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Annual Report and Accounts 2008 |
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Chairman's StatementThese are challenging and changing times. Northern is well positioned to deal with them. We have assets which we are bringing into production to create not just a sustainable cash flow but one which will be expanded upon. We have the cash, working capital and operating cash flow to bring on stream the planned developments, and we have a massive upside potential which, as the farmout to Shell Italia E&P S.p.A demonstrates, is capable of being realised even in today’s financial environment. It is that potential and the need to effect full control of the commercial transactions for their development and realisation that lies behind our agreed acquisition of the entire share capital of ATI Oil Plc that was announced on 3 April 2009. I am in disagreement with our Prime Minister’s view of the global economic crisis. I would state that your Board foresaw the warning signs of the current financial turbulence and since mid-2006 has adopted a strategy of tight expenditure controls coupled with strategic asset sales that have realised significant profit for the Group. I can now report to shareholders a significant pre tax profit for the second year running, which in the 2008 year amounted to €11.56 million, plus an increased net cash position of €35 million with further working capital of €17 million, being net current assets less current liabilities plus long term receivables. Together these total €52 million, or approximately €0.73 per share currently in issue. This has been achieved ahead of oil and gas production start up in the Netherlands. We have made the decision to report in Euros mindful that our two main countries of operation are located in the Eurozone. Following operational activities during 2008 it is considered appropriate, that Northern reports its financial results in the same currency as its major expenditures and revenues. The effective date of the transition to Euros was 1 July 2008 and the financial statements have been restated for you on that basis. Shareholders will have seen not insignificant exchange losses and gains reported in the Group’s income statement in previous years, periods in which foreign exchange markets were far less volatile than they were in 2008. Shareholders, Board and staff have been commendably patient whilst the processing of licence transfers, planning consents and zoning approvals have been ongoing in The Netherlands during 2008. These hurdles are now clearing and I look forward to reporting first production in the year ahead. We have recently carried out hydraulic reservoir fracturing operations on two gas fields and one oil field in the southwest of The Netherlands. As a result it is likely that our production and future profitability forecasts will exceed the original forecast estimates of 4,670 boepd gross (2,100 boepd net to Northern). Operations now move northeastwards to the Grolloo and Geesbrug gas fields where we are making arrangements to minimise the lead time to production through a project change to delivery of raw gas by pipeline over a short distance to utilise existing third party gas processing facilities. This year we are able to take advantage of our careful financial management to bring on stream some of the 33.5 million barrels oil equivalent of net proven and probable reserves in five fields, namely the four gas fields plus Ottoland, where the Ottoland 1 sidetrack will be put in production ahead of full field development. The Papekop field development is awaiting certain planning approvals from the Dutch authorities. Furthermore we have been able to commit to and commence a two well exploration drilling programme. The Nieuwendijk well is in progress and the Tiendeveen well, near the Geesbrug gas field, will follow. The latter has been independently viewed as having the lower risk but also has the outside potential to greatly expand our position in the northeast region. With little fanfare, the technical team has completed their works on the Utrecht licence expanding the inventory of potentially commercial existing gas discoveries and further identified one sizeable exploration prospect. I believe that there is more to come in other areas. Our Netherlands team are also to be complemented on taking new initiatives. I will mention but three instances. At Waalwijk the previous taxation charge upon gas consumed in operations has been successfully challenged, gaining a €407,000 refund covering the first sixteen months of our period as operator on behalf of the joint venture. We have also supported through the grant of the first contract a novel drilling rig concept, designed in The Netherlands and Czech manufactured. The rig is capable, mast and draw-works included, of being dismantled into container size units for speedier, cheaper and less disruptive mobilisation. Also at Nieuwendijk we have utilised the Casing While Drilling (CWD) process achieving a European and eastern hemisphere record drilling run of 780 metres (2,567 feet) for this type of system. This is another technology to be welcomed by our industry for safer and speedier drilling through unconsolidated formations. Our south of England onshore position does not rival our core areas of Italy and The Netherlands in size or excitement, but it is of profitable potential and, given our current UK domicile, tax efficient. Northern’s existing production is about 27 bopd from the small non-operated interests in Avington, which came into production in January 2009, and Horndean. We have now leases and gained planning consent for the Markwells Wood and Havant drilling sites to which we would expect to add Hedge End and Baxters Copse. Baxters Copse is on a licence awarded during 2008 operated by Providence Resources (GB) Limited. The plan is to apply long reach drilling technology from the Singleton production facility thereby dispensing with the requirement for a new well location. In an arena not populated by a great number of well financed companies to offer a good price, we continue with the strategy of drilling and producing. I see Italy as our core area that offers the greatest potential for material growth. We can now expect the acquisition of ATI Oil Plc to complete during June and provide us with better flexibilities to realise value. Unfortunately success was not achieved at Savio-1, but I am encouraged in my view by the farmout deal announced in December 2008 with Shell Italia E&P S.p.A (“Shell Italia”) for the six licences in one of our core areas in the thrust belt offshore west of Sicily. Under the terms of the contract there are additional licences remaining the subject of further possible arrangements between the companies. In early 2009 we recorded a joint 2D seismic survey of 2,463 km, the results of which will determine the next activities. Our agreement grants Shell Italia the option to acquire 3D seismic and drill a well to maintain a 70% interest in licences G.R20.NP, G.R21.NP and G.R22.NP and a 55% interest in licences G.R17.NP, G.R18.NP and G.R19.NP. and their cover of licence expenditures could exceed €100 million. Following the 2D survey above an additional 2D seismic survey totalling 602 km, was also carried out to infill our 2006 survey over C.R147.NP. These data were acquired in order to better define the large primary prospect Arcturus plus the Antares and Altair prospects which had been mapped. During the early part of 2009 we have also seen the successful preliminary award of licence d351C.R-.NP. This licence covers the full mapped eastern extension of our now giant Vesta prospect, currently mapped at well over 600 million barrels resource potential. This change resulted from a detailed study of volcanic strata in the area which in parts overlie the target formations and intensive seismic reprocessing of our 2006 survey. I intend that drilling Vesta and Arcturus will form an important part of our 2010 programme and believe that, as with the thrust belt, we will find a partner to help with the costs. We have been working on another core area in the southern Adriatic Sea. Eni’s seismic data over and around the Rovesti oil discovery will likely be purchased. After completing our revised evaluation a partner will be sought to assist in funding the appraisal and development programme. It has also been a time to move forward with the evaluation and mapping of our wider and substantial exploration activities in an area which holds a drilling record of five successes for all five prospects drilled to date. I have reviewed our Italian activities at some length. The next exciting move into significant production and profitable cash flow will happen in The Netherlands in the coming year. The Group’s Dutch assets have reserves and resources for subsequent expansion to a provisional 6,000 boepd target from existing discoveries by 2013. I believe that in Italy we have acquired and identified an opportunity of rare potential, just one part of which has already caught the attention of a major oil company. I will list them again as I am certain that they will form the subject of future statement from me and announcements to shareholders. The southern Adriatic core area of 3,681 km² with a one hundred percent drilling success record and proven and probable reserves currently independently assessed at 53.2 million barrels; the Vesta prospect of over 600 million barrels resource potential in C.R146.NP close to the boundary with Malta; the multiple large prospects in C.R147.NP covering the Italian northern end of the Tunisian Birsa oil production trend; three gas discoveries down slope of the 1.5 trillion cubic feet Luna gas field and certainly not least the west of Sicily extension of the Apennine-Maghrebian thrust productive belt that Shell Italia farmed into last year. These are many projects which offer very high potential with the right spread of geological risk in many different proven petroleum systems, and yet all are located in an acceptable low political risk country. This is a vast future for our Company which perhaps has remained insufficiently understood whilst we have extended our licensed positions and undertaken critical geological and geophysical works. It will require funding from third parties which will see our licence interests reduced until increasing profits are achieved in The Netherlands to make some contribution. Nothing however can deter from this being a future of enormous potential for our Company. R H R Latham |
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