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PetroNeft set for an Indian summer in Siberia

Having unshackled itself of problem debts the company is hoping for something of an Indian summer, with drilling this week kick starting a busy phase of work in Siberia.


The spudding of a new horizontal well in western Siberia kick starts a busy period for AIM-quoted PetroNeft (LON:PTR).

Having unshackled itself of problem debts, the company is hoping for something of an Indian summer.

A rig crew has already been dispatched to the Tungolskoye field and drilling is set to get underway this week.

The well, tagged Tungolskoye No.5, is effectively a proof of concept for a planned roll out of horizontal drilling across the undeveloped oil field.

PetroNeft has high hopes that the horizontal well, the first to be drilled across its licences, will yield better rates than the existing vertical production wells at the Arbuzovskoye field, which at the moment operate at 100 to 150 barrels per day.

Speaking with Proactive Investors Paul Dowling, PetroNeft’s chief financial officer, said: “We’d be very happy with production of 400 to 500 barrels per day from this horizontal well and we think that is easily achievable.”

He adds: “We’re pretty excited about it [the No. 5 well]. Drilling will take about 60 days and assuming success it will basically lead to us bringing the Tungolskoye field into production next year.

“It is pretty important in that it would really drive what our activities are going to be in 2015, and it would drive the production growth that we’re aiming for.”

Whilst not committing to forecasts for the field’s potential production rates, as they will be informed by actual results as they come, Dowling highlights plans for as many as 10 horizontal wells at Tungolskoye, where reservoir sands are believed to be fairly uniform.

It is not beyond the realms of possibility that the field could yield in the order of 4,000 to 5,000 barrels a day in the foreseeable future.

This would be a significant step-change from the current operation, which produces about 2,000 barrels a day from Arbuzovskoye.

At the same time the development of Arbuzovskoye will continue. A separate rig crew is expected to be dispatched shortly.

Here, more vertical drilling is planned with each new well expected to boost output by around 100 to 150 barrels a day. At least three (and as many as five) additional wells will be drilled at Arbuzovskoye as part of the programme which will start at some point in September.

Oil India, the state backed E&P, is paying for the development programmes following the completion of a long awaited farm-out deal last month.

PetroNeft says it has been “significantly strengthened” as a result of the transaction. 

The deal facilitated the repayment of the group’s debt (c.US$25mln was owed) and it has provided the financial impetus for drilling to restart.

Oil India is acquiring 50% of Licence 61, paying PetroNeft US$35mln in cash upfront and committing to spending US$45mln on exploration and development work.

Licence 61 spans almost 5,000 square kilometres of western Siberia and hosts seven identified oil fields, which are currently estimated to have a combined proved and probable (2P) oil reserves of 116mln barrels (post farm out equates to 72.2mln net to PetroNeft).

In 2013 production totalled 870,965 barrels. This generated revenues of US$38.6mln and saw a net loss of US$9mln (of which US$6mln was attributable to currency losses relating to the company’s borrowing).

Drilling will continue in the coming months at the Tungolskoye and Arbuzovskoye, while at Sibkrayevskoye an upcoming seismic programme will inform a drill programme slated for next year. 

The programme paves the way for Tungolskoye to come online in 2015, followed by Sibkrayevskoye in 2016.

Initially developing production is the focus for the partners, though given the scale of the licence area there is believed to be several years of exploration work remaining.

Dowling, meanwhile, says Licence 61 may be just the beginning for PetroNeft’s association with Oil India in Russia.

“It is Oil India’s first foray into Russia,” Dowling said.

“They are very keen to go forward with this partnership in Russia and see us as their front-man, if you like, to go beyond Licence 61 and hopefully develop a business together.”

For investors, of course, the geo-political backdrop remains something of an elephant in the room.

A degree of apprehension is understandable given PetroNeft is awestern company operating in Russia, which has in recent months been the subject of increasingly stringent sanctions from the EU and America.

Nevertheless, Dowling said its operations have not been impacted thus far. 

He points to the fact that the sanctions have targeted specific high profile individuals and high profile state companies, and he also highlights that being partnered with one of India’s national oil companies is a possible advantage.

In terms of operational matters, production is sold domestically and therefore it would not be affected by international sanctions, and if necessary Dowling says equipment and services could be provided by non-western contractors though that has not as yet been an issue.

He adds: “Nothing that has happened so far has had any impact upon us.”

Ultimately, investors will make their own mind up over the investment risks and as such the share price will likely tell its own story.

With the drill programme now imminent, investors undeterred by the potential geopolitical risks will not be short of potential catalysts.

“We’ve got a very active twelve to eighteen months coming up once the drilling is underway, so we’re going to start seeing various well results every six weeks or so.

“And we’re fully funded to do it.”

Quick facts: Petroneft Resources

Price: 1.32 GBX

Market: AIM
Market Cap: £10.94 m

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