Tethys Petroleum - A Play on Central Asia's Hunger For Oil
by Michael Welsh
China is in an unfortunate position regarding their energy consumption. They currently consume in the region of 8 million bopd (barrels of oil per day) second only to the U.S. However where U.S consumption may be starting to dwindle in light of the recession Chinese consumption is growing at an alarming rate. Figures recently released showed that during September Chinese consumption grew at the fastest rate since 2006 and analysts expect that China will soon match the US for oil imports.
What makes China’s position unfortunate however is their limited ability to provide for themselves as China's proven oil resources are small in comparison with their levels of consumption. Subsequently China will increasingly rely on foreign imports which for transportation purposes will more than likely come from nearby destinations such as the Middle East.
One company ideally placed to aid China's and other East Asian countries' ever-increasing demand for hydrocarbons is Tethys Petroleum Limited (TSX: TPL), an oil and gas exploration and production company with projects in Kazakhstan, Uzbekistan and Tajikistan. Tethys Petroleum (TPL) are listed on the Toronto Stock Exchange in Canada and the KASE in Kazakhstan. Their main focus is on the prolific sedimentary basins of Central Asia in which some of the world’s largest oil and gas fields can be found and which also happens to be on Chinas doorstep.
TPL have acquired interests to 5 projects spanning these 3 countries. Broken down these projects comprise 2 at exploration stage, 2 at development/production stage and 1 at redevelopment/production stage. TPL are regarded primarily as an exploration company though the company currently have proved and probable (2p) reserves of 13.7 million boe (barrels of oil equivalent). This is being used to provide short term cash flow as TPL have an offtake agreement in place. In exploration terms TPL have in excess of 1.5 billion boe unrisked resources and prospective rights to some 43,000 square kilometres of land. Thus as far as exploration companies go TPL has considerable upside potential. To understand the company’s position better we will look at each country’s operations individually.
The first and most advanced project within Kazakhstan is the Kyzyloi field in which TPL has a contract in place till June 2014 granting them exploration and production rights to over 274km2 of land.
The second project is the Akkulka field which is in close proximity to the Kyzyloi field. With this contract TPL have exploration rights to approximately 1380km2 of land up until March 2011 by which point they should have production rights granted.
An NI 51-101 Resource Report was carried out in 2007 on these licenses with results estimating that the 2 fields in total contain 13.2 million boe of 2p reserves and 17.5 million boe of 3p (proved, probable and possible) reserves. Production has already begun on the Kyzyloi field with an offtake agreement in place meaning the field is currently producing 520,000 cubic metres of gas a day (Mcm/d) which is expected to increase progressively to 566,000 Mcm/d. Work has also been completed which will enable gas from the Akkulka fields to be fed into the main gas pipeline known as the Bukhara-Urals trunk line currently utilised by the Kyzyloi field only. When production work on the Akkulka field is complete and TPL is granted production rights, gas production from the 2 fields combined should be in excess of 1500,000Mcm/d though all will depend on ongoing drilling results from both fields. A drilling update released last week confirmed that drilling had been completed at the company’s first “deep” well in the Akkulka field and the presence of moveable hydrocarbons was confirmed so conditions are looking promising so far. If the situation continues as planned both fields should be in production by mid-2010 increasing short term cash flow.
The third contract TPL have entered into in Kazakhstan is the Kul-Bas license which comprises a 25 year exploration and production license to an area of approximately 8500km2 surrounding the Akkulka block. TPL regard this area as largely underexplored and believe it will contain significant oil and gas reserves. Other large gas/condensate fields have been discovered in the same basin as Kul-Bas to the South such as the Shakhpakhty field which holds in excess of 48 billion cm. An NI 51-101 resource report was carried out in 2007 giving estimates of 32.8 billion cm of gas (approximately 34.2 million boe). Therefore the Kul-Bas license could potentially become a lucrative reserve. The company is acquiring seismic data on it presently and aim to begin drilling in 2010.
TPL have entered into a Production Sharing Contract (PSC) for an area covering 34,785km2, equivalent to 84% of the size of Switzerland, with the Tajik government. The PSC entails that 70% of costs will be covered by the Tajik government and the remaining production will be split 70:30 between TPL and the Tajik government. The PSC is in place for 25 years from June 2008.
This PSC area is arguably TLP’s most prized asset owing to its prime location within the Afghan-Tajik basin, an extension of the Amu Darya basin in which there are giant and supergiant gas and gas condensate fields. An independent reserve assessment carried out in a different portion of the Amu Darya basin recently yielded results indicating 6 trillion cm of gas, placing that field in the top 5 largest gas reserves in the world. In May this year the groups share price shot up 30% in 1 day when the results from an NI 51-101 compliant resource report was announced for the Tajikistan assets. The results indicated that the assets potentially contained a volume of 1.13 billion boe with an expected 40% of this figure to be made up of gas and 60% to be made up of oil. This is a remarkable prospective resource for a junior exploration company and has meant the TLP story just got a great deal more exciting.
TLP are currently pursuing a geophysical and geological seismic data program to firm up the resources and evaluate the best places for future drilling. The work so far has been conducted on 3 fields within the PSC area, specifically the Beshtentak field, the Khoja Sartez field and the Komsomolsk field the largest of which being the latter. The group are also currently drilling exploration wells and recently reported that a significant gas influx was encountered at a well at East Komsomolsk with up to 78% methane being observed at the surface. The company have already signed a supply contract for a limited amount of gas (65Mcm/d) to be supplied to the nearby town of Kulob.
TPL entered Uzbekistan in February this year after acquiring Rosehill Energy’s interest of a production enhancement contract (PEC) with state owned Uzbek oil company Uzbekneftegaz (UNG). This involves workover operations at the existing oilfield (North Urtabulak), drilling of a new well in this field and the rehabilitation of 2 new fields. The group announced in August this year that oil production was up significantly since it took over in April reaching 2,065 barrels per day (bopd) of which TLP keeps 1,031 bopd. TLP believe there is further scope to increase oil production from Uzbekistan through work on the North Urtabulak field and from exploring other potential fields in the same proximity under the terms of agreement of the PEC.
Analysts estimate that TPL will be able to generate revenues in the region of $20M in 2009 and $46M in 2010 based on expected oil production from the Uzbekistan and Kazakhstan assets. This coupled with existing capital should give TLP sufficient cash to see them into 2010.
In summary, oil and gas exploration companies are very high risk particularly in the preliminary stages of their existence and TLP is no different. However from the information TLP have acquired from independent assessments of their assets their prospects do look very promising. Coupled with assets that are already in production providing cash flow, excellent location next to some of the most energy hungry nations on earth and a dedicated and experienced management TLP could one day make the transformation from junior exploration company to mid tier oil and gas production company.