Quick overview of projects
On 14 February 2007 Eromanga announced a farm-in agreement with Silver Marlin. Silver Marlin was awarded the blocks in the ANP 2005 licensing round.
In total Eromanga had farmed into 5 blocks at 50% participation per block.
Reconcavo 59 Silver Marlin 50%
Reconcavo 79 Silver Marlin 50%
Reconcavo 96 Silver Marlin 50%
Reconcavo 118 Silver Marlin 50%
Reconcavo 138 Silver Marlin 50%
The blocks were awarded to Silver Marlin in Brazil’s 2005 licensing round and cover approximately 140 km2. Under the terms of that licence round, Silver Marlin has 2 years from 12 January 2006 in which it must complete a minimum work programme. To retain any of the blocks for a second exploration period of one year, Silver Marlin must commit to drill one well per block. Eromanga will farm-in to the blocks by paying:
– 100% of the seismic acquisition and processing cost during the first exploration period (to be agreed by the parties); and
– 70% of the cost of the first well in each block where the parties elect to enter the second exploration period; and
– All costs thereafter in proportion to ERH’s participation in the blocks.
Due to the formation structure of 3 of the blocks being rift plays they where relinquished and the JV kept the 2 blocks REC-T-138 and REC-T-59 which were pre-rift plays. The pre-rift plays are proven reservoirs that are widespread throughout the basin, with secondary objectives in the younger, but also proven reservoirs of the Rift play.
Announcement released by Eromanga on the 13/02/09
Blocks 138 and 59
Silver Marlin Joint Venture (ERH 50%, contributing 70%), Reconcavo Basin, Onshore, Brazil Drilling was suspended by the Operator (Silver Marlin) in Block REC-138 at a depth of 820 metres pending the determination by the ANP of a request by the Operator for an extension to the second exploration period for Blocks REC-138 and REC-59. The ANP granted an extension to 2 April 2009. Eromanga has suspended payment of later cash calls until; inter alia the Operator provides evidence that it has:
i) Disbursed approximately BRD 2.5 million contributed by Eromanga directly against expenses associated with the drilling of Blocks REC-138 and REC-59; and
ii) That the Operator has also contributed its 30% share against such costs.
The Operator’s failure to produce this evidence for more than 60 days has resulted in Eromanga today initiating a formal notice of termination under the Participation Agreement to the Operator in respect of Blocks REC-138 and REC-59. Eromanga has taken this action because of the Operator’s breach of its obligations under the Participation Agreements and the Joint Operating Agreements. Eromanga is seeking repayment by the Operator of amounts expended by it in accordance with the Participation Agreements Despite not providing Eromanga with the information it requires, the Operator has proposed revised terms which continue to be commercially unacceptable to Eromanga. Eromanga has just received formal letters of default from the Operator in accordance with the Joint Operating Agreements. These default notices claim drilling costs to date of BRD 2 million (approximately AUD 1.3 million) and costs for both blocks of BRD 5.6 million (approximately AUD 3.8 million). Eromanga strongly disputes these amounts. Eromanga is optimistic that a successful commercial resolution to the above impasse can be negotiated with the Operator.
Block 138
Monday 17 November 2008 Eromanga announced mobilization of a drill rig to Block 138 and then on the 26 November 2008 the company announced that 138 spudded on the 24th of November. On the 4th of December the company announced that the operators had only reached a total depth of 100m due to operational delays. 5 days later on the 9th of December ERH announced the following;
The Operator has today advised that the current well will be plugged and abandoned after various attempts to resume drilling have failed due to a broken conductor pipe preventing further drilling. Drilling has not progressed since the last announcement on Thursday 4 December 2008. The Operator has advised that 13.5 meters of conductor pipe became lodged at a depth of 86 meters. Subsequent fishing operations were only able to recover a 3.5 meter section, the remaining 10 meters of conductor pipe has not been able to be dislodged. The Operator has advised Eromanga that it is preparing extensions for mud flow lines and will move the rig substructure, mast and carrier to setup drilling for a well a few meters from the original location.
17 December 2008 the company announced that they had recommenced drill and where at a total depth of 162meters. On the 24th of December the JV had reach a depth of 820 only 80meter from being half way to total depth of 1800meters.
For me this is where it gets interesting.On the 31st of December ERH announced that it had got to a total depth of 850 meters and had 11 meters of light oil shows at a depth768 to 777 meters. Then on the 7th of January the JV announced that they had stopped drilling at a depth of 850meters due to time frame restrictions based on the minimum work schedule that expired on the 12th of January.
- So in 1 week the operator managed to drill 658meters and if the same pace was maintained, they would have reached the target depth of 1800meters by the 3rd of January. Instead the operator only managed to drill another 30meters within the next 2 weeks. Something else clearly went wrong within this time period.
There has been a concern with Silver Marlin for some of us since the signing of the JV and throughout there has only been a short history with the JV those concerns have only compounded.
Gas and oil insider reported in December 07 that Silver Marlin in this early stage found its self running out of time in its requirements in the minimum work obligations set out by the ANP; here is part of this story
Silver Marlin found itself running out of time to get through the committed work program to advance the leases to a second one year term, with wells to drill in each area. Eromanga came in promising to fund a 2D survey to advance some already-defined leads to drillable status, along with funding 80% of the first well in each block.
For the full story please see link below
http://www.karoongas.com.au/LinkClick.aspx?fileticket=LVKYsp3ktMU%3D&tabid=80&mid=443
Even in this early stage of the JV there where clearly some cash issues with Silver Marlin
• Sometime during the course of last year we also seen Silver Marlins President removed from his position. The former Silver Marlin President Wagner Freire, Wagner had 38 years experience within Brazil's oil industry with some high profile positions including but not limited to CEO for Petrobras between 1985 to 1990 and also having a seat on Brazil's advisory Oil broad during the 1990’s. Reading through some of his press interviews it would have seemed that he was highly admired and respected within the Brazilian oil industry. The post of president has been substituted by Executive Director that will now act with a Board of Directors. Ulisses Andrade, ex-Petrosynergy took over the job as Executive Director. Form this it appears the company board of Directors has taken over the operational running of the company. This would indicate that there have been some major internal issues within the company and boards are not renowned for their ability to deal quickly or efficiently with operational issues
There have been other things that have occur which have also been the course of some anxiety for Eromanga shareholders. For example, the planned timing for the drilling of Block 138 and 59 in the later part of last year which left very little time for dealing with operational problems, this was also during the time when drill rig hire would have been at a premium due to a rush on companies wanting to get rigs secured to meet minimum work obligations. It would also appear that Silver Marlins selection of drill rig was to say the least exorbitant. The drill rig was still on site for some weeks after drilling was suspended, and it still remains unclear whether we were charged hire rates for the drill rig during this down time.
There also appears to be a lack of communication within the JV as it took Silver Marlin a week to report to Eromanga about the conductor pipe mishap in December.
As a conclusion, I would suggest that ERH has found enough oil with the far more reliable Gavea JV to occupy its self during the course of 2009. With the current credit markets in the mess that they are in, I firmly believe that Eromanga would be far better position to focus on blocks 330 and 430 with field development which should be the order of the day and exploration taking a back seat regardless of Silver Marlins cash or business position to date. But with the information provided in this blog update it clearly suggest that Eromanga would be far better off not just walking away from the JV but running.
I can see no advantage of throwing good money after bad with a JV partner that at best, appears to be on the ropes. When 30% cost of exploration funding seems to have been a tall order for Silver Marlin, then the costs of full field development at 50% cash participation rate would seem well out of reach for Silver Marlin and Eromanga is not in a position to go this projects alone with it development commitments at 330 and 430.
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