Petrel Resources audio interview transcript

So David, why Iraq?

Iraq is the last great oil frontier province in the world. It's got the biggest structures - the most oil prone - it's the sweetest oil and yet it has the fewest wells drilled of any major petroleum province. So the prospects for finding major new reserves are very high. Already it's got the third reserve in the world officially, but ultimately it will end up second behind Saudi Arabia. That's why we're in Iraq!

What are the advantages and disadvantages for an Irish company working in Iraq?

The advantage of being Irish is that we don't bring any baggage. Now, Ireland is generally perceived as a country that is sympathetic to Arab causes and sensitivities. The Irish government was sympathetic to humanitarian complaints about the sanctions, pre 2003 invasion, and Ireland didn't have any role in the "Coalition of the Willing". So we don't bring the baggage that the super-majors from countries of coalition nationalities bring, and yet we have access to the London capital market where we're quoted, and also we've got access to the best technology in the world - particularly US technology. So, Irish nationality is perceived as bringing the best in terms of capital and technology, without the political baggage.

We hear the terms "Technical Co-operation Agreements" (TCAs),"Technical Service Agreements"(TSAs),"Engineering Procurement and Supervision of Construction Contracts" (EPCs), and "Production Sharing Agreements" used. Please could you explain them to us?

Yes, these are all different forms of co-operation between different international companies and the Iraqi Ministry of Oil. The main contract that we have is an EPC (Engineering Procurement and Supervision of Construction Contract) on two oil fields in the south of Iraq, and that involves us doing detailed and general design, procuring equipment and supervising construction of facilities - as contracted to the Ministry. We've also got a couple of Technical Co-operation Agreements which involve transfer of technology and training for the Iraqi Ministry's staff, and also the analysis and reprocessing of a lot of historic data, initially on the Merjan oil field in the centre of the country, and now we've just started the second TCA (or Technical Co-operation Agreement) on the Dufiah oil and gas field in the south of the country. And this a way that you can build relations with the Iraqi Ministry, add some value in terms of understanding of the reservoirs, and also get access to some information on a confidential basis. And this is a model that the Iraqi's have developed quite strongly with international contractors, and the Ministry is now seeking to expand this model into a wider area called "Technical Service Agreements" which will still give no formal rights to the international companies to develop that particular field, but will probably involve the payment of some remuneration for the work that's done, and hopefully, more detailed and deeper work than is possible on the TCAs. But what the industry is, of course, focused on in Iraq is the prospect of some sort of risk-sharing agreements where the companies can actually book reserves that participate in the development of an oil field, taking part in the production, both towards their costs and also taking a share of the surplus towards their own profit. Now, Iraq did have some such agreement or PSAs negotiated in the 1990s and the history in Iraq involved such arrangements. However, there aren't currently any PSAs in operation because the elected sovereign Iraqi government is reviewing its policy on these matters, seeking to pass a hydrocarbon law or, in passing such a law, to negotiate such contracts under the existing law, but that process is not yet complete. So at the moment companies are involved in the technical co-operation agreement of one sort or another and a limited number of companies like ourselves, that prefer to work on the ground, are actually doing so as contractor, but there aren't yet production sharing agreements.

David, please can you walk us through the work programmes you've been awarded in Iraq and Jordan?

Yes, our main project is the Iraqi southern oil fields called the Subba and Luhais, near Basra, and we have an EPC contract there and our work programme is to do detailed and basic engineering, to procure key bits of equipment and deliver to site, to supervise the construction of the facilities the Subba and Luhais oil fields so as to bring the minimum production of those fields up to 200,000 barrels a day, which is a very major field by well standards. In addition, we've got two Technical Co-operation Agreements, one which is complete on the Merjan and oil field in the centre of Iraq and that involved reprocessing the existing seismic and other data, and the inversion of the data using state-of-the-art techniques that the Iraqis have not yet had the opportunity to use extensively, and the proposition or proposal of a further work programme involving further wells and three dimensional seismic on that oil field. We've just started a new Technical Co-operation Agreement on the Dufriah oil field, in the centre of the south of Iraq, and that similarly will involve reanalysis and reprocessing of existing data where it is available and where the analysis makes sense, together with any new techniques that have been developed in the years when Iraq was largely closed from the rest of the world. We will make a recommendation for any further work that should be done on both those projects and that would, basically, be the drilling of more wells and the shooting of three dimensional seismic to better understand the potential and the proportion of those fields to the extent that we can. As soon as the Iraqi government has confirmed our title at Block 6, we will launch a work programme, presumably similar to the one that was negotiated before the war, which will involve reprocessing of the existing seismic and other data, the shooting of new seismic - which is basically a minimum of a thousand kilometres of two dimensional seismic in each phase of exploration - and then basically the drilling of one exploration well each year during the exploration phase. So we would hope to shoot seismic as quickly as possible and to drill a well within about six months after the shooting of the seismic. That's the quickest you can really get this sort of work done in present circumstances. Turning to Jordan briefly, there we already have a production sharing agreement on the East Safawi block, which is as close as you can get to Iraq in the eastern pan handle of Jordan, and there we are currently involved in the reprocessing of seismic, the conducting of block, and regional, geology and other work. As soon as we have completed that phase of the work we will shoot additional seismic, probably focused on a relatively shallow Triassic oil play in the north east of the block, towards the border of Iraq and Syria. The deeper targets that require more analysis are probably gas-prone and, therefore, not quite as attractive as the oil-prone large targets that you find in Iraq. So the main focus of our work in the years to come will be on Iraq.

David, what are the chances of Petrel becoming an oil production company in Iraq, Jordan or elsewhere?

Excellent prospects. The Jordanian PSA, on which we are currently working, throws up many interesting possibilities. It is gas prone at greater depths but there are oil plays at shallower depths. If we have a discovery there - we will immediately go into production. If it's oil, it will probably be sold through the existing pipeline system; if it's gas it will probably be linked into the existing export pipeline from Arish that will ultimately be tied into the Arab gas pipeline from Egypt to Europe. So there's no impediment towards us becoming an oil and gas producer. In Iraq, for an international company to become an oil and gas producer the law either needs to be changed or the government needs to enter into negotiations on risk-sharing arrangements under the existing law. That has not yet happened - but it's expected to happen reasonably shortly. The Iraqis are keen to get the benefits of international company involvement and the discussions are really about the terms under which this will be conducted. But no matter what the terms, and no matter how the story unfolds, we're determined to be a part of the future of the Iraqi oil development industry.

You use the word "shortly", but time works differently in Iraq than it does in the west. Would you care to say a bit about time scales and Iraq?

Well, the Minister was recently reported as saying that he expects the first of the Technical Service Agreements to be negotiated in March. Let's say it takes a little bit longer than that and there's no reason why they wouldn't move to negotiate Production Sharing Agreements this year - and indeed, must do so if they are to achieve their ambitious but attainable targets of 6-10 million barrels a day within the next 15 years or so. So, there is every incentive for them to move forward with the liberalisation of their laws and practices, and enter into negotiations as soon as possible. No one really benefits from any further delay, everyone would benefit from moving forward.

What can investors expect from Petrel over the next six months?

Definitely, there will be lots of excitement and there will be lots of events. We will start work formally this week on our second Technical Co-operation Agreement. We will be close to completing our EPC contract unless it is further extended, and we hope to enter into negotiations that will initially involve completion or confirmation of our pre-war negotiations on Block 6 in the western desert and, hopefully, start negotiations on a development field because that's the prize that we've been focused on for these last ten years; the prize, indeed, that the whole industry is fixated by - the prospect of getting access to a fair proportion of the last great oil field development projects in the world.

What is the financial position of Petrel Resources?

Well, Petrel has cash and it's due a large payment of cash for the work done and equipment delivered over recent months to the oil fields in the south of Iraq. We've got very supportive institutional share holders and we're always looking to extend the reach of institutional share holders, and we hope that we will be expanding, our business very aggressively, in the months and years to come - and this will involve a much greater market capitalisation for the company. As part of that work we expect to be working closely with the Japanese giant ITOCHU, with which we have a joint venture on Iraqi upstream activities. They already are working with us on our Technical Co-operation Agreements and they have the option of participating on the same terms as anyone else, should we wish to bring in a partner for any of the explorational development projects that we are pursuing in Iraq, and ITOCHU is a very large company; it's one of the biggest takers of crude in the Pacific Basin - if not the biggest. It has a 14 billion market cap and it has exactly the balance sheet strength and size, and downstream presence, to fill out our local and exploration expertise. So, we think we're very well positioned, financially, technically, and in every other way, to participate in this very exciting next stage of the development of Iraqi oil.

Where do you hope Petrel will be in five years' time?

I'd like to see Petrel developing into an international oil independent, focused on one or two oil fields in the south of Iraq.

What are your thoughts about the AIM market, David?

Well AIM has worked, in that the authorities have kept a generally light regulatory hand and they've relied on the Nominated Advisor to supervise individual companies, and that works well because Nomad will always know much more than any regulator can or should. At the same time, the exchange has been very good at drawing companies in from as far afield as the United States and China, with many Aussies and Canadians and South Africans. They've been far less successful in seeking out new institutional funds. So you leave yourself with the current situation where there are far too many junior companies, oil and gas and minerals, with far too few serious intuitional funds supporting them. That's a pity because there are a lot of undervalued companies which would make excellent investment. So I'd like to see a rebalancing of the AIM Team's priorities into getting more funds and a higher quality image for the AIM market, rather than seeking, "willy nilly", to add new Canadian or other juniors.