Statement Accompanying the Final Results
Junior oil explorers remain in the doldrums. The shares of listed oil exploration companies are generally friendless. Their share prices have almost all fallen and remain in, many cases, more than 90% below their peak. It is virtually impossible to raise serious money. This in turn makes it very hard to undertake meaningful grass roots exploration. The bear market in this sector has lasted for at least seven years, with little sign of improvement.
That's the bad news. The good news is that oil prices are once again at levels which can provide a huge return to successful explorers. A serious reduction in oil and gas exploration in recent years means that properties with potential become available to companies surviving in the sector.
Clontarf has taken advantage of this environment. We were successful in acquiring ground offshore Ghana initially in 2008 with revisions in 2010. In 2017, we obtained Block 18 offshore Equatorial Guinea.
The Ghana block has been the subject of ongoing wrangling for over 5 years. This is not all bad as it implies that people see value in the ground. The current position following the most recent series of discussions is an agreement to submit the licence for approval to the cabinet in Accra. No time scale has been finalised. Cabinet approval would clear the way for the next step – parliamentary approval. Given our experience no guarantees can be given.
Equatorial Guinea is an emerging oil producer in West Africa. We applied for a particular block but were awarded in June an exclusive right to negotiate an agreement on another block – Block 18. Negotiations on the general terms of th
e licence led to us signing a six month exclusive Memorandum of Understanding earlier this year which enables us to agree a Production Service Contract (PSC) on the block. Talks on this continue though we are yet to negotiate the detailed terms of the PSC, which will be subject to final approval by the Minister and the President.
We have a long history, across numerous countries and resources, of bringing together good technical skills, seed finance and, later, partners to prospect and explore early stage prospects. The very tough oil industry environment of recent years has seen good ground such as that in Ghana and Equatorial Guinea become available. We did outstanding work on the Ghana ground to identify numerous drill targets. If we can finalise the Equatorial Guinea negotiations we will do the same. We then attempt to bring in bigger partners to do the drilling. We did this earlier in Clontarf by bringing in Union Oil on Block 183 in Peru. Earlier still, as Pan Andean, we had joint ventures with Reliance Industries of India, CEPSA of Spain in Peru, and BHP in Bolivia.
Companies such as Clontarf do the early prospecting work, identifying good geology, negotiating workable agreements and often doing enough work to validate the potential. At this stage the multinationals appear. The projects have been de-risked to a degree while the potential has been clarified to a degree. Juniors get a return and/or a potential upside by getting a participation in a joint venture. But the once active joint venture oil exploration market is on the floor. The majors gorged on debt in the early part of the century to fund acquisitions. The collapse in the oil price has seen a serious cut in discretionary expenditure as management scramble to reduce debt. Exploration has been a major casualty.
Of course this must change as oil fields run out and supply becomes sluggish while demand continues to grow. But, explorers such as Clontarf have to survive and hold on to their ground until the majors are ready to move. Eighty dollar oil and a growing world economy suggest that the time is near. But not yet.
Political uncertainty and changing policies continue to bedevil exploration. Governments frequently set unrealistic fiscal and permitting terms which mean that great ground can be left fallow. That has happened to our ground in Peru where our partner, Union Oil, returned Block 183 to the State after failing for three years to obtain necessary permits. Earlier, we had a long and successful period of investment in Peru selling most of our assets in 2009. The decision by Union means that Clontarf now has no assets in Peru so we have written off our residual investment of just over £2.5 million. This accounts for most of the loss reported in the accounts. It does not have any impact on our cash.
Bolivia nationalised natural resource assets without compensation in 2006. Since then almost no junior company exploration capital has been invested in Bolivia. We continue to have ongoing contact with parties in the country but there is nothing to report. Ghana, with good ground and good fiscal terms, has had inordinate delays in finalising contracts – years. Obstacles are raised which companies find difficult to overcome.
The directors are aware of the need to give hope to investors. Almost ten years after negotiating an agreement in Ghana it has not been ratified and we do not know when it will be. The Equatorial Guinea block award is a positive development but it too has complications. We like our strategy of selecting good geology with politics being a secondary concern but we are considering other directions.
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