.5 million barrels (2007: 8.7 million barrels) of oil in 2008 and held a crude oil inventory of 0.7 million barrels at year end (2007: 0.2 million bbls). The quantity sold during the year is lower due to change in the lifting positions and inventory movement. At the year end, Dragon Oil was in an underlift position of approximately 0.3 million barrels that resulted in an increase in revenue by approximately US$13 million. The average realised price in 2008 was approximately US$90.8 per barrel (2007: US$70.9 per barrel). The realised oil prices achieved a discount of about 6% to Brent during the year.
The Company continues to market approximately 80% of its crude oil through Neka in Iran as it offers the higher netback as compared to the western route. Dragon Oil moves approximately 20% of its crude through Baku, Azerbaijan, in order to maintain marketing flexibility. The marketing team continues to assess the possibility of opening additional routes through Makhachkala in Russia and the BTC pipeline initiating at Baku, Azerbaijan.
Drilling Programme
Nine development wells were completed during 2008, four from Dzheitune (Lam) 22 platform (L22/124, 126, 128 and 130) using the CIS Rig 1, four from Dzheitune (Lam) A platform (LA/125, 127, 129 and 131) using the Iran Khazar and one from Dzheitune (Lam) 21 Platform (L21/132) also using the Iran Khazar.
The depths of the nine wells vary between 3,000m and 4,135m. Excepting L21/132 which was completed as a single string completion, the other eight wells were completed as dual completions. Initial tested rates from the nine wells vary between 916 BOPD (L21/132) to 4682 BOPD (LA/131).
Further perforations were added to three wells in the fourth quarter of 2008 resulting in an incremental production of approximately 2,000 bopd.
Following the refurbishment of Dragon Oil's own Rig 40, it began drilling the first of five wells in January, of which four are expected to be completed by the year end.
The 'Iran Khazar' rig is now undergoing planned maintenance which is expected to be completed by March. The Iran Khazar will then relocate to begin drilling the first of four wells, three of which are expected to be completed by the year end.
The CIS 1 Rig is now being mobilised to the Dzheitune (Lam) Platform 28 to commence drilling the first of four wells, three of which are expected to be completed by the year end. Drilling is expected to commence by March.
The contracts for the Iran Khazar rig and the CIS 1 rig are due to expire in H1 2009. Pending negotiations, it is expected that either these rigs or potential replacement jack up rigs will continue drilling for the next two years.
Financial Positioning
The cash and cash equivalents and term deposits at the year-end were approximately US$867 million (2007: US$543 million) including about US$92 million (2007: US$19 million) set aside for abandonment and decommissioning activities. The increase in cash over the previous year reflects strong realised oil prices, despite a 14% decrease in sale volumes and a 35% increase in capital expenditure.
Capital expenditure for 2008 was approximately US$307 million. The expenditure during the year was primarily on drilling and infrastructure projects in Turkmenistan. Of the total capital expenditure to date, 61% was attributable to drilling. The balance of the capital expenditure was spent on infrastructure projects including the refurbishment of Dzheitune (Lam) 13 and 28 platforms, the new Dzheitune (Lam) B platform, construction of tanks at the CPF, and the 40-km trunkline.
Dragon Oil hedged 3.8 million barrels comprising a proportion of the total 2008 production using zero cost collars, with oil price floors at US$45 per barrel and a ceiling price averaging US$102 per barrel. The fair value charge in 2008 on account of the Group's derivative financial instruments was approximately US$21m. No hedges have been undertaken for the period beyond December 2008
2009 Outlook
Dragon Oil will deploy three full time rigs in 2009 and expects to spud thirteen wells, ten of which will be completed by year end. Drilling will take place from the Dzheitune (Lam) A and B platforms and the refurbished Dzheitune (Lam) 28 and 13 platforms. The average daily rate of production is expected to increase by approximately 15% by the end of the year.
The Company has an estimated capital expenditure programme of up to US$600 million. 60% is allocated to infrastructure (including platforms, trunkline, CPF, gas development and export facilities), 40% will be spent on drilling (including development wells, appraisal wells and workovers). The level of capital expenditure is dependant on a number of factors including approval of projects and availability of contractors.
The New Ventures team is continuing to assess potential assets with a focus on the Middle East, North Africa and Central Asia. Dragon Oil is aiming to capitalise on lower asset valuations while focusing on quality.
Background Note
Dragon Oil Plc is an innovative international oil and gas development and production company, quoted on the London and Irish Stock exchanges (Ticker symbol: DGO). Its principal producing asset is in the Cheleken Contract Area, in the eastern section of the Caspian Sea, offshore Turkmenistan and recently acquired interests in Blocks 35, 49 and R2 (10%) in the Republic of Yemen.
Dragon Oil (Turkmenistan) Ltd., a wholly owned subsidiary of Dragon Oil plc, holds 100% interest in and is the operator of the Production Sharing Agreement for the Cheleken Contract Area in the Caspian Sea, offshore Turkmenistan. Operational focus is on the re-development of two oil producing fields, Dzheitune (Lam) and Dzhygalybeg (Zhdanov).
www.dragonoil.com
For further information please contact:
Media enquiries
Citigate Dewe Rogerson (+44 20 7638 9571)
Martin Jackson
George Cazenove
Investor and Analyst enquiries
Dragon Oil Plc (+971 4 305 3600)
Leanne Denman, Investor Relations Officer
Disclaimer
This statement may contain forward-looking statements concerning the financial condition and results of operations of Dragon Oil. Forward-looking statements are statements of future expectations that are based on management's current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. No assurances can be given as to future results, levels of activity and achievements and actual results, levels of activity and achievements may differ materially from those expressed or implied by any forward-looking statements contained in this report. Dragon Oil does not undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information.
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