2007 Ten Bagger Hunt

PETREL RESOURCES


Petrel Resources: Riding the risks in Iraq
By:Orson Carter

Vital statistics Date: 14th December 2006
Epic: PET
Shares Issued: 68.98 million
Share Price: 44p
Market Cap: £30.35 million
range: 72p - 35p
Sector: Oil and Gas Exploration
News: Latest
Market Data: Charts
Website: Petrel Resources
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Oil is a risky business, and present day Iraq is probably one of the riskiest places for a company to try its luck. But Petrel Resources (AIM: PET, Berlin: PQ4) is undeterred.

Iraq undoubtedly has huge reserves of oil waiting to be exploited. The question is: which companies are both willing and able to do it? Petrel has been trying since 1999, and carried on through the invasion that deposed Saddam Hussein and ushered in the current state of affairs, which in many areas seems to resemble chaos. Petrel’s Managing Director David Horgan contrasts this commitment on Petrel’s part with the world’s major oil companies, none of which he believes are in any real hurry to enter Iraq.






To its credit, Petrel has managed to make progress, and appears to be going effectively about the rehabilitation of the Subba and Luhais oil fields in the south of Iraq. This is being carried out as a joint venture with Iraq’s Makman Group under an Engineering, Procurement and Supervision of Construction (EPC) contract awarded by the Iraqi Ministry of Oil. Horgan reports that security issues have been manageable, the south being Iraq’s least trouble prone area.

A Basic Design Package (BDP) for the facilities needed to bring the Subba and Luhais fields on line has been completed, and Petrel has submitted it to the Iraqi Ministry of Oil’s Project Company (SCOP) for review. When the BDP is accepted then a payment, which Horgan says will be of $8-12m, from SCOP to the joint venture is triggered and a Detailed Design can be finalised. An initial payment, of $20m, was made in March.

The Subba and Luhais contract is basically for the provision of services – it does not qualify Petrel for any share of future production. But it is a high value contract - $197 million to be exact, and it does provide the company with good experience of working in Iraq and with the Iraqi government – experience which should come in handy for future projects. Indeed, for Horgan, this was half the motivation for entering the agreement, although of course, Petrel expects to make money out of it too.

Petrel has an alliance with the ITOCHU corporation of Japan, which is involved a diverse range of businesses - one being oil & gas. ITOCHU is a big player in the trading and distribution of oil and oil products, as well as financing and project development. It is therefore a good, heavyweight partner for Petrel to have. ITOCHU funds some of Petrel’s expenses and has right of first refusal on any of its Iraq projects.

Petrel has a Technical Cooperation Agreement (TCA) with the Iraqi Oil Ministry to evaluate the Merjan oil field in west central Iraq. Petrel expects to have completed the evaluation by around the end of the year, after the company may or may not remain involved with the field, depending partly on the Iraqi government and partly on Petrel’s assessment of the security situation in the area, which is worse than in the south.




The Iraqi government is currently working to establish laws to govern the extraction of hydrocarbons in the country and Petrel anticipates that this process will be complete by the end of 2006 give or take a few weeks. The company is confident that Iraq will adopt the sort of Production Sharing Agreement (PSA) that is the norm in many of the world’s oil producing countries.

Speaking of PSAs– Petrel has agreed the terms of a PSA for the East Safawi Block in Jordan with the Jordanian government, although the arrangement must still be ratified by the Jordanian parliament.

Once Iraq’s new hydrocarbon laws are in place then Horgan says that Petrel’s priority will be to negotiate a Production Sharing Agreement, preferably in the south. He expresses some hope that the EPC on the Subba and Luhais fields could be converted into a PSA, although this is far from a certainty. But he also says that Petrel has its eye on other fields from a PSA standpoint. As he puts it – ‘We didn’t come to Iraq to be an oil services company.’

Prior to the removal of Saddam Hussein, Petrel negotiated access to Block 6, an exploration area in Iraq’s Western Desert, and hopes to have this access confirmed when the new package of laws comes out. The Western desert though is a tough operating environment and Block 6 is early stage – the top prize for Petrel would definitely be a PSA on a known field down south.