Nigeria

In September 2016, San Leon Energy secured a 10.584%* initial indirect economic interest in Oil Mining Lease 18 (“OML 18”), onshore Nigeria. The Lease contains nine discovered fields, Alakiri, Asaritoru, Awoba, Bille, Buguma Creek, Cawthorne Channel, Krakama and Orubiri – Figure 1) as well as a significant number of satellite exploration and appraisal prospects. The only field not entirely on block is Awoba which straddles OML 18 and OML 24 and is governed by a unitisation agreement dividing production equally between the OML owners. Cumulatively, OML 18 has produced over 1 billion bbls of oil (including Alakari condensate) and 1.8 TCF of gas.

Figure 1: Map showing the location of the discovered fields, and existing infrastructure, on OML 18

Geologically, OML 18 lies in the eastern part of the Cenozoic Niger Delta (a typical wave and tidally dominated delta) where the main reservoirs are the sandstones of the heterolithic Agbada Formation (Eocene to Recent) deposited within delta-front, delta-topset, and fluvio-deltaic environments. The seismic data across the concession defines three megastructural trends; Northern (Alakiri, Buguma Creek, Orubiri and Asaritoru), Central (Krakama, Cawthorne Channel and Awoba) and Southern (no discoveries but at least one very good prospect identified).

The concession currently has four flow stations (all, except Alakiri, have associated gas export facilities), a central gas gathering plant and a non-associated gas plant. Oil production, from the Cawthorne, Akaso and Alakiri fields, is transported to Bonny Oil terminal via the Nembe Coastal Trunk line (NCTL) with produced gas currently being exported to the Notore fertilizer plant (northeast of the Orubiri field).

With over 150 wells and a merged 3D seismic survey, covering all of the producing fields on OML18, the dataset available is significant and provides a powerful resource to assist in the re-development of these fields, under Eroton’s operatorship. OML18 production has already seen significant increases, rising from approximately 10,000 bopd of oil in March 2015 to approximately 50,000 bopd of oil and approximately 50 MMscfpd of gas in April 2016.

Based on the June 2016 Competent Persons Report by Petrovision Energy Services Ltd. the Operator has proposed a significant oil and gas development drilling programme that will involve capital expenditure of approximately US$1.5 billion in the 2P case over the next five years that is expected to see oil production increase from approximately 50,000 bopd to 115,000 bopd (including production losses and downtime) and sales gas from 50 MMscfpd to 485 MMscfpd by 2020. This includes 50 notional new wells (which may include side track on some existing wells) and 26 gas wells utilising two rigs over a five year period to effectively produce the undeveloped reservoirs, un-drained regions of the reservoirs and accelerate the recovery of identified reserves.

*The Company undertook a number of steps to effect the purchase of its indirect interest. Midwestern Leon Petroleum Limited (“MLPL”), a company incorporated in Mauritius of which San Leon Nigeria B.V. has a 40 per cent shareholding, was established as a special purpose vehicle to complete the transaction by purchasing all of the shares in Martwestern Energy Limited (“Martwestern”), a company incorporated in Nigeria. Martwestern holds a 50 per cent shareholding in Eroton Exploration and Production Company Limited (“Eroton”), a company incorporated in Nigeria and the operator of the OML 18, and it also holds an initial 98 per cent economic interest in Eroton. Eroton holds a 27% direct participating interest in OML 18.

To partly fund the purchase of 100 per cent of the shares of Martwestern, MLPL borrowed US$174.5 million in incremental amounts by issuing loan notes with a coupon of 17 per cent (“Loan Notes”). Midwestern Oil and Gas Company Limited is the 60 per cent shareholder of MLPL and transferred its shares in Martwestern to MLPL as part of the full transaction.

Following its placing in September 2016, San Leon became beneficiary and holder of all Loan Notes issued by MLPL. Quarterly payments to San Leon under the Loan Notes commenced during 2017. The payments received represent interest and principal on the Loan Notes. San Leon is also a beneficiary of any dividends that will be paid by MLPL as a 40 per cent shareholder in MLPL but the Loan Notes repayments take priority over any dividend payments made to the MLPL shareholders.

The economic effect of this structure is that San Leon has an initial indirect economic interest of 10.584 per cent in OML 18. This is higher than the percentage interest announced by San Leon at the time of the acquisition in 2016. There have been no further purchases or payments by San Leon but this revised percentage is based on a reassessment and recalculation of the various parties’ interests in OML 18 which has resulted in Martwestern’s economic interest in Eroton now standing at 98 per cent.

Further details regarding San Leon’s involvement in OML18, including the structure/production arrangements, can be found in the 2016 AIM submission document in the investors section of this website.