Genel to acquire additional interest in the Miran Block and assume joint operatorship

abarrelfullabarrelfull wrote on 29 Aug 2012 10:56

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Genel Energy announces that it has agreed to acquire an additional 26 per cent interest in the Miran exploration block in the Kurdistan Region of Iraq (the "Miran Block") from Heritage Energy Middle East Limited ("HEME"), a wholly owned subsidiary of Heritage Oil Plc ("Heritage"), for $156 million (the "Acquisition"). In addition, Genel Energy will provide a bilateral loan of $294 million to Heritage, secured on Heritage's shares in HEME as well as HEME's remaining working interest in the Miran Block (the "Loan"). Either party to the Loan can elect that, subject to receipt of approval from Heritage's shareholders, the Loan is repaid through the transfer to Genel Energy of Heritage's entire holding of shares in HEME rather than in cash. Both the Acquisition and the Loan will be funded and serviced from the Company's existing cash resources. As part of the Acquisition, Genel Energy will become joint operator of the Miran Block.

Transaction rationale

  • The Acquisition allows Genel Energy to increase its interest in the Miran Block a commercial gas discovery, from a 25 per cent working interest to a 51 per cent working interest (38.5 per cent working interest post KRG back-in right)
  • It progresses Genel Energy's strategy of consolidating the leading position in the Kurdistan Region of Iraq
  • It leverages Genel Energy's strong operating and development experience in a region where the Company has extensive geological knowledge
  • A competent person's report prepared by RPS Energy Consultants Limited as at 31 March 2012 for Heritage, estimates that the block contains mean Gas In Place of 10.5 Tcf with mean contingent and risked prospective resources of 3.75tcf of gas and 161 mmboe of liquids
  • Together with the Company's recent acquisition of a 44% interest in the Bina Bawi gas discovery, it allows Genel Energy to create a material gas position in the Kurdistan Region
  • Assuming joint operatorship of the Miran Block will allow the Company to take the lead in driving the development of the Miran Block forward to meet the growing needs of the domestic and Turkish markets

Commenting on the transaction, Tony Hayward, Chief Executive Officer of Genel Energy, said:

"This acquisition represents an excellent opportunity to extend our interest in, and assume joint operatorship of, a commercial gas discovery and high quality asset in the Kurdistan Region of Iraq. Following our recent acquisition of a 44% interest in Bina Bawi, it will further enhance our position as the leading oil and gas company in Kurdistan. We believe that as an Anglo-Turkish company we are uniquely placed to execute the full field development of the Miran Field including gas exports to Turkey and we aim to build a material gas business alongside our existing oil business in the medium term. Our belief in the significant potential of the region is stronger than ever and we aim to continue to play a leading role in the consolidation and development of the oil and gas sector in Kurdistan."

Principal terms

The Acquisition

Genel Energy will acquire 26 per cent. from HEME, and become the joint operator of the Miran Block with, Heritage. As consideration for the Acquisition, Genel Energy will pay to HEME a cash sum of $156 million, adjusted to reflect any cash calls made in respect of the Miran Block since 1 July 2012. Additionally, at the request of the Kurdistan Regional Government ("KRG"), on completion of the Acquisition the Company has agreed to donate $30 million of local community and infrastructure projects over the next 3 years.

On completion of the Acquisition, which is subject to various consents, approvals and assurances, including from the KRG and Heritage's existing lending banks, Genel Energy will hold a 51 per cent working interest in the Miran Block, and HEME will hold a 49 per cent working interest. The KRG will retain a back-in right for a 25 per cent. working interest which is exercisable until the date falling 180 days from a commercial discovery and which will, if exercised, reduce the working interests of the contractors accordingly.

Genel Energy and Heritage have agreed to establish a new joint venture company for the purposes of managing the Miran Block, to be held between them pro rata to their working interests in the field. Heritage will transfer the operatorship of the Miran Block to the new vehicle within 60 days of the Acquisition completing.

All present and future payment obligations and liabilities of HEME under the Acquisition have been unconditionally and irrevocably guaranteed by Heritage.

In addition, Genel Energy will enter into a $294 million bilateral loan with Heritage. The Loan will be made on standard commercial terms and will be secured against both Heritage's interest in the share capital of HEME, a company wholly owned by Heritage and Heritage's working interest in the Miran Block which is held through HEME. Initial interest under the Loan is 8 per cent per annum, and the Loan will have a fixed term ending on the date which is the earlier of: (i) 15 months after the date of the completion of the proposed acquisition by Heritage of an interest in OML 30 in Nigeria, and (ii) 6 February 2014.

The Loan will permit either party to elect that the repayment is satisfied through the transfer to Genel Energy of Heritage's entire holding of shares in HEME, instead of repaying the outstanding facility amount in cash. Any transfer by Heritage of HEME shares in settlement of the Loan shall be subject to the approval of the Heritage's shareholders in a general meeting. Heritage has undertaken to convene a general meeting of its shareholders within 65 days of either party electing repayment of the Loan through the transfer of HEME shares. In the event that shareholder approval is not provided, the interest rate on the Loan shall increase by a further 4 per cent per annum for the duration of the term, and Heritage shall be required to pay a break fee to Genel of $6.6 million.

Under the terms of Heritage's existing facilities, Heritage could only enter into the Loan with the consent of the banks under its existing facilities. Therefore, Genel Energy agreed with Heritage's existing financiers that Heritage will not repay in cash any principal amount of the Loan to Genel Energy (other than through enforcing Genel Energy's security over the Loan if there is a default) for a limited period of time. The period of such subordination is expected to end in early November. Genel Energy will in any event have a right to require repayment of the Loan in cash if Heritage's shareholders do not approve repayment of the Loan through the transfer of shares in HEME. Notwithstanding the above, Heritage remains free to pay interest, the break fee (subject to compliance with the UKLA rules) and to proceed with repayment of the Loan through the transfer of Heritage's entire holding of shares in HEME.

Information on the Miran Block

The Miran Block covers approximately 1,105 square metres in the southern part of Kurdistan. The Miran structure lies approximately 65 kilometres from the Kirkuk oilfield and 60 kilometres from the Taq Taq field.

The Miran Block contains two large contiguous structures, Miran West and Miran East. 2D seismic data acquired by Heritage in 2008 identified the two structures which together cover approximately one third of the entire licence area. Well results have established that the Miran Block contains two hydrocarbon systems with oil in the shallower Upper Cretaceous section and gas/condensate within the deeper Lower Cretaceous and Jurassic formations.

Work programme to date

The drilling campaign commenced in December 2008 and since then four wells have been drilled on Miran West. Miran West-1 tested approximately 3,000 bopd of 15 API oil from the Cretaceous Shiranish formation at a depth of approximately 800 metres. Miran West-2 tested three separate intervals in the Jurassic at an average rate of approximately 25 MMcfpd and a condensate gas ratio of 7bbl/MMcf. Miran West 3 reached the primary target of the Jurassic gas reservoir and well testing operations within the main Jurassic reservoir were successfully completed In May 2012. It resulted in a constrained flow of up to 22 MMscf/d of wet gas with a yield of 20 bbl/MMscf of 55˚ API condensate. The well has been suspended pending re-entry and completion as a production well. Miran West-4 commenced drilling on 21 June 2012 and reached target depth on the 16 July. The well was drilled to a target depth of 1,905 metres and is designed to further appraise the Upper Cretaceous oil reservoir.

Drilling of the Miran East-1 exploration well commenced in March 2012, with an estimated target depth of c.4,000 metres. The well is targeting exploration potential within the Cretaceous and Jurassic reservoir intervals of the Eastern structure. The well is currently at 3,700 metres in the main Jurassic reservoirs and is on schedule to reach target depth by November. Oil shows encountered while drilling in the Upper Cretaceous are consistent with wireline log interpretation indicating the presence of hydrocarbons and pressure data indicates that the structure is in communication with the existing discovery.

Development of the Miran Block and the Turkish Gas market

The Miran Block is a commercial discovery and independent engineering studies have confirmed the potential for a fast-tracked, phased development of the field.

Options being considered include early gas production to existing and planned cement and power plants for local markets in Kurdistan, as well as exports to Turkey under full field development. The KRG has outlined favourable development options for gas utilisation. The initial priority will be to satisfy local gas demand by supplying gas on commercial terms to local cement plants and power stations and other end-users in the Sulymaniyah region in 2013.

The early production will be paralleled with full field development and the export of gas to Turkey with the full production of blended oil and condensate.

The consumption of natural gas in Turkey started in 1987. Since then, consumption has grown rapidly and reached 46 bcm in 2011. Turkey has the highest growth rate in all of Europe and Eurasia. According to estimates produced by the Turkish state company BOTAS and the World Bank, Turkey's consumption of natural gas is expected to grow in the coming years and exceed 50 bcm by 2015. These estimates correspond to a forecast 9% annual growth in domestic demand.

Turkey has few proven reserves and consequently little domestic production. Given the imbalance between domestic supply and consumption of primary energy, Turkey is a large and net importer of energy products, in particular oil and natural gas. Turkey is one of the world's top importers of natural gas mostly for domestic consumption. Currently Turkey imports the majority of its natural gas from Russia, Iran and Azerbaijan through the pipeline network and imports LNG from Algeria, Nigeria and the spot LNG market. The Turkish Goverment is acively seeking to diversify its supply.

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