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Italy: review of operations

Northern considers Italy to be an excellent country in which to operate as it is viewed as having great potential for finding prospects with significant resource potential. The exploration position Northern has built over the last eight years is now larger than that held by Eni, the ex State oil company and is held in a number of producing petroleum basins. Italy has a long history of over a century’s involvement in oil and gas production, being now the fourth largest producer of hydrocarbons in Europe. This position is supported by a stable regulatory system and like all of Europe a deregulated energy market which provides greater opportunity for improved economics.

Northern continues to build where possible the licence position in the areas it has established as being core to the Company as this provides the opportunity of ensuring any success can be followed up with further drilling opportunities. This also improves the ability to close deals with companies where multiple exploration prospects exist. In this respect the company was able to farmout six contiguous licences offshore west Sicily to Shell Italia E&P S.p.A (“Shell Italia”) over acreage containing an extension of the Apennine thrust belt trend which in the southern Apennines contains the giant Val d’Agri oil complex of fields in which Shell Italia holds an interest.

The intention is to continue to find partners to assist with the funding of the considerable acreage position and what will be significant well costs in the offshore. Northern will where possible contribute to projects and together with the income generated from bringing on stream the six fields in The Netherlands, will improve the ability for the company to participate financially to a greater extent in developing the Italian portfolio. The number of opportunities is considerable and ranges from field developments through to exploration.

The field development projects are located in the southern Adriatic Sea and have been independently audited to contain 53.23 million barrels of recoverable oil reserves in the Rovesti and Giove fields. A further audit on six exploration prospects gives a mean unrisked oil in place of 2.29 billion barrels of oil. The fields and prospects are located in two awarded licences but a further three adjacent preliminary awards contain a number of large additional mapped prospects making this acreage holding another core area for the Company and one in which a partner will be sought.

The offshore Italy position is recognised as containing the greatest potential within the Company’s portfolio to transform the Company with an exploration success. The interpreted prospect sizes in the southern Adriatic and offshore Sicily would be ranked as world class in any company’s portfolio and progress towards drilling in 2010 is a priority for Northern.

Overview

The portfolio comprises twenty seven licences, preliminary awards and applications having made further applications in the Sicily Channel and offshore Calabria. The acreage position is held mostly in proven petroleum basins, or interpreted extensions of proven petroleum systems into an underexplored region. Italy has not had the levels of exploration activity in the last few decades as other basins in northwest Europe. This is not viewed as a reflection of the prospectivity but rather the limited data available for the oil industry to analyse from previous work. What is available, mostly from Eni, is sold at a very high price that effectively prevents companies from evaluating the remaining prospectivity. Elsewhere in northwest Europe the vast majority of well and seismic data is made available after a period of confidentiality at little over the price of reproduction. This difficulty with data access though has provided the opportunity for Northern to make use of what data can be evaluated and then to be highly selective in applying for licences, against limited competition. Inevitably some areas will not be as prospective as hoped for once additional data is purchased but the low cost of applying for licences and the drill or drop licence terms means Northern has a wide selection of opportunities at minimal initial cost or financial exposure. Success would be well rewarded as the fiscal terms are limited to corporation tax and a modest royalty. Italy is a high net importer of both oil and gas, therefore developing indigenous resources is seen as a priority and recent governmental initiatives to improve procedures with licence administration should assist the industry.

Northern operates all its licences, a strategy that is considered vital to maintaining technical and financial control across its portfolio. The area held under licence is in excess of 16,114 km², equivalent to more than 70 UK North Sea blocks. Northern holds a 100% Licence interest (50% beneficial interest) with ATI Oil Plc (“ATI”), having a 50% beneficial interest in most of these licences. Northern owns 37.04% of the shares of ATI Oil Plc (“ATI”) whose subsidiaries are the remaining 50% beneficial interest owners, thus bringing the total Northern net beneficial interest to 68.52%. In April 2009 Northern announced the terms of a recommended acquisition of the entire issued share capital of ATI not already owned by it to be effected by way of a Scheme of Arrangement. Given the required ATI shareholder support, the acquisition should be completed in June 2009. The acquisition is considered extremely advantageous to the Company in attracting future potential partners in the licences and ensuring work progresses optimally without the need for ATI to participate in the funding requirements of the proposed programmes.

The high potential of the exploration portfolio offshore has been substantiated by the farmin announced in December 2008 by Shell Italia to six licences offshore Sicily. The acreage is recognised as having high exploration risk given the relative lack of previous exploration effort with only one well having been drilled in the 1980’s. However, the prospect sizes are sufficient to give the high reward required from exploring in a thrust belt structural setting, proven to be so prolific elsewhere onshore Italy. It is expected that further farmout arrangements will be announced for the additional licences held in the Sicily Channel, offshore Calabria and for the multiple adjacent licences held in the Southern Adriatic that contain the Rovesti and Giove oil fields. The technical work on all these licences continues to improve the recognised potential for both significant oil and gas volumes. The opportunities to be offered compete very favourably when compared with acreage offered elsewhere in Europe, it is unusual to have multiple prospects with significant resource potential available over such an extensive licence position.

The onshore acreage position in three licences in the eastern Po and Marche basins was farmed out to Avobone Italy S.r.l (“Avobone”), an Italian subsidiary of the Indofin Group, a private global investment company in October 2008. Avobone will earn 20% in these licences through a payment of back costs and a promote on the first well in each licence. The Savio-1x well completed drilling in May 2008. The well encountered thicker than expected sandstone formations but log interpretation indicated that the gas contained in them was insufficient to warrant testing. Wells are in the planning design phase on the Cerasa and Longastrino licences, both of which are subject to the Avobone farmin agreement. Additional Po Valley acreage is held that will add to the opportunities onshore.

Northern is in a strong position with such a promising portfolio of acreage to make further progress with the development and exploration of this asset base to increase value. To achieve our goal of having production on stream from the existing fields and from future exploration successes most activities in the short term will be funded by other companies under farmout arrangements in return for equity in the licences.

Licences in detail

Full details of operations in Italy

Further information


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