Indus Energy (ASX:IND) is selling its 80% shareholding in Prabu Energy Pty Ltd, the holder of the Ranau production sharing contract in South Sumatra, to focus on its Cold Lake oil sands project in Alberta.
The sale will be made to PT Tosec World, a wholly-owned subsidiary of Indonesian oil and gas company PT Tech Oil International.
This follows a strategic review of the PSC and the company’s operations in Indonesia and was influenced by the ongoing challenging operating environment in the country’s oil and gas sector.
In consideration for this share transfer, Indus or its nominee shall retain an overriding royalty interest equal to 10% of any and all oil and gas produced from the assets held by PrabuEnergy as at the date of the agreement.
Indus and Tosec will execute a royalty agreement to this end as soon as practicable.
Drilling into Alberta oil sands
In November 2014, the company executed a binding Term Sheet with First Nations Exploration Company, Keyano Pimee Exploration Company Limited (KPECL), to farm in to 82,290 acres of Cold Lake oil sands in Alberta.
Since then, Indus has held several meetings with KPECL and associated Cree Nations Chiefs in Alberta and is advancing negotiations towards finalising and executing the Joint Operating Agreement.
This provides Indus with an opportunity to partner with a Cree First Nations oil exploration and gas production company that owns a large scale, multi target, drill-ready land position in a significant oil and gas producing location in Canada’s first ranking oil production province.
Once the JOA is executed, Indus will commence Phase 1 of the work program which will consist of low cost re-entry of four historic wells in areas where oil occurrences have been encountered during gas production activities on KPECL lands.
Combined all-in-cost of these is estimated at $700,000.
On successful completion of the Phase 1 program, Indus will earn a 50% interest in the four wells and four corresponding 640 acre sections of project land and the right to proceed with Phase 2 of the farm-in.
Phase 2 involves Indus funding thirteen low cost vertical conventional wells (estimated to be $600,000 each) or additional re-entries (at a much lower cost) to test oil occurrences across thirteen separate 640 acre Project sections.
This will earn the company a 50% interest in the wells and the thirteen corresponding sections of land as well as the right to proceed to Phase 3 of the Project.
Indus is also entitled to recover all of its Phase 1 and 2 costs from 80% of the associated production revenue.
Analysis
The divestment of Indus Energy’s Ranau PSC in South Sumatra comes as the company turns its focus on the Cold Lake oil sands project in Alberta.
This will preserve the company’s cash position while retaining exposure to any future production through the 10% overriding royalty interest.
Cold Lake offers a significant opportunity for Indus given that the region produces an estimated 500,000 barrels of oil per day and is one of three major oil sands deposits in Alberta.
Alberta’s oil sands are the third-largest proven crude oil reserve in the world, next to Saudi Arabia and Venezuela.
The current low oil price environment also offers short to medium term value accretion opportunities through the acquisition of prospective properties with low holding costs within the area of interest surrounding the current projects.
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