Executive chairman's letter
Although this report and accounts covers the twelve months to 31 December 2017, it is since that date that significant events have taken place which are now bearing fruit in building on the promise of AAOG and its interest in the Tilapia field.
The entire board and I are very grateful to members for their support in the recent placing. By raising sufficient capital in June 2018, AAOG can now ensure that TLP-103 is drilled and any delay in partner contributions can be better managed. This well is pivotal to the value of the Company and we are determined to execute the drilling operation and achieve our planned timetable.
The Tilapia field
At the risk of repeating what is well understood by many shareholders, it is worth taking the opportunity to explain why TLP-103 is such an important well for AAOG.
AAOG holds, through Petro Kouilou (“PK”), its wholly owned subsidiary, a 56 per cent interest in the Tilapia field, which covers an area straddling both on-shore and off-shore in the Republic of the Congo.
Unusually for a small E&P company, AAOG is already a producer and the field has been in production for over ten years. We have successfully worked over both existing wells, TLP-101 and TLP-102, and while production from these wells is small, the Company does generate some cashflow and, as a result, there is a base value to PK that acts as a backstop and downside protection for investors.
The current focus of AAOG is on drilling a new well, TLP-103, in this field. This well is a multi-target well, which aims to hit three horizons:
Importantly, a profitable, valuable business can be developed from bringing only the Mengo Sands on line. Just one well would make AAOG significantly cashflow positive and a full field Mengo development plan would make the asset very valuable. This opportunity provides a backstop that has no exploration risk while the Company still has the considerable exploration upside potential from the Djeno.
In this context, if we are not successful in the Djeno on TLP-103, we will put in place a Mengo field development plan. Where there is a technical case for further testing of the Djeno, we will continue to consider the opportunity worth investigating.
New management team
It is never easy to decide to change the management team of a company, but the decisive action we took in 2017 and early 2018 to replace the senior operating executives has clearly worked. Whereas the operational team was previously floundering in delays and unable to achieve any success, since the appointment of James Berwick as CEO, the plan for AAOG has finally been properly executed. The workovers have been carried out on time, under budget and with successful outcomes. The drilling plan for TLP-103 has been meticulously put together and James has assembled an experienced team who are working very hard to deliver the well safely, successfully and on budget. As a board, we have complete confidence in the ability of James to take AAOG forward.
New board members
I was very pleased in January to welcome Phil Beck, Nick Butler and Sarah Cope to the board to join Brian Moritz as non-executive directors. We now have a non-executive team with an excellent and complementary mixture of skills and experience and I have already seen how valuable their advice can be to AAOG as we take the company forward. I also want to thank our finance director, James Cane, for his continuing hard work and sometimes unsung contribution to the success of AAOG.
We have worked carefully on the process for a new licence for the Tilapia field and received the welcome news in February that the state oil company, SNPC, has recommended that PK be granted a 20-year extension. This recommendation is now going through the Congolese regulatory and administrative processes. We have recently received assurances that our work on TLP-103 is of critical importance to the finalisation of this process.
At the moment, the clear and overriding focus of everyone is on drilling TLP-103. However, as we move forward, we will look to further opportunities available to the Company, provided they fit with its strategy of becoming a lean, profitable oil producer with a focus on the bottom line and a clear and unswerving commitment to the payment of dividends.
We look forward to keeping members updated on progress.
Chief executive's report
Although the annual report covers the twelve months to 31 December 2017, I am using my report to provide an update on the latest progress on these three wells:
Following the successful work to disconnect, clean through and reconnect the flowlines to TLP-101, and testing of flow through the annulus, the well was then re-directed to production through the coiled tubing. Having done so, pressure stabilised in April, at which time the well was re-opened. It was successfully brought back on line and the flow rate immediately surpassed the previous rate of 35 bopd. The Company is now allowing the flow rate to increase gradually until it achieves the maximum level of sustainable flow.
As announced in April, Schlumberger conducted a successful intervention focused on the integrity of the perforations on TLP-102. Following the intervention, oil and gas samples were taken at the surface and were sent to Total's laboratory in Pointe-Noire for testing. The test result has now been received and has confirmed the Company's evaluation that TLP-102 is now in contact with the reservoir. The pressure in the well continued to increase steadily.
Well TLP-102 was opened on 17 June 2018 with a view to bringing the well online. When the well was opened, it was believed that water was found to be blocking the tubing. As a result of this information, the Company decided to conduct a swabbing exercise and engaged Slick Line to carry out the work on a turnkey contract. Slick Line commenced work on 19 June.
Eight runs were made down hole and oil was recovered to surface. The oil samples appear to be identical to samples from TLP-101 and have been sent for testing. The well requires two further runs in order to fully complete the work programme, which will be finished shortly.
Due to the absence of gas in the well, a pump will need to be installed. The Company intends to install this pump following completion of Slick Lines' work programme.
Based on the data obtained during the work, the Company's reservoir engineers now expect a minimum flow rate of 120 bopd from TLP-102 once the pump has been installed.
Drilling operations have commenced ahead of mobilisation of the rig:
The Company has also received a notification from its specialist transport contractor, Ocean Transport, who are responsible for delivering the rig, SMP 102, from Port Gentil in Gabon to the Tilapia site, that the transport vessel, the Kota Bakat, on which the rig is to be loaded, is late in arriving and is now due to arrive in Port Gentil on 4 July.
After the delays over the last year, it is very pleasing to have a rig under contract and underway, and the entire team is focused on drilling a successful well.
The funding for the next stage of development was completed in early June. We now have the necessary resources to finance the total cost of the planned work, when previously we had anticipated SNPC paying its 44 per cent contribution as costs were incurred. We will be able to recover their unpaid contribution from future oil sales cash flow.
Our top priority remains the optimisation of our drilling programme from TLP-103 and, to a lesser extent, enhancing production from TLP-101 and TLP-102. In addition, we are reviewing other opportunities that come across our desks as we seek to build a high-quality oil and gas company.
Since my appointment at the turn of the year, I have been very pleased and am grateful to all the staff and contractors to the Company, who have supported me and worked hard to enable a turnaround in operational performance and effectiveness. They have worked impressively on the workovers, which have also allowed me to have a dry-run with the team and make such further tweaks to the organisation as needed ahead of drilling TLP-103. I approach the new well with confidence, while being very aware that it is hard work as well as care and attention to detail that have delivered the performance so far this year; more of the same will be needed in the second half.
Chief executive officer