Operating and Corporate Update

21 February 2018

San Leon Energy plc, the AIM listed company focused on oil and gas development and appraisal in Africa and Europe, is pleased to provide an update on operations and finances related to its initial indirect 9.72 per cent. interest in the OML 18 project, onshore Nigeria. 

OML 18 Operations Overview

  • Current oil production, including 50% of the Awoba field, is approximately 53,000 barrels of oil per day ("bopd") before downtime and pipeline losses, down approximately 3,000 bopd since the operational update of 19 April 2017.
  • In 2017, OML 18, including 50% of the Awoba field, produced 40,360 bopd before pipeline losses, or 50,450 bopd before pipeline losses on a producing day basis.
  • In 2017, average oil sales, including 50% of the Awoba field, (after downtime and disputed pipeline losses) were 26,440 bopd (compared with 30,969 bopd in 2016).
  • The discrepancy between the sales and production numbers, and delays in production increases, continue largely to be attributable to three main factors: (i) workover/drilling progress (ii) production downtime and (iii) estimated pipeline losses. Each of these is being addressed by Eroton, the operator of OML 18, and is explained further below.
  • Current gas sales are approximately 50 million standard cubic feet per day ("mmscf/d"). In 2017 the average gas sales were 45.2mmscf/d, after downtime.
  • Production at OML 18 has continued uninterrupted by any security issues in 2017. During January 2018 illegal bunkering activity caused a fire on a non-operational well on the Buguma field. This did not affect production, and there were no casualties. The fire was swiftly brought under control by Eroton without a reportable spill.
  • The Krakama field was brought into production in January 2017 on schedule. Further well activity on the field has yet to commence. Current oil production from Krakama is approximately 4,500 bopd.
  • The Buguma Creek field, previously expected to go online in Q4 2017 with production transported in bulk to the Krakama facility, is now expected online during Q3 2018.
  • Field development plans ("FDPs") for Akaso, Cawthorne Channel and Alakiri have been submitted to the Nigerian National Petroleum Company ("NNPC"), with approval expected during Q1 2018.
  • Eroton is working on an updated reserves report, with an expectation of adding material oil and condensate volumes. A summary of the finalised reserves report will be communicated to shareholders once it is available and after review by the Company.   

OML 18 2017 Production Summary and Commentary   

Delays in production increases have been as a result of:

(i) Workover/drilling progress

  • Non-rig workovers performed during 2017 continued to proceed less quickly than expected due primarily to downhole challenges.
  • There were some challenges in execution due to the process of approvals with JV partners. Given the positive improvement in the prompt settlement of ongoing partner cash calls, Eroton expects the JV approvals process to continue to improve.
  • San Leon's senior operations manager has now been working as an appointee in Eroton for approximately two months, bringing with him a wealth of downhole operational experience. Together with Eroton's team, this experience is being applied to the ongoing non-rig workovers and will also be used for rig-based workovers and new wells.
  • Following the 2018 budgetary planning process, and assuming the approval of various FDPs, the Company now expects that rig-based workovers, previously anticipated to commence in Q4 2017, will commence in Q3 2018, and new wells will be drilled commencing Q4 2018. As mentioned in previous operational updates, this type of drilling activity has yielded material production gains in similar fields elsewhere in Nigeria and the Company remains confident the work will add materially to Eroton's production base. Such activity was the basis for the production gains reflected in the Admission Document.

(ii) Production downtime

  • Tank tops and cargo shipping delays at the Bonny Terminal, as well as intermittent upstream outages on the Nembe Creek Trunk Line pipeline ("NCTL"), the export pipeline used to transport oil to the Bonny Terminal, has resulted in material production downtime at OML 18.
  • Eroton is evaluating a number of independent alternative oil evacuation routes that will improve consistency of supply to the market. The preferred evacuation route selected by Eroton is a new dedicated pipeline and offshore Floating Storage and Offloading ("FSO") system.

(iii) Pipeline losses

  • Following the installation of new Lease Automatic Custody Transfer ("LACT") units on the NCTL line in 2016, the Bonny Terminal operator allocated an average of approximately 35% pipeline losses to all operators using NCTL for 2017 (compared with 9% assumed and documented in the Company's admission document dated 26 August 2016 ("Admission Document")). Eroton disputes the allocation and has requested that the relevant regulatory authorities investigate the allocation of such excessive losses with a view to reallocating losses in Eroton's favour (thereby boosting the sales numbers). Those discussions are ongoing.
  • LACT units for OML 18 are now in Nigeria and, following commissioning and regulatory sign off, are anticipated by Eroton to be operational in H2 2018. The use of these units is expected to provide accurate measurements at the transfer point and therefore reduced the pipeline losses allocated to Eroton.
  • The proposed alternative crude evacuation (pipeline) and storage facilities are anticipated to realise significant advantages with respect to pipeline loss allocation and production up-time, coinciding with the expected timing of the production increases from rig-based activity. The Company expects tendering and approval by JV partners to occur in the next 6 months.

Nigeria Financial

In accordance with the terms of the $174.5 million loan note instruments held by San Leon pursuant to the OML 18 assets (as described more fully in the Interim Statement dated 29 September 2017), the average quarterly scheduled amount of principal and interest to date is approximately $19 million. To date, $39.6 million has been received by San Leon in order to avoid a default under the loan note instruments. SLE is also due to receive approximately $19 million by 1 April 2018 from or on behalf of Midwestern Leon Petroleum Limited ("MLPL"), and further similar quarterly amounts thereafter, until all Notes have been repaid.

The Reserves Based Lending ("RBL") conditions required for the payment of dividends by Eroton have been met, with the exception of satisfying the amount payable to Debt Service Reserve Account ("DSRA") and the filing of Eroton's 2017 financial accounts. Eroton awaits repayment of the majority of NNPC's historic operational expenditure and capital expenditure cash calls from 2015 and 2016, although encouragingly such repayments began in Q4 2017 and have continued. NNPC has also paid the large majority of it 2017 cash calls promptly and continues to do so in 2018.

The delayed receipt of NNPC 2015/2016 arrears has had two main impacts to date.

  • First, as announced on 7 September 2017, this has been a contributory factor to some work programme delays (such as well workovers and the drilling of new wells). These delays to heavy workovers and new well drilling, which target significant hikes in production rates, in turn impact the cash generated by Eroton.
  •  Secondly, as also announced on 7 September 2017, depositing three future quarterly reserves based lending ("RBL") repayments into the debt service reserve account ("DSRA") attached to Eroton's existing RBL facility, is one of the conditions that needs to be met before the RBL lenders will allow distribution of dividends from Eroton to its shareholders. The cumulative amount required to fill the DSRA varies according to the RBL amortisation schedule and is approximately $90m for much of 2018. The DSRA balance however fluctuates according to operational needs and due to some of the funding challenges experienced.

Any future payment of dividends by Eroton, and receipt by MLPL, will be used to pay the principal and interest due on the loan notes, and to pay dividends to San Leon. Given the delays in operational activity, downtime and pipeline losses, dividend payments by Eroton are not expected until the impact of the alternative export pipeline and/or the rig-based well activity have materially increased sales volumes of oil.

During January 2018, Eroton put in place a new hedge covering its RBL borrowing base. The hedge is a put option at a price of $50/bbl for 10,170 bopd until 30 June 2019.

Nigeria Administrative

As provided for in the shareholders agreement between San Leon Energy Nigeria Limited, Midwestern Oil and Gas Company Limited and MLPL dated 22 March 2016, San Leon has the right to nominate people for appointment to the following positions within Eroton.

  • Two Eroton Board members: Mr. Oisin Fanning and Mr. Mutiu Sunmonu sit on the Eroton Board.
  • The Chair of the Finance Committee: an appointee has been agreed with Eroton, and will formally assume the role at the next Eroton Board meeting.
  • A Senior Technical Manager who has extensive experience in Nigeria and similar environments: Mr. Les Johnson has now been in place for two months. 

Oisin Fanning, San Leon's CEO, commented:

"San Leon has been part of OML 18 for nearly 18 months. The pressure on production levels caused by a scarcity of capital available to OML 18 for investment in well activity, together with securing permissions, has been exacerbated by downtime and pipeline losses caused by external factors. This has resulted in materially lower production and sales volumes compared with those assumed and documented in the Admission Document. We look forward to receiving the new competent person's report which will form a new basis for evaluating the development plans, forward production profile and economics of the OML 18 project.

Most importantly, these issues are not expected to affect, materially, the long-term field performance, whilst in the shorter term San Leon has a number of protections in place for receiving loan note repayments which are expected to be approximately $19 million per quarter.

The Company anticipates a turnaround in OML 18's net production (after downtime and pipeline losses) once several events have occurred.

First, capital needs to be available at Eroton level for well activity. This may include the receipt of NNPC arrears payments, and external finance (for instance).

Secondly, rig-based activity needs to begin, in combination with the non-rig workovers already occurring. This is expected materially to increase gross production.

Thirdly, the alternative crude evacuation and storage facilities must be installed, which the Company expects to bring the combined downtime plus pipeline losses to below 10%. This would provide a large boost to net oil production (sales oil)."

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

San Leon Energy plc
+ 353 1291 6292
Oisin Fanning, Chief Executive

SP Angel Corporate Finance LLP (Nominated Adviser)
+44 20 3470 0470
Richard Morrison
Ewan Leggat
Soltan Tagiev

Whitman Howard Limited (Financial adviser and Joint broker)
+44 20 7659 1234
Nick Lovering
Francis North

Brandon Hill Capital Limited (Joint broker to the Company)
+44 20 3463 5000
Oliver Stansfield
Jonathan Evans

Vigo Communications (Financial Public Relations)
+44 20 7830 9700
Chris McMahon
Kate Rogucheva

Plunkett Public Relations
+353 1 280 7873
Sharon Plunkett


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