Petroceltic continues to strive to be a full-cycle exploration and production company.

Middle East, North African and Mediterranean-focused oil and gas developer Petroceltic (AIM: PCI) is striving to be a full-cycle exploration and production company. It has a 75% interest in a gas field the size of Greater London and the cash to turn its recent discoveries there into a recoverable resource and begin full gas production in four years' time.

Of its notable targets in Algeria, Tunisia and Italy, Petroceltic's largest and most valuable asset is the Isarene permit in Algeria, where in 2009, a successful drilling campaign led to the tenth largest discovery of the year, according to independent consultant IHS. However, while this is an undoubtedly exciting asset, the Dublin-headquartered company's other interests have faltered slightly in recent months, with a dry well in Tunisia and political roadblocks in Italy. As such the shares have floundered slightly and present bullish investors with an excellent window of opportunity to buy into a fantastic Algerian bet and the strong possibility that the Italian wind will turn in its favour again.

In April the company placed $120 million of new shares with institutional investors in order to secure its finances for the near future and fund its Algerian and Italian developments. A small part of the funds were also to go towards paying back a $7.5 million option fee it owedSpanish energy colossus Iberdrola, a former partner until its own cash needs saw it sell off its non core assets this year, including its entire 15.7 percent stake in Petroceltic, which was snapped up by other shareholders at a premium to the market price.

Petroceltic intends to replace the Spaniards with another 'big name' partner, farming down its interest in the Isarene field, getting cash up front and trimming its risks. While oil consultants Wood Mackenzie have described Algerian's government's fiscal terms as among the world's most challenging, the Isarene permit was signed on much more favourable terms than those currently offered, which gives Petroceltic a very strong hand in potential talks. We think a deal could well happen before the end of the year.

Algerian asset

Covering a similar land mass to that of Greater London, the Isarene permit area in the Illizi basin of south eastern Algeria borders a number of considerable hydrocarbon havens owned by such big players as BP, Total and Repsol. Petroceltic has a 75 percent share of the Isarene licence, with the remainder spoken for by the state-owned oil and gas company Sonatrach.

Estimates of the probable gas in place vary between five and 12 trillion cubic feet (TCF), with future production likely to be snapped up by a Europe eager to limit reliance on Russian gas. In recent weeks energy consultant Wood Mackenzie affixed a significant valuation on the Isarene asset of some $733 million.

A five-well drilling programme between April 2009 and February 2010 built on historical activity in the area and produced four wells that tested at commercial flow rates that ranged from four  to 33 million standard cubic feet of gas per day (mmscfd), with some wells also producing condensate. The larger Ain Tsila discovery was found to extend for at least 22km – and it is thought to be considerably larger – while the nearby Issaouane structure's two wells produced rates of 3.9 and 16.7 mmscfd of gas.

The next 18 months will be spent trying to move the contingent resources towards bookable recoverable reserve status.  April 26 saw a move from the exploration phase of the licence to a delineation/appraisal phase. Petroceltic has two years to appraise the field and has set aside $85 million of the $120 million for its Algerian developments.

There is clearly a huge gas in place resource but the exact recovery factors are yet to be gleaned. Put simply, the northern part of the block looks like it has high recoverability but the southern part has more gas but a lower recoverability factor. At the moment it appears that between 30-70 per cent can be recovered, but it depends on how the rock varies across the block. If results put it at the lower end that would result in a more phased development, though 30-40 per cent recoverable would still mean 600 million barrels, and 50-70 per cent would be better than expected but may only be marginally better for Petroceltic economically as the production sharing agreement attributes marginally larger portions of the economic returns to the state-owned vehicle at higher production rates.

Appraisal drilling is due to begin in October. The Company is committed to  a minimum  three well drilling programme but may drill additional wells. First results will not be available until late December.

The licence allows a two-year period to appraise the asset. By the end of the third quarter of next year gas commercialisation discussions on joint marketing with Sonatrach are due to be complete, with a field development plan delivered the following year and approved by Sonatrach by April 2012. First gas is expected in 2015.

Tunisia dry...

Until recently a principal target for Petroceltic, Tunisia has been a marked disappointment and the company's once high hopes have diminished somewhat after a recent drilling result. Part of Petroceltic’s equity interest in the Ksar Hadada Permit  were farmed out out to Hong Kong-listed PetroAsian Energy Holdings in 2009, leaving Petroceltic with an equity stake of 27 per cent, with the Hong Kong owned company covering the blocks future costs up to £14 million. Petroceltic says it now has 'no financial exposure to this programme'.

A well recently drilled in the potentially large Oryx structure turned out to be dry, meaning that this structure is unlikely to be drilled again in the near future, however the data gained from the drilling can be used to high grade other prospects on the block. . The rig has been moved on to spud the Sidi Toui-4 well 4 by the last week in August, where independent analysis points to 88 million estimated barrels with a 40 per cent chance of success.

...Italy on ice?

Italy on the other hand is more geologically promising. Drilling was pencilled in for September or October this year at the Elsa discovery in the Adriatic sea, where Petroceltic is operator and 70 per cent owner of the BR 268 permit, containing the Elsa-1 discovery well where a 65 metre oil column was logged in 1992. In June of this year the company announced that it had entered into agreements with two industry partners that would secure up to $26 million towards the drilling of the Elsa-1 well. The company had also secured a drilling rig for the September/October spud date.

However, in late June Elsa was put on ice as the Italian environment minister Stefania Prestigiacomo announced that she intended to change the law to prevent offshore drilling within five miles of the Italian coastline, catching Elsa in a considerable new legislative dragnet. This seems a knee-jerk reaction to deep-water events in the Mexican Gulf and appears to be an entirely political move as drilling nearer to the shore is shallower and so inherently safer.

However, given the uncertainty and that the drilling is now unlikely to be brought on track until next year, Petroceltic has applied to suspend the terms of the licence to give it sufficient time to complete its obligations. Costs incurred by the delay should not be too onerous.

The company is hopeful that the Elsa well, as it was an existing permit, will be able to be progressed under previous legislation. Government confirmation on this should emerge soon, and whether other necessary wells to develop the field can be drilled under pre-existing legislation. Meetings with the ministries involved  are scheduled for September.

Other Italian interests include ten other exclusive offshore applications along from Elsa – most outside of the new exclusion zone – as well as five onshore permits on the mainland of which it is operator of four. Of most interest is a 47.5 per cent share with Italian oil giant ENI of a project in the Po Valley, where Petroceltic is currently operator. Petroceltic is currently in discussions with ENI to transfer operatorship to its partner. ENI has such high hopes for this project that it has retained it as one of only four others in the country after a recent asset sale. ENI believes the play is a lookalike of the nearby 80,000-barrel-a-day Villa Fortune field 30km west of Milan. While drilling is not scheduled until 2012, if ENI take over things could accelerate.

Upbeat developments from Italy, allied to continued seepage of data from Algeria over the ensuing few quarters should see under-appreciated Petroceltic shares recover from their 12-month slide from 19p to 10p.