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Tethys takes advantage of Central Asia’s push for energy independence

Published: 18:42 15 Jul 2010 BST

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If asked about oil and gas bearing nations, ones thoughts naturally turn to the Middle East or perhaps America. If pushed, Russia and China may even get a mention. There is a region however, that is likely to be a little lower down on the list, and although not by any means ignored by producers, one that still has a lot of investment potential; the ‘stans’ of Central Asia. Fraught with energy supply troubles and disagreements with Russia in recent years, these countries are actively pursuing energy independence, and offer a prime environment for oil and gas producers to operate in. Tethys Petroleum Ltd (TSX: TPL) is well aware of the strategic advantages these nations hold, and is currently the only independent oil and gas company with operations in three of the Central Asian Republics; Kazakhstan, Tajikistan and Uzbekistan.


Tethys Petroleum is an oil and gas exploration and production company, with market capitalisation of US$271 million, $49 million available in cash and cash equivalents, and $38 million in working capital, which is focused on high quality projects in proven basins in Central Asia.


The company’s key assets comprise of three properties in Kazakhstan (Kyzyloi and Akkulka Gas Discovery, Doris Oil Discovery and the Kul-Bas Block), the first ever Production Sharing Contract (PSC) in Tajikistan (Bokhtar PSC Area) and a Production Enhancement Contract (PEC) in Uzbekistan (North Urtabulak PEC Contract).


In addition, Tethys own over $75 million worth of property, plants and equipment, including five drilling rigs, a Gasodynamic research mobile lab, and all other ancillary equipment required to run their operations. Tethys believe this portfolio offers a combination of discovered reserves, to produce and provide near term cash flow, as well as a large exploration portfolio for upside.


The advantages to working in these three Central Asian countries are abundant. Their developing economies offer a ‘resource friendly’ environment for energy and mineral producers alike, with strong political and financial support to develop in the region, and with close links for foreign companies to state owned oil and gas companies. The countries have solid infrastructure in place, as well as a well trained workforce, particularly in the oil and gas industry, which has been encouraged by the governments through a variety of training obligation programs. A significant effort has also been made in compiling legislation conducive to property rights, fiscal stability and fair taxation in order to attract foreign companies and investors. As previously discussed, this has been part of a broader push in recent years for the countries to gain energy independence and remove their reliance on oil and gas from Russia.


Tethys’ Kyzyloi and Akkulka development is one of the first dry gas developments carried out in Kazakhstan, and has one of the first tie-ins by a foreign company to a major gas trunkline in Central Asia. These fields contain low sulphur (sweet), dry natural gas at shallow depths of up to 610 metres, allowing relatively low development and operating costs. Phase 1 production began in December 2007, and the site has proved reserves of 37.6 billion cubic feet (Bcf), with an additional probable reserve of 29.8Bcf, and with a further 23Bcf in possible reserves (all complied in a report by McDaniel & Associates on behalf of Tethys). The Kyzyloi and Akkulka fields are tied into the major Bukhara Urals gas pipeline by a 56 kilometre pipeline, owned and built by the Tethys, and with a design capacity of up to 2 million cubic metres per day (Mcm/d). The company has also been very successful in exploring for new gas in the Akkulka area, and has tested commercial gas from 11 exploratory wells. The first of these deposits has now been tied into the system and will comprise the Phase 2 production.


The AKD01 exploratory well of the Doris Oil Discovery in Kazakhstan, has tested oil at over 6,800 barrels per day (bpd), and encountered two oil bearing zones; the lower zone being a Jurassic dolomite sequence at approximately 2,355 metres, and the  upper zone, a lower Cretaceous sandstone sequence at approximately 2,174 metres. Oil quality in both zones is very good, coming under the ‘light sweet’ banner .i.e. has gravity higher than 31 degree API (specifically, the  lower zone had 46 degree API, the upper zone 37 degree API), referring to ‘light’, and as with gas, has low sulphur content, deemed as ‘sweet’. This quality of oil has the highest commercial value, thanks in large part to its amiability to high end distilled products, such as gasoline.

The separation between these two zones, and the different gravity levels, suggest they are two separate reservoirs, and should be able to be developed simultaneously with a dual completion. The combined flow rate of these two tests in this well was over 8,200 barrels of fluid per day. The upper zone interval showed extremely good permeability and a large investigated distance, in excess of 10 kilometres, indicating a large connected volume of around 29 million stock tank barrels. Tethys suggests this indicates a very high quality laterally extensive reservoir, although further testing is required to confirm the full extent of the reservoir. That said however, Tethys has now interpreted a similar zone in a previously drilled well over 16 kilometres to the west, and encouraging sign towards confirmation of the extent of the reservoir.


Again the company believe there is very good potential exploration in the area, and have mapped four similar prospects in the Akkulka and Kul Bas block near to Doris. The Kul Bas Block particularly is of interest, as it has similar geological, tectonic and structural features to the Akkulka Block. The block is a large exploration area of approximately 8,890 square kilometres, and the company considers this area to be under explored, having only been subject to regional magnetic, gravity and seismic surveys in the Soviet era. The company has reprocessed much of this data, as well as acquiring and interpreting over 500 kilometres of new seismic information.


As previously highlighted, Tethys’ operations in Tajikistan comprise of the first ever Production Sharing Contract in the country, held by Tethys’s 51% owned subsidiary, Kulob Petroleum. This is a 25 year contract, with fixed economic terms where the government takes a fixed portion of production that covers all taxes, royalties and levies. The company have mapped over 130 structures at various levels within the PSC area, and are at various stages of exploration and development, with an active program ongoing. The PSC area lies in the Afghan-Tajik basin, the eastern part of the Amu Darya basin, home of some of the world's largest gas and condensate fields.

Proved gas reserves in the PSC area are 0.63Bcf, with proved oil reserves of 6.4mbls. Probably gas and oil reserves are estimated to be 1.8Bcf and 56mbls respectively, with a possible 1.6Bcf additional gas reserves, and 25.7mbls of oil. This means the area has independently assessed mean unrisked prospective resources of over 1.1 billion barrels oil equivalent. A number of existing oil fields fall within the area, and Tethys has carried out rehabilitation work on the Beshtentak oil field and the Khoja Sartez gas field, commencing limited oil production from Beshtentak.


Tethys’ current project in Uzbekistan is as Contractor under the Production Enhancement Contract (PEC) for the North Urtabulak oilfield, located in the prolific Amu Darya basin. The North Urtabulak field was the second largest oilfield in Uzbekistan, and Tethys believes there is substantially more recoverable oil remaining. This is an incremental oil production project where modern technologies are being applied to increase production in partnership with NHC Uzbekneftegas. Tethys is preparing a comprehensive reservoir model on the field and intends to use the information from this to drill more wells and apply modern rehabilitation techniques such as radial drilling. Part of the obligations of NHC, under the PEC, is to transport the oil to the Ferghana refinery. When it has been refined, the company take an agreed split of oil products which it then exports and sells on the regional export market.


For the rest of this year, Tethys’ plans mainly revolve around the Doris Oil Discovery. The company's plans for the appraisal of the Doris prospect are fully financed and planned for 2010, and include drilling two appraisal wells and one contingent appraisal well, and extensive 2D and 3D seismic surveys. Tethys intends to file for a production contract with all work expected to be completed by March 2011.

Production costs for Tethys in the first quarter totalled $974,000, and the company made a turnover of over $2 million from refined product sales from Uzbekistan, $494,000 from gas sales from Kazakhstan and turned over $35,000 gas sales in Tajikistan.

Although the company still has someway to go to profitability, the benefits of producing gas and oil in these Central Asian countries, coupled with the mixed portfolio of near tern cash generation and long run exploratory prospects, leaves Tethys with the potential for a lot of value growth as production ramps up over the next few years.

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