Tanzania Gas Sales Agreement Will Re-Rate AMINEX & SOLO

It’s hotting up in Tanzania for AMINEX and Solo Oil. The recent placing by AMINEX where they have raised £1.67m, provides some indication that investors believe the company will be successful in securing favorable terms for the Kiliwani North Gas Sales Agreement. Both AMINEX and SOLO will become cash generating companies this year when the gas sales agreement for Kiliwani can be secured. The pre-requisite infrastructure is in place.

It is in everyone’s interests for this agreement to be signed quickly. Tanzania needs the gas, its economy is booming, GDP growth is expected to be circa 7% in 2015. Only last week the World Bank Group, approved a $100 finance package to help Tanzania increase transparency and accountability in governance and improve public financial management, this is important intervention.

AMINEX will be looking to finalise the Kiliwani gas sales agreement that follows international oil and gas industry standards, sounds obvious, but these agreements can be complex and require the support and guarantees of external international financing agencies.

The last gas sales agreement I can recall being struck in Tanzania that is representative of the type of contract AMINEX will need was the Mnazi Bay GSA secured in September 2014 by Wentworth (OSE: WRL) & (AIM: WRL).

The Mnazi Bay GSA covers a 17 year term with net back price of gas agreed at US$3.00/MMBtu for the discovered gas and is non Brent linked. The Tanzania

government is responsible for transportation and processing costs. Importantly it is an 85% take or pay deal, however, as of yet I understand the financial guarantees have not yet been signed.

This is always a sticking point with these type of gas sales agreements for some Africa countries where the end customer is essentially the domestic market.

Yes the main utility customer of the gas such as Pan African/TPDC which is piloting bottling distributing natural gas in Tanzania will be credit worthy, however, they will need to secure reserve bank support, ie from the Bank of Tanzania, who in turn will need to secure international financial support, so the guarantees within these gas sales agreements are syndicated. But remember, the World Bank and a host of other international financial agencies are very active in Tanzania, which is why last weeks news of World Bank support for Tanzania is timely.

We have seen some evidence of the complexities involving gas sales agreements, particularly in Namibia with the Kudu gas project. The question was always Nampower, the parastatal power utility, and its ability to guarantee to take the Kudu gas production at a price that could support the economics to finance the gas to power project. Encouragingly the Kudu Gas GSA was signed in 2014 and has paved the way for Kudu to begin producing in 2017.

Credit risk is the reason why this is interesting. In Namibia for example Nampower sell their electricity to regional electricity distribution companies, (REDS) who in turn are responsible for collecting the revenue from their local domestic and business customers. Credit control and cash collection can be challenging, and often Nampower can suffer as a result. In Tanzania, TANESCO is the electricity utility and operates a vertically integrated a system that removes some of the risks Namibia has where Nampower is exposed to the ability of its REDS to collect cash.

The REDS in Namibia tend to be lenient and are not fond of cutting off electricity and Nampower is exposed to this more tactile system of cash collection. Customers of TANESCO, I think will not be treated so kindly, and I think the international funding partners understand that and so I think at least the credit risk in Tanzania is lower than other African countries. Given Shell’s recent purchase of British Gas Group who now join a raft of international oil and gas companies operating in Tanzania, the pressure to finalise a structure for gas sales agreements is clear.

On the demand side, Tanzania currently has five gas fired power stations, Ubungo I, Ubungo II, Tegeta, Mtwara and Songas. Coming on stream are Kinyerezi II Thermal Power Station (240MW) 2015, Mnazi Bay Gas Plant (300MW) 2016 and Kinyerezi III Gas Plant (300MW) 2016.  The demand for electricity in Tanzania is clear and so is the domestic demand for gas. These developments are helping lower credit risk.

The recent decision by the World Bank to support Tanzania in terms of the strengthening its financial management is saying to me that the syndication of international financial risk to support GSA’s is underway.

I would expect AMINEX to secure its GSA for Kiliwani quite soon and this would mean a significant re-rating of its stock and that of Solo Oil, who can excerise an additional 6.5% stake in Kiliwani on the GSA being signed.

Currently we are in perfect investment horizon for both of these stocks.

Schlumberger Report on Horse Hill Weald Basin

The news out this morning by UKOG is breathtaking. There is no other word to describe Horse Hill. This is Schlumberger we are talking about.

Schlumberger estimates an overall Oil in Place ("OIP") for the Jurassic section of the Horse Hill to be 271.4 million barrels of oil ("MMBO") per square mile. (NUTECH said there was 158 million) The total OIP comprises 16.2 MMBO per square mile for the conventional Upper Portland Sand reservoir discovery and 255.2 MMBO per square mile solely for the tight limestone and mudstone plays of the Kimmeridge, Oxford Clay and Lias. The OIP hydrocarbon volumes estimated should not be construed as recoverable resources or reserves.

Let’s remind ourselves of the facts.

It was a very simple deal, a consortia of oil company investors “Horse Hill Developments Ltd” including Angus Energy Ltd, Alba Minerals, Solo Oil Plc Doriemus Plc, Stellar Resources Plc, Magellan Petroleum Corporation, UK Oil & Gas Investments Plc came together to finance the drilling of a well in the Weald Basin…………WHY?

Because there was a pretty good chance oil was contained in the Weald Basin, simple as that.

Exploration began as far back as 1930 when a number of wells were drilled and where in 1964 oil was discovered when the Collendean Farm1 well was drilled.

The respected academics, Butler and Pullan published a paper in 1990 that provided pretty robust academic research on the Weald Basin that detailed the reservoir rock structures, detailed the seals, traps, generation, timing and migration of the Weald Basin oil play………..yes there was a fair chance oil was in the Weald Basin.

Remember, when drilling was done in the 1960’s there was no Windows software, there was no high powered geological, geophysical software available…….what did anyone know about tight oil or low permeability tight sandstone rock bearing oil back then………….not a lot?

But there was enough data to encourage Magellan to commission their own geological study on the Weald Basin with their consultants ENVOI. Let’s face it, conventional tight oil extraction was now commonplace in the US, Magellan, god bless them could see the potential in the Weald and so could others.

So the Horse Hill consortia came together, and it needed a leader, someone that could raise money, but also someone who could but a decent petroleum geological and geophysical team together to drill the Weald Basin.

But for the first time, drill it deep enough to access all of the main rock structures. The well would need to be drilled to over 8,500 feet, but just as importantly, the open hole electric logging would need to be undertaken properly.

David Lenigas, had rescued a failing AIM shell company and formed UKOG, with a simple idea to drill for conventional oil, UK onshore. No stranger to the oil business, Dave was founder of AIM listed Lenigas and Oil, (LGO Energy) and someone who had hands on and current experience in drilling for oil onshore. He stepped up, helped mobilise the consortia and raise the money to drill Horse Hill, it was as simple as that.

On the 3^rd September 2014, Horse Hill 1 was spudded.

This is when the game changed.

It really is pretty much after this point that the game changes when it comes to AIM rules for oil and gas companies and reporting of reserves and resources.

To its credit UKOG said, “OK we have drilled this well, lets get a competent person (CP), an external expert in tight oil plays to serve as an independent assessor that can tell the Horse Hill consortia what the results of the Horse Hill well actually are.”

That independent assessor was NUTECH, one of the world's leading companies in petrophysical analysis and reservoir Intelligence, who were appointed by UKOG on the 30th January 2015 to assess the Horse Hill 1 well data.

Now the significance of the appointment of NUTECH was not, in my view, properly picked up on by the press. I will come to that later and why today’s announcement is so important in that respect.

On the 9th of April, shares in UKOG surcharged at one point by 400% on the news that NUTECH, remember the independent CP, had provided the Horse Hill consortia with their assessment of the Horse Hill-1 well.

Horse Hill-1 had a total oil in place ("OIP") of 158 million barrels ("MMBO") per square mile, excluding the previously reported Upper Portland Sandstone oil discovery.

This led to huge media coverage and where some commentators who clearly did not have a clue about AIM rules on reporting, served to dish out what was clearly unjustified criticism of UKOG and the Horse Hill project without, in my view proper understanding of the way in which AIM works when it comes to the independent reporting of reserves and resources.

Now remember, NUTECH has their own reputation to consider. They are not in the business of misreporting, they have nothing to gain by that, there is no moral hazard here.

They just report what they see given their own extensive access to data and importantly up to date field knowledge of tight oil plays from their own extensive experience of working in the US Bakken oil formation.  No commentator ever gave any credit to NUTECH or indeed UKOG for hiring one of the best petroleum geoscience companies around. UKOG also hired Xodus Group, another highly respected team of petroleum geoscientists to report independently on the oil in place volumes contained within the Horse Hill conventional Portland Sandstones, again, I do not think enough credit was given to UKOG for that appointment either.

With criticism lingering, what did Dave Lenigas and UKOG do next? They approached Schlumberger, the world’s leading independent petroleum industry experts that specialise in providing governments, yes governments and the world’s major international oil companies with services such as seismic data processing, formation evaluation and petrophysical evaluations.

So now will the market give UKOG any credit for hiring Schlumberger?

Well if it doesn’t then we should all turn the lights off and go home.

The news today is so incredible on many levels.

For UKOG, by any standards a minnow oil company, to have secured the services of Schlumberger is in itself pretty incredible, but for Schlumberger to have allowed UKOG to released today’s Petrophysical Evaluation on Horse Hill is even more impressive.

What Dave Lenigas has said by hiring Schlumberger to conduct their independent assessment of Horse Hill, is,,,,,,,,,

“Look, I am highly confident of the technical reservoir assessment work undertaken by NUTECH and Xodus on Horse Hill, but it would be nice to get another opinion and I we would like Schlumberger to do that, not because we have any issue with NUTECH and Xodus but because of the magnitude of what we have here. This is potentially a major oil system, that has huge consequences for the British government and that they must take Horse Hill and the Weald Basin seriously and that the oil play itself is so interesting that it warrants investigation by Schlumberger’s Unconventional Resource Group and because Schlumberger is such a highly respected oil and gas petroleum geoscience company, and the Weald Basin-Horse Hill discovery is such an extremely interesting oil system, this combination justifies the highest level of professional attention and intervention by an expert such as Schlumberger.”

Summary

Later today I will write up an assessment of the Schlumberger report and what it means. But for now, anyone who is considering shorting UKOG and indeed any of the Horse Hill consortia, please think again, you would have to be certifiably insane to do so.

If Andy Samuel the CEO of OGA is reading this, then Andy, please pick up the phone to Dave Lenigas and open up a discussion…….. a proper discussion about the Weald Basin,,,,,,,,,,,,,he has bowled you a googly and you should work out how to play it.

Further, NUTECH this morning must feel vindicated in their early assessment of Horse Hill now that even Schlumberger confirm the volumes, which they say are even bigger!!!!!!!

And for those reporters that might want to have a go at Dave Lenigas, just have a think. This is an entrepreneur, someone that has got stuck in and made something happen, it is businessmen like this that have made Britain great and we need more of them and we need to encourage them and support them if we are to succeed as a nation.

The Weald Basin has the potential to generate billions of pounds of tax revenue to help fund schools, hospitals, create jobs and provide the UK with much needed energy security. We should remember that and we should also remember that this is a conventional oil play, a tight oil horizontal well recovery system technique to enable oil production, its not fracking.

The Weald Basin needs the support of the community, enabling its development could unlock huge wealth for the country and help fund many great positive environmental projects across our great land.

Andre Brand