Chairman and Chief
Executive’s Statement

 

Dear Shareholder,
2010 was a year of solid progress for Petroceltic despite challenging circumstances. The Company has put in place the resources to exploit its world class discovery in Algeria and the underlying strategy and investment case remains strong. The Company is well positioned to add value within its existing business through an ongoing exploration and appraisal programme, and is continuing to explore opportunities to expand its portfolio in areas that exploit the strengths of our team.

 

Adding Value in Algeria

In Algeria in early 2010, Petroceltic completed a five-well drilling programme which resulted in the discovery of the world class Ain Tsila gas condensate discovery with internal estimates of most likely gas initially in place of 6.1 TCF. A two year appraisal period, ending in April 2012, was agreed with the Algerian authorities and a multi-well appraisal programme commenced in November 2010. The first well successfully confirmed the extension of the field to the east and has increased the proven area and calculated gas initially in place. On the second well of the campaign, the mud losses while drilling and log results on the pilot hole all indicate the interval is highly fractured with some of these being open natural fractures whilst also showing the objective Ordovician reservoir to be fully gas bearing. Over the next twelve months Petroceltic plans to further de-risk the discovery through the ongoing appraisal programme, the negotiation of a gas sales contract and the completion of a field development plan.

 

In order to manage its investment obligation to the Algerian asset, during 2010 the Company initiated discussions with third parties with the aim of bringing in a strong industry partner who can contribute to the long term development of the asset. Petroceltic has submitted a proposed farm-out transaction to the competent authorities and is awaiting their formal response, which is expected in the near future. The commercial effect of the transaction, if approved, will be to provide Petroceltic with a refund of certain historic costs incurred, as well as a substantial carry on the current appraisal drilling programme. Additional consideration may also become payable based on the results of the programme.

 

Notwithstanding the political events that are occurring in North Africa and across the Middle East, Algeria has remained stable and largely unaffected by unrest while Petroceltic’s operations have progressed without interruption. However, the Board will continue to monitor the situation and respond accordingly should circumstances change.

 

Progress in Italy

In Italy, plans are progressing to drill an onshore well on the large Rovasenda oil prospect located on the Carisio permit early in 2012. As part of the preparations for drilling of the well, the operatorship of the licence has recently been transferred from Petroceltic to ENI, in exchange for access to a substantial database of proprietary ENI seismic data in the area of the Carisio licence. The drilling of the Rovasenda prospect is a potential company–changing event, and the management team is focused on delivering this well in 2012.

 

Elsewhere in Italy, Petroceltic focused its efforts on the offshore Elsa field in licence B.R268.RG where a well was due to be drilled in the fourth quarter of 2010. However, an unexpected change in Italian environmental legislation announced in June, in the aftermath of the Macondo oil spill in the Gulf of Mexico, resulted in an effective ban on all drilling within five nautical miles of the coastline and 12 miles of protected marine areas. This change has prevented the well from being drilled, and the licence has subsequently been suspended, pending clarification of the new legislation, thus preserving the value of the licence. Although the industry is actively lobbying the Italian Government to reverse the change in legislation it is unlikely the well will be drilled in the next 12 months. However, it is likely that recent events in North Africa will serve to highlight the importance of the development of European indigenous resources for security of supply reasons, and we remain optimistic that Italian legislation will permit the development of shallow water offshore oil and gas fields again in the near future.

 

Exploration Programme Completed in Tunisia

In Tunisia, a two well exploration programme was completed on the Ksar Hadada permit. The two wells designed to test the Sidi Toui and Oryx prospects were unsuccessful with neither well finding commercial hydrocarbons. The Company’s operations in Tunisia were fully carried as a result of a farm-out agreement with PetroAsian Energy Holdings Ltd, a Hong Kong listed company. Following these two wells the Company no longer has any current interests in the country, and has relinquished its interest in the Ksar Hadada permit.

 

Successful Placing, Strong Balance Sheet and Investor Base

Cash and cash equivalents at the year-end were US$82.2 million and the Company had no bank debt. This followed the successful share placing completed in April 2010, which raised net proceeds of US$118.9 million for the Company.

 

In January 2010 Iberdrola S.A. informed the Board that, in line with its general asset disposal programme designed to realise €2.5 billion in divestments of non-core assets, it wished to dispose of its investment in Petroceltic, and, with the agreement and active support of Petroceltic, successfully placed its 15.7% holding with a consortium of our existing investors. The combination of the Iberdrola placing and the further share placing in April 2010 have considerably strengthened the Company’s shareholder base with many large institutional investors now occupying prominent positions on our shareholder register and we look forward to their continued support at this exciting phase in the Company’s growth.

 

Revenue from the Kinsale gas fields in 2010 increased slightly to US$270k (2009: US$210), with marginally higher gas prices offsetting lower production. The Company’s loss for the year increased to US$12.6 million (2009: US$6.1 million) primarily due to the write-off of historical exploration costs associated with the withdrawal from the Ksar Hadada permit in Tunisia. These costs mainly relate to activities prior to the PetroAsian farm-out in 2009.

 

A Strengthened Board

The Board was pleased to appoint Tom Hickey as Corporate Development Director in November. Tom brings with him a wide range of skills and experience gained during his long service as CFO of Tullow Oil where his tenure coincided with a hugely successful period for that company. Tom’s appointment underlines Petroceltic’s ambition to continue to grow its business over the coming years and significantly increases our capacity for deal-making and execution.

Focus on Corporate Governance, HSE, and Business Ethics

The Petroceltic Board recognises the importance of good Corporate Governance and is committed to business integrity across the Group’s activities, which it views as an integral part of managing the Group’s business. The Company is committed to the highest ethical standards in all aspects of business and expects the same from its employees, contractors and agents worldwide. We comply with relevant national and international laws and act in accordance with local operational guidelines and regulations, including those which are industry specific. We try to create value for our stakeholders and fulfil the obligations we have in the countries where we operate and towards those with whom we have dealings: employees, business partners, suppliers, competitors, host governments, shareholders and the community at large. We recognise that our reputation for behaving well and doing the right thing enables us to access new business opportunities, to partner with new host governments and ultimately build lasting relationships with countries, communities, partners and all other stakeholders, which are the key components of value creation in oil and gas exploration and development.

 

In Health, Safety and Environmental policy, we set targets for HSE performance, and monitor performance in all areas. In 2010, we had 431,472 million operational manhours, with one lost time incident, giving a lost time incident frequency of 2.31 per million man-hours.

In 2010, we reviewed and strengthened the terms of reference for all Board committees, and published these on our website. The Board has also conducted a board effectiveness review, and continues to review methods and practices to make the Board more effective, and to provide entrepreneurial leadership to the Company, within an effective overall control structure which enables risk to be accurately identified, assessed and mitigated.

 

A Year of Growth in a Changing Environment

2010 was a challenging year as the Company focused on delivering the next phase of the Algerian appraisal programme but was frustrated in its planned exploration programme in Italy. 2011 has begun positively with two successful appraisal wells in Algeria. We are happy that the results of the appraisal programme, allied to the initiation of the gas marketing discussion and pre-development planning, will result in a substantial increase in the value of the Ain Tsila asset during 2011.

 

Petroceltic has strong growth ambitions and we will continue to complement our organic growth programme by continuing to pursue corporate and asset acquisition opportunities appropriate to our resources and strategy. However, the Board will remain vigilant with regard to the changing political conditions that are sweeping the Middle East – North Africa regions and pay particular attention to balancing the risks involved with the potentially exciting opportunities that may become available.

 

We would like to thank Petroceltic’s shareholders for the strong support which they have shown for the Company during the last twelve months. We are optimistic that this support will be rewarded with growth in shareholder value in the coming year when we hope to demonstrate the value in our existing assets and take advantage of the growth opportunities in our area of focus.

 

We would also like to thank Petroceltic’s staff and contractors, our partners and other stakeholders for all their hard work and loyal support in bringing the Company to this exciting stage in its development and we look forward with considerable optimism to the years ahead.

 

On behalf of the Board of Directors,

 

 

Robert Arnott Chairman	Brian O’Cathain Chief Executive