Dragon Oil
10/12/2006
The recent correction in the price of oil has had a widespread impact on explorers and producers both large and small. Dragon Oil (DGO) has not been an exception. However, in the first half of the year robust prices overcame a modest decline in production enabling Dragon to report a healthy 23 percent rise in operating profit to US$95.3 million.
The Cheleken Contract Area (CCA), offshore Turkmenistan in the Caspian Sea, is the principle focus of Dragon's exploration and production activity. Proved and Probable reserves in the CCA as of 30 June 2006 stand at 647 million barrels of oil (Dragon's entitlement is 303 million barrels). Estimates for gas resources in the area are 3.5 trillion cubic feet.
In January a temporary blockage reduced production by 5,600 barrels of oil per day (bopd). Despite this hiccup, production during the first six months declined only modestly to 18,576 bopd from 19,533. Dragon's attributable production was 13,444 bopd. More than offsetting this drop was a 40 percent increase in realised oil prices to US$61.10 per barrel.
Strong operating cash flows have left Dragon with US$265 million sitting in the bank. This despite the debt repayments and the funding of major infrastructure projects such as the LAM A production platform and on-shore 50,000 bopd oil processing facility.
Drilling activity by Dragon is set to receive a boost with the addition last month of a second jack-up rig. Under contract for only six months, the "Astra" rig has gone straight into service drilling development well LAM13/116.
The existing "Iran Khazar" jack-up rig is also busy and is now drilling development well LAM 21/117. Immediately following the completion here, Khazar will move to begin drilling the first wells from the new LAM A platform. In addition to these jack-ups, Dragon is also adding two platform based rigs in 2007.
Meanwhile, the well work-over programme is also continuing apace. Dragon has recently finished another four well work-overs adding incremental production of around 2,800 bopd.
Despite the recent price correction in the oil market, we believe the situation is temporary. In our opinion global supply and demand will remain closely matched in the foreseeable future. As additional production comes on-line, robust growth will lead to China and India demanding ever more resources to satisfy their collective thirst. In this context, we believe the price of oil will in time regain upward momentum to the benefit of Dragon's unhedged rising production profile.
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