News

Final Results

29 June 2018

San Leon Energy plc (“San Leon” or “the Company”), the AIM listed oil and gas exploration and production company focused on Africa and Europe, today announces its audited final results for the year ended 31 December 2017.

To view the full press release, please click here.

Highlights:

  • 2017 was the first full year of the Company’s involvement in OML 18, onshore Nigeria, and the first year of cash flow from the Company’s OML 18 investment. $39.6 million was received by the Company in 2017, with an additional $30 million received in H1 2018 up to 28 June.
  • The Company’s cash position (€17 million at 28 June 2018) has been substantially strengthened compared with this time last year, enabling management to focus further on yielding value from OML 18. While the financial results show 31 December 2017 figures, continued Loan Notes payments in 2018 have enabled significant additional improvement in creditor and cash positions.
  • As of June 2018 the Company anticipates future cash flow from:

1) Principal and interest repayments to the Company from its $174.5 million Midwestern Leon Petroleum Limited (“MLPL”) Loan Notes which were issued as part of the Company’s OML 18 investment (balance as of 28 June 2018 is $165.4 million).
2) Dividend payments as a consequence of the Company holding an initial indirect 9.72% economic interest in OML 18. Delays in dividend payments to date are discussed below.
3) Income from the provision of rig-based drilling and workover services, and production services, to the operator of OML 18 under a Master Services Agreement (“MSA”).
4) The Company’s 4.5% Net Profit Interest in the Barryroe oil field, offshore Ireland, through potential income or a potential sale.

OML 18, Nigeria Operational Highlights

  • While Krakama Field was brought onto production in early 2017 and a number of wells have had work performed on them, several operational issues constrained OML 18 performance during 2017.
  • Underlying production from the assets has been steady at approximately 50,000 bopd. However, as previously disclosed, a number of operational issues, mostly external to the asset, have resulted in average OML 18 oil sales of approximately 26,000 bopd for 2017.
  • 20% production downtime in 2017, primarily caused by third party terminal and gathering system issues, has impacted annual production. This issue is being addressed by the planned implementation of the new export pipeline and FSO project, and is also expected to improve overall well performance by removing the requirement to restart wells following any shut downs.
  • 35% pipeline losses allocated to all operators by the Bonny Terminal operator are much higher than was anticipated in the 2016 Admission Document. Allocated losses are being disputed by Eroton Exploration and Production Company Limited (“Eroton”), the operator of OML 18. In the short term, this issue is being partially addressed by the installation of Lease Automatic Custody Transfer (“LACT”) units to make sure that the OML 18 partners have fiscal metering of the oil prior to export into the gathering system. In the longer term, the export pipeline and FSO system mentioned above will provide additional control.
  • The Nigerian National Petroleum Corporation (“NNPC”) has made substantial repayments to Eroton for 2015 and 2016 joint venture cash call arrears. However, significant outstanding arrears still remain unpaid, which if received would provide capital for further investment in OML 18. NNPC has been paying its 2017 and 2018 cash calls and it is hoped that the improved business climate and outlook will enable settlement of remaining arrears to Eroton.
  • Removing the challenges will enable greater capital allocation to production growth and support future dividends from Eroton to the Company via its initial indirect 9.72% economic interest in OML 18.

Corporate Highlights

  • The Company spent much of 2017 in a formal offer period. San Leon confirmed in January 2018 that such offer talks ceased.
  • In November 2017, San Leon confirmed that it had received a letter from Midwestern Oil and Gas Company Limited (“Midwestern”) with an indicative proposal that included San Leon acquiring Midwestern’s 60% shareholding in MLPL (the “Proposal”). San Leon holds the remaining 40% of MLPL. Since the Proposal could have resulted in a transaction being characterised as a “reverse takeover”, the Company’s shares were temporarily suspended. In late April 2018, the Company announced that its board had elected not to accept Midwestern’s proposal, and the Company’s shares recommenced trading.
  • In December 2017, San Leon paid the final instalment of amounts owing to Avobone N.V. and Avobone Poland B.V. (together “Avobone”) in relation to Avobone’s exit from the Siekierki project in Poland. This was aided by the provision to the Company of a £11,000,000 convertible loan facility by funds managed by Toscafund Asset Management LLP (“Toscafund”), which was subsequently converted into shares of the Company.
  • The receipt of the MLPL Loan Notes payments and the conversion of the loan facility from Toscafund into shares has put the Company in the financial position whereby many creditors at the year-end have now been settled. The Company is therefore able to progress with the planned capital reorganisation, which upon completion is anticipated to allow returns to shareholders.
  • Following on from the resignation of Nick Butler as a non-executive director in September 2017, the Company subsequently appointed Linda Beal as a non-executive director and chair of the Audit Committee in January 2018. In May 2018, the Company appointed Bill Higgs as a non-executive director.
  • The Company continued its policy of reducing costs outside Nigeria and focussing on its Nigerian assets. Agreements were entered into in September 2017 for the sale of the majority of the Company’s Polish assets, subject to certain conditions. A decision was also made to relinquish Sidi Moussa, offshore Morocco, and to fully impair its other Moroccan assets due to a lack of expected activity on those other assets. As a result of these decisions, impairments and provisions of €55.5 million have been recognised.
  • Oisin Fanning (Chief Executive Officer) has drawn only 20% of his salary in cash with the balance paid or accruing in San Leon shares.

Financial

  • Total comprehensive loss for the year of €87.1 million (2016: profit of €10.7 million).
  • Total assets of €255.8 million at 31 December 2017 (2016: €345.7 million).
  • At year end the Group had cash and cash equivalents of €8.1 million (2016: €1.5 million).
  • In 2017 the Company received a total of $39.6 million (€34.3 million) of Loan Note payments under the Loan Notes agreements entered into in September 2016 with MLPL, with a further $30.0 million being received in H1 2018 up to 28 June 2018. This leaves $165.4 million of principal and interest outstanding and payable as of 28 June 2018. Such receipts to date have been paid on behalf of MLPL due to the existence of guarantees to the Company under the Loan Note instruments, as dividends have yet to be received by MLPL. The Company anticipates continued payment receipts of an average of $18.1 million per quarter in H2 2018 and $16.6 million per quarter in 2019 until the Loan Notes are repaid in full following similar payments in 2020. San Leon has various guarantees and a share pledge is in place which provide security for payments due to the Company under the Loan Notes.
  • San Leon income from its initial 9.72% indirect economic interest in OML 18 has been delayed because asset performance has not been as expected. As mentioned above, efforts are underway to address underlying issues.
  • Other potential future income streams comprise the Master Services Agreement (entitling San Leon to provide rigs and related services to the OML 18 operator, Eroton), and the Barryroe Net Profit Interest, offshore Ireland.
  • A facility is available as contingency to enable the Company to fulfil its cash flow requirements. This facility comprises up to £10 million available for a 2 year period from 08 June 2018 which can be drawn down in quarterly amounts of £1.25 million from Shard Capital Limited and Shard Capital Management Limited at the discretion of the lender.

Outlook
The Company is now in a far stronger financial position compared with the same time last year, with the benefit of an expected regular future income stream from its ongoing quarterly Loan Notes repayments. The Company continues to believe in its Nigerian asset and, as issues outlined above are addressed, anticipates future cash flows from both San Leon’s indirect economic interest in OML 18, and from providing services under the MSA in due course.

The Annual Report and Accounts are available on the Company’s website at www.sanleonenergy.com and will be posted to shareholders.

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.

To view the full press release, please click here.

CHAIRMAN'S STATEMENT
OVERVIEW

2017 was the first full year of the Company's involvement in OML 18, onshore Nigeria, and the year under review was the first year of cash flow from the Company's entry into Nigeria.

The Company's cash position has significantly strengthened compared with this time last year, enabling management to focus further on yielding value from OML 18. We have exited or are exiting non-core assets and we anticipate future cash flow from:

  1. Repayment of the Loan Notes.
  2. Dividend payments as a consequence of holding an initial indirect 9.72% economic interest in OML 18.
  3. Income from the provision of rig-based drilling and workover (and associated) services, and production services, under a Master Services Agreement ("MSA") with Eroton Exploration and Production Company Ltd ("Eroton"), the operator of OML 18.
  4. 4.5% Barryroe Net Profit Interest (through potential income or a potential sale).

CORPORATE
San Leon's board took the view in 2015 that the Company needed to change its strategy, moving away from pure exploration and appraisal, and focussing on development, production and cash flow. The business climate in the industry had changed, partly as a result of lower commodity prices. It was against this background that San Leon sourced and completed its OML 18 transaction in September 2016.

1) Loan Notes repayment and interest
The Company entered into a Loan Notes agreement in September 2016 with Midwestern Leon Petroleum Limited ("MLPL"), whereby, once certain conditions have been met and using an agreed distribution mechanism, San Leon would be repaid the principal of $174.5 million (€165.6 million) plus an annual coupon of 17% through to 2020. By 31 December 2017, San Leon had received a total of $39.6 million (€34.3 million) of Loan Notes payments in order to avoid a default under the Loan Notes instruments, the start of such payments having been delayed due to the OML18 operational and external issues described in the Chief Operating Officer's report. During H1 2018, a further payment of $30.0 million was received, bringing total receipts to date to $69.6 million and leaving $165.4 million of principal and interest outstanding and payable as of 28 June 2018. Such receipts to date have been paid on behalf of MLPL due to the existence of guarantees to the Company under the Loan Notes instruments, as dividends have yet to be received by MLPL. The Company has a future receivable profile of an average of $18.1 million for H2 2018 and $16.6 million for 2019, with final quarterly payments during 2020, and the board anticipates that MLPL will continue to make these payments. San Leon has various guarantees and a share pledge in place which provide security for payments due to the Company under the Loan Notes.

2) Indirect equity interest
Eroton is the Operator of OML 18 while San Leon has a defined partner role through its shareholding in MLPL. San Leon has appointed a senior operational consultant into Eroton to assist in the development of the OML 18 asset.

The strategy for the asset is dividend growth from the indirect equity interest, as reserves are converted into production and cash flow. No dividend has been paid by Eroton in 2017 because asset performance has not been as hoped due to funding constraints caused mainly by external factors, although there have also been some delays caused by operational issues. These operational issues are summarised below, and explained in more detail in the Chief Operating Officer's Statement.

Firstly, while underlying production from the assets has been steady at approximately 50,000 bopd, substantial production downtime, caused by problems in the third party terminal and gathering system, resulted in the majority of the approximately 20% downtime in 2017 (reducing field production effectively to 40,000 bopd). This issue is being addressed by the planned implementation of the new export pipeline and Floating Storage and Offloading ("FSO") project, and is also expected to improve overall well performance by removing the requirement to restart wells following any shut downs.

Secondly, substantial pipeline losses have been allocated to all operators by the Bonny Terminal operator. The 35% pipeline losses (reducing field oil sales further to approximately 26,000 bopd) are much larger than the 9% assumed in the Admission Document and are being disputed by Eroton, who have asked the relevant authorities to investigate. In the short term, this issue is being partially addressed by the installation of Lease Automatic Custody Transfer ("LACT") units to make sure that the OML 18 partners have fiscal metering of the oil prior to export into the gathering system. In the longer term, the export pipeline and FSO system mentioned above will provide additional control.

Finally, the Nigerian National Petroleum Corporation ("NNPC") still has significant outstanding payments due to Eroton, settlement of which would provide capital for further investment in the asset. NNPC have been paying their cash calls through 2017 and it is hoped that the improved business climate and outlook will enable settlement of the outstanding payments.

Removing the above challenges will enable greater capital allocation to production growth and support future dividends from Eroton to the Company via its initial indirect 9.72% economic interest in OML 18.

The Reserves Based Lending ("RBL") conditions required for the payment of dividends by Eroton have now been met, with the exception of satisfying the amount payable to the Debt Service Reserve Account ("DSRA") and thereafter submitting audited accounts. As announced on 7 September 2017, depositing three future quarterly RBL repayments into the 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 payments of dividends by Eroton to Martwestern and from Martwestern to MLPL, after settlement of MLPL's Loan Notes obligations, will enable MLPL to pay dividends to its shareholders including 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.

3) Services revenue
San Leon expects to provide the majority of the services for heavy well workovers and new well drilling on OML 18, through a new service entity under its control. The budget for doubling production from OML 18 via such operations is hundreds of millions of dollars, illustrating the potential for services income under the MSA.

4) Barryroe Net Profit Interest
The Company's 4.5% Net Profit Interest in Barryroe oil field, offshore Ireland, provides a zero cost potential future cash stream that has a carrying value of €42.6 million. Providence Resources Plc, the operator of Barryroe, has made recent progress with the announcement of a farm-out to drill three wells and is at the initial stages of development.

OTHER OPERATIONS
The Company continued its policy of reducing costs outside Nigeria and focussing on its Nigerian assets. As announced in September 2017, agreements were entered into for the sale of the majority of the Company's Polish assets, subject to certain conditions. Subject to closing of those transactions, the Company will retain material profit interests for no additional outlay to the Company. A decision was also made to relinquish Sidi Moussa, offshore Morocco, and to fully impair its other Moroccan assets due to a lack of expected activity.

The Company has applied for entry into the appraisal period of its offshore Duressi asset in Albania, for which a farm out is sought.

As a result of these decisions, impairments, write offs and provisions of €55.5 million have been recognised as set out in the financial review contained in the Chief Executive Officer's Statement. The total comprehensive loss for the year of €87.1 million is predominantly such impairment/write offs and provisions of non-Nigerian assets, and foreign exchange loss.

CORPORATE TRANSACTION ACTIVITY
The Company spent much of 2017 in a formal offer period, although in early January 2018 San Leon confirmed that such offer talks had ceased.

In November 2017 San Leon confirmed that it had received a letter from Midwestern Oil and Gas Company Limited ("Midwestern") with an indicative proposal that included San Leon acquiring Midwestern's 60% shareholding in MLPL (the "Proposal"). Through MLPL, Midwestern and San Leon are both indirect shareholders in Eroton, the operator of OML 18. Since the Proposal could have resulted in a transaction being characterised as a "reverse takeover", the Company's shares were temporarily suspended. In late April 2018, the Company announced that its Board had elected not to accept Midwestern's proposal, as it was not in the best interests of San Leon's shareholders since it did not provide a sufficient balance of added value for shareholders and certainty of near-term cash flow, and the Company's shares recommenced trading.

Settlement of outstanding obligations
In December 2017, San Leon paid the final instalment of amounts owing to Avobone N.V. and Avobone Poland B.V. (together "Avobone") in relation to Avobone's exit from the Siekierki project in Poland. This was aided by the provision to the company of a £11,000,000 convertible loan facility by funds managed by ToscaFund Asset Management LLP, which was subsequently converted into shares of the Company.

The receipt of the MLPL Loan Notes payments and the conversion of the loan facility from Toscafund into shares has put the Company in the financial position whereby many creditors at the year end have now been settled.

The Company is therefore able to progress with the planned capital reorganisation. This capital reorganisation, which has already been approved by the shareholders, requires legal work to be completed by the Company, and is subject to the confirmation of the High Court in Ireland, and will allow returns to shareholders.

Appointments of non-executive Directors
Following on from the resignation of Nick Butler as a non-executive Director in September 2017, the Company subsequently appointed Linda Beal as a non-executive Director and chair of the Audit Committee in January 2018. Linda brings extensive experience of working with African oil and gas groups, African-based advisers, and corporate and asset transactions.

In May 2018 the Company appointed Bill Higgs as a non-executive Director. Bill brings considerable operational experience, including in Africa, with companies ranging from a major to smaller independents.

OUTLOOK
The Company is now in a strong financial position, with the benefit of an expected regular future income stream from its ongoing quarterly Loan Notes repayments. The Company continues to believe in its Nigerian interests, as cash flows from San Leon's indirect equity interest in OML 18, and from its service offering under the MSA, are expected in due course as the issues outlined are addressed. I look forward to updating shareholders as OML 18 developments unfold.

Mr Mutiu Sunmonu
Non-Executive Chairman

CHIEF EXECUTIVE OFFICER'S STATEMENT
YEAR OVERVIEW

2017 was the year when the Company faced significant challenges - both financial and operational - and emerged positively in respect of the former, and with plans in place to address the latter.

FINANCIAL REVIEW

Income statement
Revenue for the twelve months to 31 December 2017 was €0.3 million compared with €0.3 million for the twelve months to 31 December 2016. San Leon generated a loss before tax of €71.3 million for the twelve months to 31 December 2017, compared with a profit before tax of €3.5 million in the twelve months to 31 December 2016. The tax charge to 31 December 2017 was €2.2 million (2016: credit of €2.2 million). The loss after tax to 31 December 2017 was €73.5 million (2016: profit of €5.7 million). Loss per share for the period is 16.18 cent per share (2016: profit of 3.42 cent per share).

Administration and Other Costs
Administration costs decreased for the 12 month period to €17.0 million (2016: €26.4 million). There were also some residual costs to finalise outstanding obligations to Avobone of €1.9 million (2016: €3.6 million) and some minor income to reduce operating costs along with a reduction in the decommissioning costs estimate amounting to €0.2 million.

Impairments/write offs and Provisions
During 2017 the Directors decided to make impairments/write offs totalling €49.1 million (2016: €9.3 million). These impairments/write offs partly relate to the intangible exploration and evaluation assets as detailed in Note 12 to the accounts being Albania €6.0 million (2016: €Nil), Morocco €28.9 million (2016:€6.4 million) and Poland €7.9 million (2016:€2.9 million). In addition, as explained in Note 22 to the accounts, due to the protracted nature of approval from the Polish authorities the Directors concluded that it is prudent to fully write off the Polish assets held for sale of €3.1 million.

Similarly, given the length of time to obtain approval for the Ardilaun transaction, as detailed in Note 17, and the 15% of Ardilaun shares still to be issued to San Leon, and the valuation of those shares when compared to other similar entities that are listed on a stock exchange, the Directors felt it prudent to carry a lower value of €2.2 million. Consequently, €3.2 million has been charged to the Income Statement in 2017.

During 2017, the directors, with regard to a fee due on the Ardilaun transaction, due to the protracted nature of government approval, and the potential length of time to receive such payment in the event of approval of up to 36 months, and a debtor which is in dispute, and VAT deemed to be potentially irrecoverable in an overseas jurisdiction, in order to be prudent, fully provided for €5.3 million.

As detailed in Note 20 to the accounts €1.2 million has been provided for in the event that a bank guarantee cannot be recovered.

The directors continue to vigorously pursue the value in many of the items detailed above which have either been impaired, written-off or provided for, and expect that in due course some amounts will be collected.

Finance Income and Expense and Equity Investments
Finance expense for the 12 months to 31 December 2017 was €25.5 million (2016: €13.0 million). This is made up of €4.2 million of interest expense (2016: €4.8 million), finance arrangement fees of €2.2 million (2016: €7.9 million), foreign exchange loss of €18.9 million (2016: gain of €8.0 million) on the Loan Notes, and a fair value charge on the issue of options and warrants €0.2 million (2016: €0.3 million).

Finance income for the 12 months to 31 December 2017 was €35.1 million (2016: €16.8 million). This is made up of €34.6 million of interest income (2016: €8.8 million) on the Loan Notes and other minor interest receivable and finance extension fees €0.5 million (2016: €nil).

The loss on equity investments during 2017 was €7.1 million (2016 profit of €12.2 million) and represents the Group's 40% share in the loss of MLPL.

Balance Sheet
As set out in the Chairman's Statement the receipt of Loan Notes proceeds by San Leon and the settlement of the obligation to Avobone significantly strengthened the cash position of the Group. The cash and cash equivalents including restricted cash at 31 December 2017 amounted to €8.1 million (31 December 2016: €1.5 million). In addition the San Leon balance sheet is now focused on the principal investments being the Loan Notes, the 40% equity investment in MLPL and the net profit interest in Barryroe.

COMPANY POSITION AND MARKET OVERVIEW
Our financial position has evolved since discussions with any of the various potential offerors or Midwestern commenced. With the first three quarterly payments in respect of Loan Notes received by 01 April 2018, we look forward to continued quarterly Loan Notes payments until the Loan Notes are fully repaid. Consequently, San Leon is now on a solid financial footing with a cash balance of €17 million at 28 June 2018 and all material issues with creditors and litigation behind us. I thank all shareholders, and in particular, our largest supporter, ToscaFund Asset Management LLP for their patience and support during the past year, which included a period of shares suspension arising as a consequence of our discussions with Midwestern.

I have been pleased to note the efforts made by the Nigerian administration with regard to supporting Nigerian National Petroleum Corporation ("NNPC") to become up-to-date with its historical and current financial commitments, as we approach the country's general election in February 2019. Of course, the improvement in the oil price during 2017 and into 2018 has been a boost to the country and to all those operating in it.

Finally, it was encouraging to note the passing of the first part of the Petroleum Industry Bill ("PIB"), being the Petroleum Industry Government Bill ("PIGB") through the National Assembly and Senate in 2018. We now look forward to the President signing the PIGB into law, which will help underpin investment into Nigeria. Of course we would also like to see progress of the remaining three parts of the PIB through Government.

STRATEGY
Our strategy is to deliver value to shareholders as we mature our interests in Nigeria. We shall continue to strive to monetise our existing assets outside Nigeria, allowing focus on our OML 18 core area via our indirect economic interest, Loan Notes, and MSA.

Oisín Fanning
Chief Executive Officer

CHIEF OPERATING OFFICER'S STATEMENT
OML 18

OML 18 is a world-class asset with substantial reserves and a CPR target gross production rate of over 100,000 bopd. From a subsurface technical perspective, the steps to achieve that are not particularly onerous - involving relatively simple workovers of existing wells, and the drilling of new wells in a prolific region with multiple stacked reservoir layers. That begs the question: why is OML 18 not yet generating more cash flow from operations?

To date, the operational cash flow on OML 18 has been affected by:

  1. Slower-than-expected workover/drilling progress
  2. Production downtime
  3. Pipeline losses

Each factor is described below, together with the actions being taken to address them.

1. Workover/drilling progress
Non-rig workovers performed during 2017 continued to proceed less quickly than expected due primarily to downhole challenges. Undocumented debris ("fish") in the wells has been the main issue, albeit one which is expected to be overcome - and this is one of the focus areas for San Leon's senior operational manager now seconded into Eroton.

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 as described in the Chairman's Statement, Eroton expects the JV approvals process to continue to improve.

Following the 2018 budgetary planning process, 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. 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 Company's admission document.

2. Production downtime
Tank tops and cargo shipping delays at the Bonny Terminal, as well as intermittent upstream outages on the Nembe Creek Trunk Line ("NCTL"), have resulted in material production downtime at OML 18. This accounted for the vast majority of the approximately 20% of downtime during 2017.

The proposed new export pipeline, described below, is expected to remove most of the production downtime.

3. Pipeline losses
First some definitions. The majority of operational income on OML 18 is derived from oil sales (although there is a ten-fold gas sales potential increase above the current 50 mmscf/d rate which Eroton plans to develop). Gross oil production is the volume of oil produced at the wellhead before it enters the export pipeline. Net oil production is the volume of oil deemed to be received at the Bonny terminal at the downstream end of the NCTL, the current export pipeline used to transport oil to the Bonny Terminal (and is therefore the volume actually sold). The difference between gross and net oil production is known as a "pipeline loss", and accounts for metering inaccuracies and deemed theft of oil - and is applied by the operator of the Bonny terminal as a blanket percentage adjustment to all users of the NCTL.

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 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 by the end of Q3 2018. The use of these units is expected to provide accurate measurements at the transfer point and therefore reduce the pipeline losses allocated to Eroton.

The idea for a new export pipeline for OML 18 mentioned in last year's annual report, has now become a planned development. This pipeline would be dedicated to OML 18 and run to an offshore Floating Storage and Offloading ("FSO") system. Eroton would then not have to contend with metering issues or theft attributable to third parties, nor NCTL downtime (which is often caused by issues further upstream on that pipeline). It is therefore 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.

It is clear to the Company, therefore, that the issues encountered are being dealt with. Additionally, there has been progress across the asset as detailed below.

  • Production at OML18 has continued uninterrupted by any on-block 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 is expected online during H2 2018.
  • Field development plans ("FDPs") for Akaso, Cawthorne Channel and Alakiri have been submitted for approval to the NNPC.
  • 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.
  • Gas lift installation in the near-term across a number of wells is expected to provide a production boost, as well as improving the ability of those wells to restart production after any field downtime.

I look forward to updating shareholders on the continued work to boost both gross and net oil production, and unlocking OML 18's value.

IRELAND
San Leon's 4.5% Net Profit Interest (NPI) on the Barryroe oil field provides access to potential future revenue streams with no additional capital required. A CPR was produced by the operator, Providence Resources Plc ("Providence") in 2013, and in March 2018 Providence announced a farm-out agreement with a privately-owned Chinese company to drill three wells and move the field towards development. Should this farm-out agreement complete, San Leon looks forward to this development work on an asset which has a 2013 CPR 2C resource of more than 260 mmbbl.

MOROCCO
San Leon announced during 2017 its exit from Sidi Moussa (offshore). Also during 2017, L'Office Nationale des Hydrocarbures et des Mines ("ONHYM") contacted San Leon to take control of the bank guarantee on Zag and to request a further payment for work not performed. The Company is in ongoing discussions with ONHYM regarding the area, which it believes should be subject to Force Majeure due to the security situation. No activity is currently planned on any other Moroccan assets, and consequently carrying values have been written to zero in the accounts.

The assets still held by San Leon comprise:

  • onshore gas appraisal (Tarfaya conventional area, with a well drilled in 2015) - onshore oil shale (Tarfaya oil shale)
  • onshore exploration (Zag).

POLAND
The Company has done what it set out to do last year, monetising Polish assets on the back of increased transaction interest. Subject to the closing of two separate transactions, San Leon will retain net profit interests in a number of assets in different geological settings, which will be operated by other companies. Other Polish assets have been relinquished, or are in such process.

ALBANIA
The Durresi block is an extensive offshore area (4,200 km2) gas Albania containing the A4-1X discovery well drilled by Agip and Chevron in 1993.

San Leon acquired 840 km2 of modern 3D seismic data in 2011, and continues to work on the technical side of the block while looking for a partner to take the asset through the appraisal phase by drilling a new well. Application has been made to enter the appraisal period on the asset.

Joel Price
Chief Operating Officer

To view the full press release, please click here.

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