Gold Oil plc (LSE: GOO) could teach many oil explorers a thing or two about conserving cash. It’s a remarkably lean outfit that has managed to steadily build its cash reserves over the last four years while building an attractive portfolio in Central and Southern America.
The company joined AIM in 2004, a few months after its incorporation, after its management team identified a number of opportunities, particularly in the underexplored but productive region of northern Peru.
Two licences were obtained in Peru within a year of the company’s flotation. Colombia was also identified as an area where there was an attractive mix of licence terms and the level of competition was modest. Gold Oil now has three projects on the go there too.
Along the way an interest in Spain has been bought and disposed of and an agreement/cross-shareholding with Minmet has come and gone. This was after the latter decided Gold Oil’s interest in Cuba didn’t fit with its own strategy of exploration in the US. In Cuba, Gold Oil has operator status and last year said it was waiting to commence negotiations on three offshore blocks although nothing much seems to have happened since.
It’s been slow going across most of company’s operations in fact and Gold Oil has often remarked how the environmental permitting process in both Peru and Colombia has become considerably more protracted. There’s not much the company can do about this: . However, in the last few months, the pace of activities has picked up and Gold Oil’s focus on preserving cash means it’s still well placed to take advantage.
Peru
Gold Oil has two huge licence areas in north-west Peru. Block Z34 lies offshore and covers 371,000 hectares, the equivalent of 17 North Sea blocks. It’s close to four major oil fields that lie in the shallow waters to the east. A gas discovery has been made to the south while Shell has farmed in to the north.
Within Block Z34 the water depth varies from 400 ft to 10,000 ft although the much of the block can be reached from the shallower sections. Gold Oil believes the shallower areas of Z34 could contain 250 million barrels. Gold Oil has 50% participation and is the operator. Plectrum, which has since been taken over by Cairn Energy, farmed in for the other 50% and will carry Gold Oil’s initial costs for seismic acquisition. A 30-year exploration and production licence for oil and a 40-year one for gas was awarded for this block in February 2007. Gold has just received the environmental permit it wanted to shoot seismic across the block. At least 2,000 km of 2D seismic will be shot and processed by February 2009.
Progress is also being made onshore in Block XXI. This is another large licence area, covering 303,000 hectares. A 30-year licence for oil and 40 years for gas was granted here in 2006 and the first well, SA 1-X, was sunk the same year. Two hydrocarbon bearing sands were discovered over 315 gross feet in the Verdun and over 250 gross feet in the Palaeozoic. Water inflows prevented any hydrocarbons flowing to the surface and the well was subsequently plugged and abandoned.
Gold Oil went for the cheaper option of an electromagnetic surface survey rather than more seismic to get more information on the Verdun sands before making a second attempt with the drill bit. San Alberto XXI-2 reached its target depth of 5,200 ft on 17 August of this year and testing began in early September. The timescale for testing has been put at between 10 and 120 days.
Colombia
The Nancy-Burdine-Maxine oil fields were farmed into by Gold Oil in 2006 and its development licence here runs until September 2015. It currently has a 40% working interest and 18.8% on a net revenue basis. However it has just increased this to 58% and 27.3% respectively by buying out a partner for $4m.
The Nancy-Burdine-Maxine fields were discovered by Texaco in the mid-1970s and produced oil for about 20 years before succumbing to the low oil price. Nancy 1 was re-entered in 2006 having previously produced as much as 1,400 barrels per day under Texaco. Initial production on re-entry was 700 barrels but has since declined to below 400. Still, this provides useful cash flow. Reserves for this well, as of last July, were 121,000 net to Gold Oil on a 3P basis.
An updated reserves report is currently being prepared and, if positive, should be followed by a small programme of infill seismic and the re-entry and workover of 5 Burdine wells. Environmental permits, surprise surprise, are still outstanding in this regard however.
An 18.4% net revenue interest in a similar, nearby low-risk development block was acquired by Gold Oil in February of this year for $4m. Called Azar, it contains the Palmero #1 well which was drilled but not tested in the mid-1990s. This well has just been re-entered and tested at 45 barrels of 15 degree API oil per day under natural flow. It’s reckoned that this can be increased to 150 to 250 barrels per day by artificial lifting and there’s potential for 300,000 barrels net to Gold Oil. 3D seismic was shot earlier this year which has shown an interesting prospect that will be drilled later this year or early next year depending on rig availability.(Gold earns a 20% interest for a 10% contribution to the well)
The third Colombia licence area is potentially higher impact. Gold Oil has a 40% interest in Rosa Blanca, which is surrounded by numerous other oil fields. A single vertical well, for which Gold Oil is fully carried, is due to drilled by December 25 of this year under terms of the licence and construction of the drilling platform has commenced. P50 resources for Rosa Blanca have been put by Gold at 26 million barrels where up to 25 horizontal wells could potentially produce up to 12,000 barrels a day although Osage, the farminee carries substantially higher potential resources.
All in all the next few months look exciting for Gold Oil shareholders. Results from two important wells are due and the company should get a better idea of the prospectivity of its large offshore Peruvian block. Not only that, it’s even thinking of spending some cash by opening an office in Colombia. Given how tightly shut the company’s purse has been in the past, that’s quite a vote of confidence in its prospects.