Farm-ins by Premier Oil and Edison International are revitalizing E&P offshore Falkland Islands with needed injections of capital.
Rockhopper Exploration got the deal it was looking for when it farmed out 60% of its interests in its North Falkland basin licenses for a consideration of about US $1 billion, which opens up the development of the Sea Lion complex with first oil expected by 2017.
The company announced the farm-out on July 12. This follows an agreement signed in June between Falkland Oil & Gas Ltd. (FOGL) and Edison International for FOGL’s licenses off the eastern and southern coasts of the Falkland Islands.
Both farm-ins will jump-start activities for Rockhopper and FOGL. For Rockhopper, the development of the Sea Lion field is now fully funded as is appraisal work for the Casper, Casper South, and Beverley discoveries, and exploration of multiple prospects. FOGL, on the other hand, has yet to drill a well, so its deal will support the drilling of its first two exploration wells in 2012.
Sea Lion takes center stage
In acquiring the 60% interest in Rockhopper, Premier agreed to pay $231 million in cash up front on completion of the transaction. Premier will carry another $722 million (net to Rockhopper) for the Sea Lion development. Finally, there will a carry of $48 million for exploration work (net to Rockhopper). Total exploration spending is pegged at $120 million. Premier will become operator for the Sea Lion development.
The proposed acquisition is expected to be completed in September after meeting the closing conditions and receiving approval of the Falkland Islands government.
The 40% retained interest gives Rockhopper significant exposure to the upside in the basin. The two companies will also enter into an agreement covering areas of mutual interest (AMI) for future exploration activities. These areas include Namibia, South Africa, and southern Mozambique, which should contain plays analogous to Sea Lion.
In April 2012, Gaffney, Cline & Associates estimated 1C, 2C, and 3C reserves of 225.6 MMbbl, 355.6 MMbbl and 515.9 MMbbl, respectively, for Rockhopper.
“We are now fully funded through the development, have brought in a capable, experienced, and competent operator, strengthened our balance sheet, and signed an AMI on some potentially new areas, all while maintaining a significant 40% equity stake in out Falklands licenses,” said Sam Moody, CEO, Rockhopper, told Hart E&P Online.
“We need to hand over operatorship to Premier and then the joint venture can begin working towards a final development plan,” he added. “Premier will become the operator of all licenses currently operated by Rockhopper, but we will lead on exploration in terms of prospect selection, etc. Conversely, Premier will lead on subsurface for the development while we work closely together on appraisal.”
Regarding exploration, Moody explained that “there was no drilling planned for the year and nothing has changed there. We are all keen to get going with the next phase of drilling as quickly as possible, and that is something we need to agree to with our new partners as soon as we can.”
The partners will undertake a front-end engineering and design study to optimize the development area of Sea Lion. Total capex for field development is estimated at $5 billion of which about $2 billion would be for a leased FPSO pre-oil and $3 billion for a purchased FPSO pre-oil. The companies have targeted the first half 2014 for the submission of the final development plan to authorities. Oil production is expected to begin during the first half of 2017.
“While we are hopeful of achieving first oil before 2017, there is obviously no guarantee,” he continued.
An FPSO vessel is being proposed for the Sea Lion development. Premier operates three FPSOs offshore Vietnam, Indonesia, and the UK. Its expertise will be valuable to the design of the production system in the North Falkland basin.
In looking at what is next for Rockhopper, Moody said, “We have Sea Lion development to look forward to as well as continuing to explore and appraise in the Falklands and potentially looking at some exciting new venture opportunities elsewhere. We now have a balanced portfolio of assets with an operated and funded development, relatively low risk appraisal, and some very exciting exploration to look forward to.”
FOGL funding boost
Edison will pay a cash contribution of $40 million to FOGL with $20 million being paid at the successful completion of the agreement and the remainder in 2013. The farm-out has been approved by the Falkland Islands government.
The farm-out consists of a 25% interest in FOGL’s blocks east of the islands and 12.5% of blocks south of the island in the South Falkland basin. FOGL will continue to be the operator on the leases.
Edison will contribute its pro-rata share of the 2012 work program and certain historical costs incurred during 2011 related to the 2012 drilling program. This cost is estimated at about $50 million. FOGL is expecting the arrival of the Leiv Eiriksson semisubmersible rig in July to drill its first well on the Loligo prospect.
Following the announcement of results of a well drilled in an adjacent block in the South Falkland basin by Borders & Southern Petroleum (its Darwin well), FOGL reduced Edison’s holding from 25% to 12.5%. FOGL is now considering acquiring a 3-D seismic survey over a portion of its southern area licenses to evaluate potential drilling targets.
“This farm-out provides further industry validation of the potential of our licenses and gives us greater financial flexibility for our future exploration program,” said Tim Bushell, FOGL CEO, in a press release.
All of the companies will also be watching what the impact of the increased activity will have on Argentina’s government, which has already warned companies not to participate in offshore activities in what that country calls the Malvinas Islands.
Contact the author, Scott Weeden, at sweeden@hartenergy.com.
