THE CEO's STATEMENT
Dr. Patrick Allman-Ward
Set against a challenging backdrop of macro-economic issues, uncertain oil prices and international trade uncertainties, we can proudly state that, 'we had an excellent 2018'. Our commitment to an efficient growth strategy since 2015 has seen an overall improvement to our operational and financial performance, generating considerable shareholder value.
Let me list some of our achievements regarding our growth strategy and how this has impacted the Company and shareholders alike.
Firstly, we delivered on two major growth projects which were materially value accretive to shareholders. These were the completion of our debottlenecking project in the Kurdistan Region of Iraq (KRI) and bringing online our Balsam-8 well in Egypt.
Secondly, we received regular cash receipts, whereby our payments from the KRI were fully up-to-date and our Egypt collections were up 27% year-on-year.
Thirdly, we achieved a consensual conclusion to the Sukuk refinancing. It was a good deal for all parties and the overwhelming vote in favour of the deal from both the bondholders and shareholders is evidence of this.
Fourthly, we were delighted to distribute our first dividend to shareholders; paying out $95 million to our shareholders and the Board has recently proposed a 10% dividend increase in 2019.
Lastly, we have an exciting pipeline of projects, with the first one, the high-impact deepwater Merak exploration well in our Egypt Block 6 Concession Area due to spud in the second quarter 2019. We also have significant expansion plans in the KRI with the aim of increasing production by 125% within 4 years.
Our group production numbers average for the full year were 63,050 boepd, a 7% decrease as a result of reduced output in Egypt from natural field declines and the UAE.
In the fourth quarter, Dana Gas Egypt brought on-stream the Balsam-8 well adding over 5,500 boepd in gas and condensate. This helped to mitigate the effects of the natural well declines across our various concessions and the net effect was a smaller than expected output decline of 13% to 34,500 boepd (FY17 39,500 boepd). In fact, on a third to fourth quarter comparative basis, production increased from 32,250 boepd to 34,450, highlighting how important the Balsam-8 well has been to the Company in terms of mitigating production declines in Egypt.
In the KRI, production was boosted by the completion of our debottlenecking project, taking annual production to 26,650 boepd from 25,750 boepd in 2017. As this was only brought on-stream in October and given the time required to fully ramp up production, the impact can only start to be seen in the Q4 production figures, which increased by 4,100 boepd to 29,200 boepd.
For the full year 2019 we expect our output to be 30% higher on average, adding approximately $50 million in revenue, reflecting the full impact of this project.
More than 70% of our production is gas whose prices remain tied to long-term contracts. However, we have been able to generate higher realised prices from our condensate and LPG sales. Average realised prices for condensate was $59 per barrel, representing a 31% increase year-on-year; and LPG was $34 per boe, representing a 13% increase year-on-year. Higher realised prices have more than compensated for the drop in our overall output.
It has been a very busy and eventful year in the KRI. Early in 2018, Pearl Petroleum signed a 10-year Gas Sales Agreement (GSA) with the KRG to supply and sell the additional quantities of gas from the debottlenecking project. First gas came onstream in October and we achieved first sales before year-end. This was a great achievement and we are proud of our team's efforts.
Earlier in 2019, Pearl Petroleum signed a second GSA, which sees the KRG committing to purchasing an additional 250 MMscf/d. This supply will come from the $800 million expansion underway at the Khor Mor plant. The expansion includes two new gas production trains, the drilling and workover of 12 wells, resulting in production increase from the current 400 MMscf/day to 650 MMscf/day by 2021, and then to 900 MMscf/day by 2023. The plant, which began operating in 2008, supplies natural gas from the Khor Mor Field by pipeline to power plants in the towns of Chemchemal, Erbil, and Bazian. The Khor Mor Plant also produces LPG and NGL, which are sold locally.
Current gross production is 100,000 boepd, making us the largest regional private sector upstream gas operation in Iraq today.
Dana Gas is not expected to be required to put additional capital expenditure towards the expansion of the plant. Instead, it will be funded primarily by Pearl through multi-lateral loans, bonds, bank debt and third-party financing arrangements and then only if required from the development fund set aside in the Settlement Agreement and from additional cash coming from the expanded production streams. The total planned capital expenditure by Pearl Petroleum is expected to reach $800 million.
Solid progress has been made in Egypt. In the second half of the year, we spudded Balsam-8 in the Nile Delta Concession. The Balsam project was completed early and came under-budget at $4.5 million with no incidents, achieving an excellent HSSE record. We added 25 MMscf/d of gas and 1,100 bbl/d condensate, in total 5,500 boepd.
Our big upcoming growth prospect is an offshore concession area, Block 6, North El Arish, our first offshore Concession Area in Egypt. Block 6 has three deepwater prospects, each with multiple Tcf of gas potential. Plans are in place to commence drilling the first well, Merak, in the second quarter 2019. The success case volumes are expected to be 4-6 Tcf of gas resources, which is substantial and of itself capable of supporting an LNG train. To give some context, ENI's Zhor Field contains 30 Tcf of gas resource. We have allocated approximately $60 million in capital expenditure for drilling this exploration well.
Big strides were made in 2018 with our condensate shipments to third parties. In 2017, we exported three cargoes, and in 2018 we managed to export five cargoes by debottlenecking the transport logistics, in the process collecting a total of approximately $54 million. This year the loading bay at our storage facility is being modified to allow us to boost the frequency of our export cargoes. The cash received from the buyers relating to the Government's share of the incremental condensate is being paid directly to Dana Gas in order to contribute to accelerate paying down the outstanding balance of accounts receivable owed to the Company by the Egyptian government.
Zora Gas Field
The Zora Gas Field has been seeing a continuous decline in its output. The field was originally designed to produce 40 MMscf/d. However, when the Sharjah-2 well was brought on-stream in early 2016, production only achieved 20 MMscf/d which was significantly below expectations. After exhaustive subsurface analysis, it was established that the production performance resulted from poor reservoir quality and connectivity which was not something that could have been predicted before drilling the well and developing the field.
No further intervention to increase production is economically viable and therefore, based on the current decline rates, we anticipate production will stop sometime during the course of this year. As a result, the reserves will not be produced, and the Company's external reserves auditor has therefore reclassified the 2P reserves to 2C (uneconomic Contingent Resources). As a result we have had to take a write-down of our investment in the Zora Gas Field of $187 million.
From a financial point of view, 2018 was a very important year with several positive steps forward in the Company's financial position.
Revenue was up by 4% at $470 million for the year as compared to $450 million in 2017. Higher realised prices and additional production from the KRI were the main contributors to the growth.
Gross Profit increased by 19% to $140 million versus $118 million in 2017. This reflected the strong underlying operational performance of the Company. For the year, on a like for like basis, before impairments and reversals, the Company recorded a profit of $64 million as compared to $5 million in 2017.
During the year, a one-off non-cash impairment provision of $250 million has been taken. As discussed earlier this was made up of $187 million for the Zora Gas Field and an impairment provision of $59 million for our Egyptian assets.
After these impairments the net loss for the year was $186 million compared to a net profit of $83 million in 2017.
G&A and OPEX for the full year totalled $70 million, in-line with the $67 million spent in 2017 which reflects our continued tight cost control program.
Our cash balance at year end stood at $407 million a 33% decrease compared to last year. This was mainly due to the Sukuk restructuring and buy back payments of $351 million and a $95 million dividend payment.
With regard to collections, the Company collected a total of $334 million during the full year with Egypt, the KRI and the UAE contributing $208 million, $114 million and $12 million, respectively.
In the KRI regular payments have been received with no outstanding overdue receivables by year end. The government is continuing to pay on time and this gives strong confidence for future investments. Since last year, we are now selling gas in the KRI for the first time, and those invoices are also being paid in full and on time.
In Egypt, progress was made in reducing our outstanding balance of overdue receivables. We received a large payment in the fourth quarter as part of a wider set of industry payments and our net receivables at year end reduced by 39% to $140 million. We expect the rest of our overdue receivables to be paid off during 2019 as indicated by the Egyptian government and are in regular communication with the authorities to achieve that objective.
Consistent with previous years our strategy in Egypt remains to continue to balance our investment program against collections to ensure we maintain a robust financial position.
Conclusion of Sukuk restructuring and buyback
We were delighted with the successful consensual conclusion of the Sukuk restructuring. It was a challenging period but, in the end, the deal agreed upon was beneficial to all parties, as clearly demonstrated by the Sukukholder and Shareholder general meetings where well over 90% votes were in favour.
In addition to the restructuring, the Company has bought back a total of $133 million of its Sukuk saving a total of $21 million. This has reduced the size of the Sukuk from $530 million to $397 million. Accordingly, the Company met the threshold amount of outstanding Sukuk which allows the Company to continue to pay the Sukuk annual profit rate at 4% rather than increase to 6% until maturity at the end of October 2020. The total saving is therefore expected to be $29 million, which is in addition to the initial saving of $35 million per annum achieved at the time of the restructuring.
Decade in KRI
I would like to highlight our decade of partnership, service and progress in the KRI. In 2018 we commissioned with our Pearl partners an evaluation of our achievements in our first ten years of operations in the KRI. In that time we have seen total investment by Pearl Petroleum reach $1.3 billion. We have made contributions of between $11 and $18 billion to GDP; created more than 20,000 jobs during the construction phase of activities and generated $19 billion in savings to the KRG in substituting diesel for gas as a fuel for power generation.
The next ten years will see Pearl Petroleum invest a further $4.3 billion, contributing an average of $34 billion to the GDP; creating 84,000 temporary jobs during the construction phase; and saving a further $33 billion in fuel costs.
I would like to express my thanks to the incredible effort made by the team from Dana Gas and its partners and to the KRG government for providing the support required to realize these results. You can read more about our achievements in the Kurdistan Gas Project Impact Assessment Report we commissioned and issued recently which can be found on our website.
In HSSE 2018 saw continued improvements by comparison to 2017 in terms of both performance and results. Risk assessments and mitigation plans continued to be carried out prior to executing activities in order to reduce risk conditions to the lowest possible reasonable level in our operations that could have an impact on our people, the environment, our assets or our reputation.
The Khor Mor operations managers, supervisors and employees were focused on HSE performance improvement throughout the year. At the end of the year, the plant has achieved 850 days with no reported lost time injury. The Zora Gas plant achieved three years of injury free work in October 2018. ESIA studies for the Egypt drilling site locations were completed on time, meeting the Government approval requirements.
Further progress was made in 2018 on the development and full integration of Asset Integrity Systems for the Egypt, KRI and UAE operations.
For the past ten years Dana Gas has made corporate social responsibility and sustainable development part of its corporate values. Ensuring we do not harm the environment while supporting local communities is a core commitment to the way in which we operate. Providing sustainable support is not only the right thing to do, it helps to ensure our activities make a long-lasting positive impact on the communities around us, thereby ensuring the Company's continued license to operate.
Our initiatives in all of our areas of operations continue to focus on supplying better quality education, improved medical services, improved infrastructure including electricity supply and roads, supporting employment opportunities for local communities and in helping those who have been negatively impacted by conflict.
Our formal reporting of our sustainability activities continued in 2018 with the publication of our second Sustainability Report for the calendar year 2017, produced in accordance with the Global Reporting Initiatives Standards. The report details our actions, progress and initiatives related to our economic environmental and social performance and records the progress we have made in this area. We are committed to issuing one every year.
We are entering an exciting period in Dana Gas's history. There is a huge growth potential for the business in the next three years and we will ensure that our production; operations and financial strategies are kept aligned to deliver on this. In the KRI, Pearl Petroleum has expansion plans to grow production by a further 500 MMscf/d of gas and 20,000 bbl/d of condensate. In Egypt, the high-impact Merak well, which in case of success has multi-Tcf gas resource potential, is to be drilled in Block 6 in the second quarter 2019. In case of success this will represent a real game-changer for Dana Gas.
I would like to thank the Dana Gas Board, staff, investors and stakeholders for their tireless efforts and continued support and we collectively look forward to delivering another year of robust business performance in 2019.
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