Petro Matad Floats On London’s AIM To Exploit Highly Prospective Assets In Mongolia

Source: Oilbarrel.com
Date: April 29, 2008

WAnd now, for something completely different, a quiz show on London’s Alternative Investment Market and oil companies.

Question (from scowling, grumpy old quiz master): “Is it true that Mongolia is a producing oil province and that Petro Matad, which floated on AIM in the first week of May 2008, is the first purely Mongolian based oil company to be quoted on the London Stock Exchange.”

Answer (from intense furrowed browed but pretty female geology student): “Yes Mongolia does produce oil, not a great amount at the moment, and it ships it by road across the border to China. Mongolia, at this point, May 2008, imports all its refined oil products. But no, it is not true that Petro Matad is the only London Stock Exchange company to be involved in Mongolia. SOCO International, which is quoted on the LSE’s main board, had assets in Mongolia between 1993 and 2005.”

Quiz master: “Well I can only give you half a point for that. Yes, Mongolia does export oil. But although SOCO was indeed involved in Mongolia from 1993 to 2005, it was also present in Yemen amongst other places. The devil of this question is in the detail. The key words are “purely Mongolian”.

“Petro Matad’s main asset, indeed, only asset just now, is the 100 per cent owned petroleum rights to the highly prospective Block XX, located in the Tamtsag Basin on the eastern Mongolian Steppe. Block XX is large, measuring 18,956 sq kms, and is immediately adjacent to blocks operated by Daqing, a subsidiary of Chinese oil giant PetroChina. Test production on Daqing owned blocks to the north east of Block XX is currently yielding over 2,000 barrels per day and is expected to increase as the discoveries on the block are developed.”

The quiz master goes on: “As a matter of fact Petro Matad is the first company with a major Mongolian shareholding to list on any International Stock Exchange. Petrovis, which imports virtually all of Mongolia’s refined oil products (95 per cent from Russia), has a 37 per cent stake in Petro Matad. Petrovis is one of Mongolia’s 10 largest companies with turnover of US$91.5 million in 2007. This marrying of Mongolian ownership and international finance can be seen as something of a milestone in the development of Mongolia’s market economy.”

Monglia is a sparsely populated country located between Russia and China. The country has an area of 1.56 million sq kms, approximately six times the size of the UK, but with a population of around 3 million people.

In terms of energy, oil consumption is approximately 11,000 barrels a day and is rising fast because of the growth in car ownership. The country does not have its own refinery and, as we said earlier, has to import most of its oil needs. The country’s crude oil production was 1,000 barrels a day in 2006 and around 2,100 bpd in 2007. Most of the production comes from the Daqing blocks, although a small amount comes from the small fields in the Dornogobi Basin. There is talk that Daqing will be able to produce 11,000 barrels a day by 2010, although the company itself has not confirmed this. However, it is known that Daqing drilled 52 wells in 2006 and 100 wells in 2007, making 152 wells. It is reported that Daqing plans to drill 225 wells, including 125 exploration wells with 25 rigs in 2008, at a cost of US$300 million it is thought.

Although there was drilling by the Russians in the 1950s the Mongolian oil story really begins in 1990. The break up of the Soviet Union meant a democratic revolution which in turn ushered in parliamentary elections. In 1991 a Petroleum Law was past which is pretty standard and has not changed in 17 years. Roughly, under a Production Sharing Contract (PSC) regime, when development has taken place, the government ends up with a take of around 60 per cent in taxes and royalties.

In 1993 SOCO was awarded Blocks XI, XIX, XX, XXI and XXII. (There are some 28 blocks in Mongolia many of them unassigned.) In 1997 SOCO discovered the Tolson Uul oilfield on Block XIX. In 1998 SOCO drilled a dry well 20-1 on Block XX apparently off structure. In 2000 SOCO relinquished Block XI and XX. Then, in 2002 SOCO discovered the Tolson Uul North field. In 2005 Daqing acquired Blocks XIX, XXI and XXII from SOCO for US$92.6 million. At this point Doug McGay, the CEO of Petro Matad, believes SOCO was producing 95,000 barrels on an annual basis and recoverable reserves could have been 135 million barrels, although these are not confirmed figures. Following the sale to Daqing of SOCO’s assets, Petro Matad applied for and was finally awarded Block XX, which was no longer assigned, in 2006.

So where does this now leave us as far as Petro Matad and Block XX is concerned? We know that that the Russians in the 1950s drilled on an area which became Block XX and Well K-24 had oil shows. Also, probably not too much significance should be attached to SOCO’s 1998 dry well since current interpretation of seismic data indicates that the 1998 well was outside of a structural closure.

The northern part of the Block is reckoned to be prospective because of its proximity to known production. Specifically there are extensions into Block XX of the Tolson Uul and East Tolson Uul Grabens (sub basins) which are productive in Block XIX. The results of gravity, magnetic and seismic surveys have identified other areas. The South Sharabog Graben in the north west of the block, the East Erdenetsagaan, the Erdenetsagaan and the Asgat Graben, again all in the northern half of the block, are thought to be prospective. Areas where the basement comes close to the surface or there are outcrops are not considered to be prospective for petroleum exploration. These areas cover the southern half or 50 per cent of the block.

Interpretation of the most recent seismic has identified the mapping of 11 prospects and leads. The Competent Person’s Report prepared by Isis Petroleum Consultants (Isis) on Block XX states: “The prospects and leads have a total mean unrisked prospective recoverable resource potential of 745 million barrels and a risked prospective recoverable resource potential of 85 million barrels.”

The chances of success on the 11 leads range from 5 per cent to 23 per cent. Particularly interesting are Prospect 8Ts and Prospect 2Ts. The former is the Tolson Uul Extension which is given a 23 per cent chance of success with means of unrisked resources of 79 million barrels and risk weighted mean of 18 million barrels. The latter is the South Sharaboog with means of unrisked resources of 83 million resources and risk weighted means of resources of 17 million barrels.

What all this goes to say is that Petro Matad is poised for some onshore low cost exploration and development with near term development potential and captive markets. The targets are shallow, between 250 and 2,050 metres, with low drilling costs of between US$700,000 and US$1.5 million a well. There is a ready market across the border in China at near world prices (US$4 a barrel below WTI, or not far below Brent Crude).

Petro Matad has not raised any money in its flotation. In early 2008 it raised US$10 million which is being used to fund the 2008 seismic programme and the corporate fees associated with the admission to AIM. The company intends to drill four wells in the first half of 2009 subject to raising necessary funds or negotiating farms ins.

Daqing has shown that production can be ramped up fairly quickly if the operator is determined. As always when there is a good story about a good opportunity one wonders why no-one else has thought about it. Doug McGay says: “I have been in Mongolia for about ten years. I was involved in minerals and I had a ban put on me from doing anything similar for two years when I sold up. Oil seemed a good idea. The thing is really that the China story really only started to happen in 2003. Nobody seemed too bothered about oil before then. But as growth took off and the demand for oil grew voracious, they wanted oil anywhere they could get it, including Mongolia. So now is a good time to be involved.”