TIDMJKX
RNS Number : 1328Y
JKX Oil & Gas PLC
01 March 2017
1 March 2017
JKX Oil & Gas plc
("JKX", the "Company" or the "Group")
Operational Update: A Year in Review
Just over 12 months ago, the newly elected Board of Directors
promised to resolve the various challenges that were facing the
business and formulate a new strategy to increase the value of your
Company. We have provided regular updates on our progress since
then and implemented monthly reporting of basic production data.
Now, on the anniversary of our first Operational Update, we set out
below the challenges and achievements of the past year and our
goals for 2017.
2016 was a rebuilding year for the Company. Our strategy was
simple: remove obstacles to growth, plan development in a modern
context, finance and execute.
That translated into four main goals for the year:
1) eliminate or restructure current and contingent
liabilities;
2) reassess the assets and rebuild the Field Development Plans
with latest generation development techniques and technologies;
3) finance the field development plan; and
4) improve operations and engineering, particularly in Ukraine,
and build a team capable of global high-performance execution.
In summary, we have restructured the convertible bond on
favourable terms, reduced our contingent tax liabilities, reached a
decision on our inherited arbitration conflict with the Government
of Ukraine, rebuilt the Field Development Plans for Ukraine and
Russia and formed a new execution team.
While we have the Hague tribunal decision, we have not yet
settled our arbitration case with the Government of Ukraine, and
financing the development plans remains a challenge for this and
other reasons. These are our two major shortcomings for the first
12 months.
Perhaps most importantly for shareholders, the reconstruction of
the Field Development Plan for Ukraine has revealed that using a
modern, North American development approach for the Rudenkivske
field could realise over $3bn worth of gas sales at today's prices.
We have a clear road map with which to generate substantial
shareholder value if we can execute. While this is obviously easier
said than done, the size of this prize more than justifies taking
on the many challenges facing our team on the surface.
We were confronted with many issues to resolve in February last
year: bloated costs, legal conflicts and contingent liabilities in
Ukraine, license suspensions, stagnated field development and a
$30.1 million bond repayment within 12 months, which the Company
could not settle due to lack of available funds. We dealt with most
of them over the course of the year, and have visibility on the
resolution of the remainder. Most importantly, we have the plans
and team in place to return the Company to its core business of
developing and producing hydrocarbons with an ambitious development
plan. Over the course of the year, we tackled many issues. Some of
the major ones are highlighted in greater detail below. We address
each one in turn.
Reductions in overheads and operating costs
Measures were taken immediately following our appointment in
January 2016 to significantly reduce the cost burden of the
Company's London headquarters. Head office headcount has been
reduced by 45% and we now occupy one floor of the building where we
previously occupied four floors. We have been able to extract
ourselves from the long-term lease on one of the unoccupied floors
and negotiations continue with the landlord to extract ourselves
from the liability of the remaining unoccupied floors.
During 2016, headcount reductions of 29% and 20% have been made
in Ukraine and Russia, respectively.
Most of this action taken on costs during 2016 will not fully
benefit our financials until 2017 and we are continuing to identify
further cost-saving opportunities.
Legal disputes in Ukraine
For claims relating to 2010, amounting to approximately $10.6
million (including interest and penalties), Poltava Petroleum
Company ('PPC') lost an appeal to the High Administrative Court of
Ukraine and lost four appeals to the Supreme Court of Ukraine. It
is currently engaged in appeal processes in the High Administrative
Court and is considering the basis of a further appeal to the
Supreme Court. For claims related to 2015 of approximately $23.3
million, PPC is involved in proceedings in the Poltava District
Administrative Court, which are temporarily suspended.
To frustrate things further, PPC has suffered several searches
by the National Police of Ukraine starting in June 2016 and again
in early 2017. PPC has cooperated fully with the investigations,
but nevertheless believes that it is in full legal compliance with
matters outlined in the warrant and that the action is completely
without merit. We have brought this matter to the attention of the
relevant authorities in Kiev. Our belief is that these actions are
damaging to Ukraine's investment climate.
In respect of the Company's international arbitration against
Ukraine to recover production related taxes ('Rental Fees') that
PPC paid in Ukraine since 2011, in addition to damages to the
business, on 6 February 2017, the tribunal dismissed the main
element of the Company's claim for payment of excessive Rental
Fees. The tribunal ruled that Ukraine was found not to have
violated its treaty obligations in respect of excessive levying of
such taxes, but awarded the Company damages of approximately $11.8
million plus interest and costs of $0.3 million in relation to
subsidiary claims.
While disappointed with the overall result, the conclusion of
these proceedings presents an opportunity to draw a line under
historical legal issues and engage with the Government of Ukraine
to settle this award and the local tax issues and return focus to
key operational matters. We have commenced this settlement process
in earnest and in the meantime continue to defend our local legal
cases.
For claims relating to 2007 and amounting to $6 million, during
2016, the Supreme Court of Ukraine ruled in favour of the PPC, the
Company's Ukrainian operating subsidiary, and this case is now
considered closed.
Ukrainian production licenses secured
In January 2016, the State Geology and Mineral Resources Survey
of Ukraine suspended four of PPC's subsoil use permits. Following
successful legal action, PPC has now renewed all four of these
licenses until 2024 and received a ruling from the Kharkiv
Administration Court of Appeal which deemed the original
suspensions to have been illegal.
Bond repayments and restructuring
A redemption of $12 million of the Company's 2013 convertible
bonds ('Bonds') was settled in February 2016 from cash on hand,
which reduced the total outstanding liability to $30.1 million
which would have fallen due, together with interest and accretion
payments, in February 2017 - a liability that the Company would not
have been able to finance from available cash reserves.
In order to reduce this liability and to improve the Company's
ability to restructure the remaining bond liability, repurchases of
the Bonds totaling $10 million (and their subsequent cancellation)
were made between June and October 2016 using improved operating
cash flows from within the Group. These purchases were all made at
a discount to par value.
By lowering the overall lability and reducing the number of
bondholders with whom to negotiate, the Company was able to
restructure the remaining $16 million of the Bonds (representing a
total potential liability of $18.6 million (including interest and
accretion payments), which may have become due in February 2017)
resulting in the liability being amortised over three years
starting from February 2018 with a small accretion payment of $2.6
million being due in February 2017. The restructuring was approved
by Bondholders on 3 January 2017. Future Bond payments are now well
within the operating cash flow capabilities of the Company and the
business can move forward with its development plans.
Relationship with Government of Ukraine
On 6 December 2016, Ukraine's Parliament passed the first
reading of Law # 5132, which amongst other things, proposed a
reduction of Ukraine's gas production tax from a maximum of 29% to
12% for new wells. We were very active in lobbying for this
initiative by the Government of Ukraine, which aims to make
Ukraine's gas sector an attractive destination for investors and
stimulate gas production in order to realize the strategic goal of
energy independence by 2020. On 21 December, following a second
reading of the law, Ukraine's Parliament passed legislation
reducing the royalty on oil production from a maximum of 45% to
29%, which will increase cash flow at PPC in 2017.
Disappointingly, the proposal to reduce the gas royalty from a
maximum of 29% to 12% for new wells, which was passed at the first
reading, was excluded from the second reading and therefore failed
to pass into law. The Company continues to believe that reducing
gas production taxes is a critical step to making Ukraine's gas
sector attractive for investors, which, in turn, will support the
Ukrainian Government's stated goal of energy independence. JKX will
continue to work with the Ukrainian Government and other
stakeholders in 2017 to reduce gas production taxes in order to
increase investment in the sector. The setback in getting the gas
production rates decreased for new wells demonstrates that there is
still some way to go in our relations with the Ukrainian Government
both as an individual company and as a leader of various trade
bodies lobbying for legislative change.
Team, operations, and enhancements
Upon our appointment a year ago, we immediately set out to
assess our well stock and implement an enhancement program. In
addition to targeting production gains, this activity gave us some
additional data for use in rebuilding the Field Development Plans.
Using the completed Field Development Plans we identified the type
of drilling, completions, engineering and operational skills that
we needed to be successful, and have built a world-class execution
team.
We know what to do, we have the team to do it, and we're
mobilizing the equipment now. How fast we can go is dependent on
financing, but otherwise we are ready to embark on a much larger
development plan than at any other time in the Company's
history.
Enhancements themselves provided 119,000 total new barrels of
oil equivalent in 2016, at a cost of $0.5 million and are still
contributing approximately 543 boe/d to current production.
Behind-pipe operations provided 142,000 total new barrels of oil
equivalent in 2016, at a cost of $0.3 million and are still
contributing approximately 591 boe/d to current production. The
enhancements and behind pipe operations are clearly working, and we
will systemise this process in 2017 and make it the basis of our
operations in the future.
We are currently engaged in preparing 11 wells for fracture
operations in the Rudenkivske field. For each well, this requires a
technically challenging work-over and 'fishing' operation to clear
the well bore of debris and make way for a frac string. Our new
team is focused on reducing work-over times dramatically, targeting
North American standards of speed - a first for Ukraine. The
fracture program itself is targeting significant incremental
production, as well as critical data needed for the Rudenkivske
drilling and development plan. We will keep shareholders informed
as we make progress in these two big projects.
Field Development Plan ('FDP') - Ukraine
In Ukraine, in addition to identifying several new drilling
locations and significant enhanced recovery opportunities in
existing fields, the work focused on unlocking the potential of a
gas field in our current portfolio previously considered
uneconomic. The Rudenkivske field is estimated to contain 2.8
trillion cubic feet of gas in place (2C). Using modern development
and completion techniques could result in the production of as much
as 600 billion cubic feet of gas over the field's lifetime.
Analogous fields to Rudenkivske's structure and depositional
environment in North America were identified and their experience
and empirical data were used in the Company's planning. These North
American fields were also previously considered uneconomic, and
have recently been successfully developed using advanced well
construction and field development design.
The full field development model for the Rudenkivske field
includes the drilling of 135 wells over ten years and results in
plateau production of approximately 110 million standard cubic feet
per day (18,300 barrels of oil equivalent per day). Total capital
investment over the same period is currently estimated at US$660
million, much of which will be financed from free cash flow.
In the fourth quarter of 2016, the Company began to implement
its FDP for the Rudenkivske field in Ukraine with the workover of
well NN16, which was completed on 6 November. Initial peak hourly
production from NN16 re-perforations was 16.4 MMcfd of gas and 467
boepd of condensate on a 48/64ths" choke (3,200 boepd total) but
has since declined, and in December, well NN47, located in the
northern section of the field, tested gas and condensate from the
V-25 interval in the Visean sands - the main focus of the FDP. The
well tested an initial maximum rate of 16.9 MMcfd and 668 boepd of
condensate on a 137/64ths" choke prior to declining to 11.5 MMcfd
of gas and 255 boepd of condensate within 36 hours. Preliminary
estimates of gas initially in place are 0.44 Bcf. More information
will be provided once production rate has stabilised. In addition,
gas lift is currently being implemented at well NN16 to restore
production and increase overall recovery.
Hungary and Russia
In Hungary, operations to sidetrack the Hn-2 well commenced in
early December. In January, the sidetrack was successfully
completed. The Hn-2ST well tested 1.5 MMcfd from the Pannonian
Pegasus sands (1,051-1,055m MD) and 2.8 MMcfd from a lower
Pannonian sand interval (1,082 - 1,088m MD). The latter is a newly
discovered productive horizon in the field. Gas sales commenced in
early February 2017 at an initial rate of 1.8 MMcfd, after a
production and sales break in Hungary of more than three years. A
reassessment of all of our Hungarian licenses is underway and a new
Field Development Plan will be produced in the next few months.
In Russia, production remains stable with work-over and acid
treatments required on a regular basis to combat harsh conditions
in our 5,000m deep, high temperature, high pressure wells. We will
be replacing certain production strings with chrome tubing in 2017,
at a cost of approximately $5 million. This will result in more
stable production and an ability to increase production modestly by
opening chokes due to better control of temperature-related string
expansion.
The road ahead
Several challenges still face our Company. The most serious are
related to our inherited tax claims. With the international
arbitration tribunal decision in hand, we are actively seeking
resolution with the Ukrainian government. We are an oil and gas
company and we very much look forward to returning to our core
business after so many years of legal distraction.
Financing will continue to be a challenge for our Company as
well. Put simply, our development project in Ukraine is much bigger
than our current market capitalisation. We will have to be creative
and aggressive in financing that development, and will be keeping
shareholders informed in all cases and seeking their support and
approval where appropriate.
Our production outlook is quite ambitious, but impossible to
specifically target in the absence of funding. As we obtain sources
of financing for the Rudenkivske development, we will tighten our
production targets and timing and keep you informed. Monetisation
of Russia, and perhaps Hungary, remain potential sources of funding
for the core Ukrainian development plan.
This announcement contains inside information as defined in EU
Regulation No. 596/2014 and is in accordance with the Company's
obligations under Article 17 of that Regulation.
ENDS
For further information:
JKX Oil & Gas plc +44 (0) 20 7323 4464
Russell Hoare, Chief Financial Officer
Stockdale Securities +44 (0) 20 7601 6100
Robert Finlay, Daniel Harris
EM Communications +44 (0) 20 3709 5711
Stuart Leasor, Jeroen van de Crommenacker
This announcement may contain statements that are, or may be
deemed to be, forward-looking statements. Any such forward-looking
statements are based on the Company's current expectations and are,
by their nature, subject to a number of risks and uncertainties
that could cause the Company's actual results and performance to
differ materially from any expected future results or performance
expressed or implied by such forward-looking statements. Forward
looking statements should, therefore, be construed in light of such
risk factors and undue reliance should not be placed on them. Some
of the most important risks in this regard are described in the
2015 JKX Annual Report. Forward-looking statements speak only as of
the date of this announcement and, save where required by
applicable law or regulation, the Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
Certain information included in this announcement is based on
management estimates. Such estimates have been made in good faith
and represent the current beliefs of the Company's management. The
Company's management believes that such estimates are founded on
reasonable grounds. However, by their nature, estimates may not be
correct or complete. Accordingly, no representation or warranty
(express or implied) is given that such estimates are correct or
complete.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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