Hello, this is Harry Norman for Proactive Investors, and welcome to another Proactive audio interview.

This interview was recorded 21st July 2009 and I'm talking with David Horgan, managing director of PanAndean Resources.

So David, thank you very much for joining us for this interview.

Thank you.

Please give investors a brief introduction to Pan Andean Resources.

PanAndean is an exploration company which is targeting South America, but it has producing assets in North and South America.  So it produces oil and gas, it's profitable, it generates cash, and it's got hard assets in good countries, as well as some exploration acreage.

 It's now the fifth largest acreage holder in one of the world's safest and most attractive provinces.  And it's got joint ventures with six of the world major oil players.

And we've got over 400 million barrels equivalent of un-risked exploration potential.  And yet we sell for a fraction of our worth, only £12 million market cap, although our carried interest in one country alone is $42 million.

So we think it's a compelling story.

PanAndean has producing assets in the United States.  What are your expectations of these assets?  And do you have any explorational development potential in the USA?

Yes, the US oil price is good now.  The gas price is depressed because of fall in demand.  Normally there's equivalence between the two, now that is totally out of sync.

Our strategy in the United States has been to develop US assets and generate cash which we can then deploy in high impact plays elsewhere.

But every now and again there is an exploration well in the United States, and we have partners in our key High Island 52 Block, which are interested in drilling deeper wells.  But that won't happen I think until the gas price recovers, so that won't happen until there are signs of economic recovery.

So, in the US we expect to generate cash and deploy that cash in South America.

PanAndean's assets in the United States are cash generative.  What does this mean in practical terms for investors David?

Well, what it means is that the company have cash and generates cash, so we don't have to go to the markets to fund periodically.  Also, the US is a country which has good legal title.

So if you're worried about what might happen in South America, you know that the current market cap is pretty well covered by assets in a safe place.

What is the situation with PanAndean's Antorcha heavy oil prospect in Columbia?  And what are your expectations in Columbia?

A project in a safe part of Columbia.  It's near existing infrastructure because there's conventional oil production around us, mostly by the state company.  So there's refineries, there's pipelines, there's existing pre-capacity.

The fiscal terms are very good.  It's onshore, the wells are shallow, there is seepage at surface.  So really this is a nice little play.  We reckon there's about a 40% to 50% chance of exploration success on the initial wells.  And the cost of the wells is relatively modest at about $1.5 million maximum tested.

So, what we plan to do is bring in partners to fund wells and drill our first well in November of this year.  And thereafter our work programme is one well per year.

But we would anticipate being part of the expansion of Columbian heavy oil, which is now rising rapidly from 170,000 barrels a day to ultimately half a million barrels a day.

David, has Bolivia become a no go area?  And are you thinking of writing off the company's Monteagudo and El Dorado prospects there?

Bolivia has one of the best gas and composite prospectivities in the world outside the Middle East.  So we certainly hope it doesn't become a no go area.  But the rise of resource nationalism and the policies of the elected indigenous president has complicated the picture.

So our strategy in Bolivia is keep our head down, not alienate the authorities, not put new cash in.  But not compromise the good position that we've built up in the country, because the economics of the industry have dramatically improved in Bolivia.

When we were looking at developing our El Dorado project in 2001, we were looking at a price of about $1.15.  Now the Bolivian's are getting the net back of $4.50.  So you could say that the rise of President Morales has been very good for business.

And then people were doubtful about whether they'd ever fill the export pipeline to Brazil, now the Brazilian's want to double the capacity of that large pipeline to Brazil.  And the Argentine's also want to buy major quantities, 12 billion cubic feet a day of gas.

So the value of Bolivian gas has dramatically increased.  The taxes have increased also.  We will wait until there's more fiscal certainty, but I've no doubt that Bolivia ultimately will recognise the hard realities of law and economics and we will have a good business there.

What progress has been made at Blocks 131 and 114 in the Ucayali area of Peru?  And what kind of oil are you looking for in Peru?

We're looking for light oil in Peru.  In the Ucayali basin it's oil rather than gas, but it's very light, it's in the mid 40s, some of the lightest in the world, just like in Bolivia.

In 131 we've just entered the next exploration phase which involves 300 kilometres of seismic or equivalent, that's what our partner CEPSA, who are funding us 100%.

In Block 114 we're more advanced, because they signed the Block earlier.  And again CEPSA is our partner and operator who is carrying us.

And as we speak they are shooting 200 kilometres of seismic in the northern section of the jungle, which is a target that they are very enthusiastic about.  And we will have that data processed in the coming months.

We hope to have a well target identified early next year.  And if permits are timely, we will anticipate spudding the well within 2010, or if not, early in 2011.

Block 161 is also in the Ucayali area of Peru.  What are your plans with Block 161 David?

We have just signed Block 161.  We are doing the preliminary stage of identifying the various collegians there and making contact with them, which is very important to avoid problems down the road.

The clock and work programme starts to tick in September.  We anticipate down the road bringing in larger partners to do the heavy lifting of major expense, such as drilling wells.  But we think it has a similar geology to what we've already shown to be attractive in neighbouring Blocks 114 and 131.

What can you tell us about the aero gravimetric and magneto gravimetric survey of Block 141 in the Titicaca basin in Peru?

Our partners Reliance Industries with India have just acquired 7,348 kilometres of aerogravity and magnetic data.  And the plan here is to process that data in the coming months and identify anomalies which would lead to shooting of seismic.  And if the seismic shows drillable targets, drill wells.

The targets are large gas and condensate type structures similar to the major Camesea discovery further to the north.  And our model here is a large catching on to meet the mountains which generated the gas that charge Camesea.  Also charged towards the south and would have been captured in traps in our Block.

What is Pan Andean's financial situation David?

We've got US$2.2 million in cash at the moment, and we're generating cash.  And that's something that we have to be careful not to overly publicise, because there are many acquisitous companies are naming us, where, which have inflated paper and would love to get their hands on our cash.

But we're well armed for the projects and opportunities that we see.  And so far we have been able to cut better deals within the industry than the implied dilution of our shares that they go onto the market.

So, for example, if you look at the carries that we've negotiated in Peru, we've got a $42 million worth of carry, when our total market cap is $19 million.

So, either the industry is overly generous or our market cap is too low.  And we think it's too low.
So our model going forward is to spend that money wisely, maybe acquiring another Block in Peru and working up 161 in Peru jungle, adding value.  And maybe bring in a partner at the appropriate time to do the heavy lifting and spend the big money.

What can investors expect from PanAndean over the next 12 to 18 months David?

Well we're due to spud our first well on the Antorcha prospect in Columbia in November.  We will have the seismic completed on Block 114 in Peru quite soon.  As soon as we have processed that data and identified a drill target, we expect to get the permitting process done.  And all going well, that would mean spotting a well in Peru in 2010, or if not in early 2011.

131 is lagging behind somewhat, just because it's a more recently signed Block.  And likewise 161 further to the north.  141, much will depend on the results of the data.  We hope we acquire seismic and ultimately drill, but one way or the other, within the next year you should see drilling in South America.

What are your thoughts about the fiscal regimes and perceived risks of operating in Columbia and Peru?  And does it make any difference to the risks involved that PanAndean is an Irish company?

The fiscal terms in both of those countries are excellent, in fact they're probably too good given the current oil price.  The Peruvians are very aware of the fact that it needs lots of drilling.  They were one of the first hydrocarbon provinces, and yet they were neglected for various reasons in recent decades.

Now it's a very hot province and there is great support for the private sector involvement.  So we don't anticipate any risk to those fiscal terms in the near term at least.

In Columbia, likewise, the fiscal terms are excellent.  The Blocks are not as big in Columbia as they are in Peru, and Peru have more colossal Block size.  Columbia has more normal sized Blocks.

But again, the Columbian's are quite sophisticated and they've identified that the economics of heavy oil are different to light oil.  So they have a special, more favourable regime for light oil that is basically the equivalent of a 40% discount to taxes.  Which again is more or less the discount to heavy oil converted conventional oil.

So we're very happy with the fiscal terms in those two countries, and we don't anticipate, under the current government, any risk to those fiscal terms.

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