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lots of detail

  1. fludy

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    Open Briefing.Roc Oil.CEO on Exploration Update

    Document date: Wed 11 Dec 2002 Published: Wed 11 Dec 2002 13:08:02
    Document No: 283228 Document part: A
    Market Flag: Y
    Classification: Open Briefing
    ROC OIL COMPANY LIMITED 2002-12-11 ASX-SIGNAL-G

    HOMEX - Sydney

    +++++++++++++++++++++++++
    CORPORATEFILE.COM.AU

    Roc Oil Company Limited ("ROC") has interests in two new oil
    provinces in the offshore Perth Basin and offshore Mauritania as well
    as two established oil and/or gas provinces in the Beibu Gulf,
    offshore China and eastern England, onshore UK. You're planning to
    undertake an exploration drilling programme in all four areas during
    2003 and have recently released to ASX an indication of the typical
    target reserve potential for prospects in these areas. Please comment
    as to ROC's current thoughts about the 2003 drilling programme and
    the size of the targets youre going to test?

    CEO JOHN DORAN

    As part of our continuing exploration and appraisal drilling
    programme, which started in mid-2002, ROC plans to drill between 10
    and 20 wells during calendar 2003. This heavy drilling activity
    represents about 75% of our Base Case Exploration and Appraisal
    Budget for next year. If we ignore the upside potential of each
    prospect, take a realistic view of the size of the targets we're
    going to drill and add together the "typical" reserves that we might
    expect to find, we end up targeting about 70 to 80 MMBOE of potential
    net ROC reserves.

    Needless to say, not all the wells will be successful, but it's
    equally true to say that some of the wells may prove to be more
    successful than we expect. Even if we hit only about half of the
    targeted reserves, which would be a terrific result, the 2003
    exploration dollar cost for reserves added would be just over
    US$0.5/BBL, which is pretty good by any industry standard.

    CORPORATEFILE.COM.AU

    At 30 September 2002, ROC had A$79 million cash and had reduced its
    debt to US$21 million. Is this sufficient to fund your exploration
    plans?

    CEO JOHN DORAN

    ROC's cash and cash flow are well able to fund the 2003 programme.
    ROC will not need to raise fresh capital through the issue of new
    shares nor reduce its interest in the relevant permits through
    farmout, although it may consider that option in the UK where our
    interest is 100%.

    We've just completed our 2003 Budget process and it has been
    particularly interesting because there is such a wide spread of
    potential drilling outcomes. This has caused us to come up with an
    "Expected" Base Case Budget with two sensitivities representing
    "Minimum" and "Maximum" scenarios. The Base Case Budget tries to
    anticipate the success/failure mix of the wells to be drilled,
    particularly those to be drilled in the early part of the year in
    places such as the Perth Basin. If our first three wells in 2003, all
    in the Perth Basin, are all dry then we certainly won't be spending
    as much of our budget as would otherwise be the case!

    Working on what we consider to be a realistic assumption of a mix of
    success and failure through the entire year, ROC expects to spend
    between A$30 and A$40 million on exploration and appraisal activity
    through 2003, 75% of which is related to the drilling of between 10
    and 20 wells. This is a heavy duty drilling programme for a company
    of ROC's size, but our cash reserve and cash flow allow us to handle
    this magnitude of activity without resorting to shareholders or
    farming out. We couldn't say the same thing with equal confidence if
    our "Maximum" case eventuates, but since that assumes that most/all
    of the wells are successful, it's a problem we would love to have -
    and one I'm sure we could handle.

    Over the last couple of years, four factors have combined to provide
    this financial self-sufficiency: peripheral assets have been sold;
    the cash balance has been nurtured; our modest debt has been reduced
    further; and our equity exposures to most of the various plays have
    been pitched at the appropriate level. That is why the 2003 drilling
    programme may well "make" the Company, but it certainly won't break
    it.

    CORPORATEFILE.COM.AU

    Although at the AGM in May this year you mentioned that alongside the
    high exploration success and strong balance sheet there were two less
    positive points: the share price which has not been re-rated despite
    ROC's exploration successes; and, company-wide proved and probable
    reserve base at around 20 million barrels of oil equivalent is fairly
    slim. Where, and how, do you expect to grow your reserves? When do
    you expect to release an updated reserve number?

    CEO JOHN DORAN

    Our preferred way of adding reserves is through the drill bit. Our
    results during the last couple of years suggest that it's also the
    most cost effective and practical approach for a company like ROC.

    We currently view the Perth Basin as the area that could have the
    biggest immediate impact on ROC's reserve growth and market standing
    - but only if the upcoming wells are successful and there's no
    guarantee of that! This reflects the size of the targets, the amount
    of equity held by ROC and the area's location offshore Australia.
    Depending upon the extent of that potential success, ROC's current
    reserve base could double or treble just on the basis of the Perth
    Basin drilling.

    Depending upon the size of the prospects which are currently being
    worked-up onshore UK, that is another area which could have a
    significant impact, possibly in the order of 50% to 100% reserve
    growth for ROC, even if the targets prove to be significantly smaller
    than the Saltfleetby Gas Field (onshore UK, ROC 100 percent). While
    it would be wonderful to find another Saltfleetby Gas Field you can't
    run a company on that basis; we've got to be sure ROC can generate
    positive cash flow onshore UK even if the discoveries prove to be
    smaller than Saltfleetby.

    We continue to look at asset acquisition, but only occasionally. This
    is because we're mainly focussed on our current assets. However, if
    the assets are Australian-based with current or imminent reserves,
    production and revenue, we'd be interested, partly because of our
    Australian tax efficiency. Unfortunately, as we've stated on previous
    occasions, it's hard to find the right opportunity and we routinely
    walk away from what we perceive are the wrong opportunities for ROC.

    We don't exclude corporate activity but, quite frankly, the
    opportunities that we're currently aware of and those that we think
    may potentially arise in 2003, do not appear to us to offer good
    value. Therefore, we have no current appetite on the corporate front,
    although we'll continue to monitor various situations.

    CORPORATEFILE.COM.AU

    As you continue to seek new reserves through exploration, asset
    purchase or corporate acquisitions, have you considered
    non-conventional areas such as coal bed methane?

    CEO JOHN DORAN

    On occasions we've extended our search for new reserves to coal seam
    gas ("CSG") or coal bed methane ("CBM"), as it's more commonly known.
    We've been aware of this sub-set of our industry for more than a
    decade, particularly in the US, where two of our directors, both with
    considerable oil and gas experience, are based. In fact, if either of
    those gentlemen were living in Australia they would probably be
    regarded as CSG "experts". One of them is currently an active CSG
    player in the US in his own right. Clearly, there are many situations
    where money can be made by extracting gas from coal seams. Over the
    last few years we've considered, to varying degrees, CSG projects in
    areas ranging from Australia to Botswana. If we found the right one
    for ROC we would give it a serious look. So far, we haven't found the
    right one.

    CORPORATEFILE.COM.AU

    Following the discovery of the Cliff Head Oil Field in WA-286-P in
    the offshore Perth Basin, Western Australia, in the last days of 2001
    you drilled a successful appraisal well one kilometre to the north of
    the original discovery well which encountered a 36 metre gross oil
    column. What is the assessment, so far, of the value of Cliff Head?

    CEO JOHN DORAN

    Today, Cliff Head's value is a matter of pure speculation. It's only
    if/when a declaration of commerciality is made that ROC would
    consider the field as having tangible value. Various analysts and
    other industry watchers have suggested what that value might be, but
    we prefer to wait and see what the next few wells reveal. If the next
    few wells are successful, then, not only will they define the real
    value of the Cliff Head Oil Field, but they'll also upgrade the value
    of the other prospects and, in fact, the whole trend.

    CORPORATEFILE.COM.AU

    On several occasions in the recent past you've gone to some length to
    emphasise the need to appraise more fully the Cliff Head discovery to
    the point where it could be interpreted that you're not as optimistic
    about the potential development as some of your co-venturers. Is that
    really the case? If it is, do you think that that is one of the
    reasons why ROC's share price has effectively stayed flat as the
    drilling approaches, whereas many of your co-venturers have seen
    their share prices rise?

    CEO JOHN DORAN

    I certainly don't have a full understanding of what drives the share
    price of a small oil stock in the current market climate, although I
    have some private thoughts on that topic. What I do know, however, is
    that when youre coming into a major exploration and appraisal
    drilling programme you have to try to manage expectations in a
    realistic manner, both within and beyond the company. People may have
    forgotten that twelve months ago this part of the offshore Perth
    Basin was undrilled and was perceived by many to be high risk with a
    likelihood of poor reservoir and the consensus view was that, if
    there were any hydrocarbons to be found, it would probably be gas,
    not oil. Lately, you could be forgiven for thinking that Cliff Head
    is a slam-dunk development just waiting to happen. The reality is
    that every exploration and appraisal drilling programme carries with
    it a sizeable amount of risk and you never want investors to lose
    sight of that fact. Otherwise, if the drilling results are
    disappointing, you'll spend a long time trying to lift investors off
    the canvas and you'll find it even more difficult to persuade them to
    stay in the ring for another round or two of investment.

    CORPORATEFILE.COM.AU

    In April 2002, ROC released information to ASX indicating that the
    net present value of the Saltfleetby Gas Field was about A$100
    million, approximately $0.92 per share. What's your current estimate
    of the value of Saltfleetby?

    CEO JOHN DORAN

    We won't be able to give a specific answer to that question until our
    year end reserves review has been completed. In a more general sense,
    if we look at the gas which has been produced since April,
    approximately 5.5 BCF, and the remaining recoverable proven and
    probable initial reserves estimated as at the end of last year, then
    the net present value of Saltfleetby to ROC is in the order of A$90
    million (A$0.83/share).

    CORPORATEFILE.COM.AU

    During the September 2002 quarter, ROC temporarily shut-in production
    at Saltfleetby because of seasonal low prices. How have prices moved
    since then and what impact has your new contract, starting 1 October,
    had on your overall price received?

    CEO JOHN DORAN

    As expected, UK spot gas prices have strengthened lately with the
    onset of the British winter. They were recently around 20p/therm
    (A$6.00/MCF), more than twice what they were a few months ago and
    more lately they have spiked above 30p/therm (A$9.00/MCF). That more
    than justifies our decision to shut-in briefly during the period of
    low summer prices. In December 2001 gas prices were in the region of
    25p/therm.

    The new contract gas price has had a definite positive impact upon
    ROC's revenue base. In value terms the impact could be broadly
    regarded as being equivalent to a 25% increase in overall production.

    CORPORATEFILE.COM.AU

    ROC brought Saltfleetby into production in December 1999. It has
    averaged around 35 MMSCFD since then and was still producing at
    around 30 MMSCFD in September 2002. How is the field operating now,
    particularly in terms of production and cash generation?

    CEO JOHN DORAN

    Saltfleetby continues to behave very well. As far as cash generation
    is concerned, the recent increase in contract gas prices means that
    the field is now producing at its most profitable level ever, on the
    basis of cash flow per MCF of gas.

    In the resource business you usually get your fair share of
    operational problems and it is a rare project which performs as
    sweetly and smoothly as Saltfleetby has for the last three years.
    With each passing month our production database is developed further
    and it appears to be confirming our view that the field is one of
    those unassuming assets which outperforms expectations. Having said
    that, we're not complacent as every field will eventually have some
    sort of operational or production hiccup - that's just part and
    parcel of the business.

    CORPORATEFILE.COM.AU

    Your aim is to find another Saltfleetby in the South Humber Basin.
    What progress have you made with processing the 3D seismic and
    progressing regional exploration?

    CEO JOHN DORAN

    3D seismic interpretation is progressing. First pass results should
    be available by the end of the year. It's too early to comment in any
    detail other than to say that we expect a few attractive drill
    targets to emerge with oil and/or gas potential. In terms of barrels
    of oil equivalent, the typical target range might be between 25% and
    50% of the Saltfleetby Field as we now know it - which is twice the
    size we attributed to it when it was first identified.

    CORPORATEFILE.COM.AU

    ROC owns 40 percent and is operator of Block 22/12 in the Beibu Gulf,
    offshore southern China. In March 2002 you announced an oil discovery
    to add to the four previous discoveries in the block. What progress
    have you made in evaluating the potential low cost, collective
    development or planning further exploration?

    CEO JOHN DORAN

    Considerable progress has been made. The 3D seismic has been acquired
    and the quality is good to excellent. We continue to be hopeful that
    the hi-tech seismic techniques we've used in deep water offshore West
    Africa will help us to better define the subtle drill targets in our
    acreage offshore China. The seismic information is currently being
    interpreted with this degree of optimism, although we won't know
    whether or not this positive expectation will prove to be well
    founded until early 2003. We continue to discuss with the relevant
    government authorities the concept of the fast track, low cost,
    collective development of one or more of the oil discoveries which
    are known to exist in the block. So far those discussions have been
    very constructive. Naturally, there are still a number of issues that
    we haven't yet had time to address so discussions will resume early
    in the New Year.

    As previously foreshadowed, ROC's drilling activities in the Beibu
    Gulf will probably slip into the fourth quarter of 2003, for a number
    of reasons, including likely rig availability. Coincidentally, that
    timing works well from the point of view of ROC's company-wide
    drilling schedule because it leaves the second and third quarters of
    2003 to be taken up with drilling onshore UK.

    CORPORATEFILE.COM.AU

    What progress has ROC made in processing and interpreting the 3D
    seismic and planning a drilling program for your blocks in the Rio
    Muni Basin, offshore Equatorial Guinea?

    CEO JOHN DORAN

    We're fine-tuning the 3D seismic interpretation. We're also making
    initial preparations for the drilling of a deep water well in
    Equatorial Guinea, probably in 2004. We've talked to a few large
    companies about the possibility of farming out part of the block and
    we've received and rejected a farm-in offer. While some of these
    farm-out discussions are expected to continue/resume during the first
    quarter of 2003 we suspect that ROC, and the rest of the industry,
    will monitor drilling results in and around the Rio Muni Basin over
    the next six months or so before finalising a detailed
    drilling/farmout strategy. One of the key things to remember in this
    regard is that there are several quite different play types
    recognised within our block in different water depths and at various
    drill depths. There is no shortage of variety in this part of the Rio
    Muni Basin.

    CORPORATEFILE.COM.AU

    You recently announced that as a result of exiting Senegal you
    expected the 2002 accounts to show a write down of expenditure in the
    country in the order of A$2.5 million. Please comment on why this
    figure seems low, given the 46.75% equity you had and the fact that
    youve been active in the country for a long time?

    CEO JOHN DORAN

    You're right, it is a low figure. It reflects a number of factors,
    including ROC's cost efficient approach to operating which we're
    increasingly coming to regard as a key ingredient in the Company
    armoury - particularly when we look at the costs incurred by larger
    operating companies.

    The decision to leave Senegal was made all the more difficult because
    we have a high regard for the government authorities who we rate as
    being amongst the best we deal with anywhere in the world. However,
    if parts of your portfolio are performing in a way that demands more
    time, energy and money be devoted to them, a company of ROC's size
    has no alternative but to swallow a large reality pill and remove
    other areas from the portfolio which, rightly or wrongly, are
    currently judged to be less attractive.

    CORPORATEFILE.COM.AU

    Along the same lines, you seem to be winding down your activities in
    Mongolia through the farmout you announced last year to a Chinese oil
    company. Could you update us as to ROC's current view of Mongolia?

    CEO JOHN DORAN

    It was the farmout of 50% of our interest in the East Gobi Basin that
    allowed ROC to remain in Mongolia for the last twelve months,
    otherwise we would have exited last year following more than five
    years of activity in that country. The basic rationale is the same as
    for Senegal: other parts of ROC's portfolio have outperformed our
    perception of the potential for our acreage in Mongolia. With this in
    mind, ROC is currently talking to the relevant government authorities
    in Ulaanbaatar with a view to exiting the permits in good standing.
    Again, just like Senegal, the support which ROC has received from the
    government in Mongolia has been terrific and that has made the
    decision to concentrate our activities elsewhere in the world
    particularly difficult. Nothing would have given us greater pleasure
    than to have found significant oil in Mongolia because, not only
    would that have boosted ROC's value, it would also have had a
    tangible effect on the economy of a country which seems to us to be
    largely composed of some of the nicest people on the planet.

    CORPORATEFILE.COM.AU

    You've also been in Mongolia for quite a long time and you've been
    much more active in that country than in Senegal, therefore, if you
    exit Mongolia how much would you expect to write off?

    CEO JOHN DORAN

    We're fortunate in that we took a large write off on Mongolia some
    time ago. Also we're in early stage discussions with regard to the
    possible sale of a drilling rig which we own in that country which
    would reduce the write off, at least to some extent. On this basis we
    would expect to be writing off about A$8 million as a result of
    exiting Mongolia.

    CORPORATEFILE.COM.AU

    So now that you've left Senegal and assuming you'll leave Mongolia,
    the countries where ROC is active will reduce from eight to five plus
    Angola, where you hope to initiate activities. Does it worry you that
    you might be concentrating too much effort on too few countries?

    CEO JOHN DORAN

    Not at all. Most investors, particularly institutions, would probably
    be relieved to know that ROC was continually high grading its
    portfolio with a commensurate reduction in the number of countries
    where it was operating. We're certainly not putting all of our eggs
    in one basket. We have a very good spread of project risk with active
    appraisal projects in Mauritania, Australia and China, continuing
    production/development onshore UK and active exploration in all of
    those countries, plus Equatorial Guinea and, hopefully, Angola. Most
    people would regard that as a reasonable amount of work to get
    through in any given week! In fact, we look at ROC's workload in
    terms of weight of activities rather than the number of countries.
    The worst thing we could do is to defocus our efforts by retaining
    all the acreage we've historically acquired.

    The whole process is like throwing seed across a field then waiting
    to see which areas start to sprout first. Initially you cover a
    relatively large area with seed but then, as the portfolio evolves,
    you see where the growth potential is coming from and you zero in on
    those areas.

    CORPORATEFILE.COM.AU

    Finally, within the last week you've received a little bit of radio
    and television coverage in the UK with the BBC news services
    commenting on local council approval which has been granted to ROC
    that will allow the Company to drill a well near Hadrian's Wall, a
    World Heritage site in the north of England. Can you give us some
    background to this application and the implications which the
    approval has for ROC and the local community?

    CEO JOHN DORAN

    When you explore for oil and gas onshore Britain you do so within a
    well-defined and quite onerous regulatory framework largely designed
    to protect everybody's rights and entitlements - and that is exactly
    how it should be, particularly on a crowded island.

    Amongst other things, UK legislation requires a company to apply to
    the relevant local government authority for planning permission to
    construct a drill site. Usually such applications are handled as a
    matter of routine. In this case, it just so happened that the
    relevant site was next to the World Heritage-listed Hadrian's Wall,
    which the Romans built to keep the Scots out of England.
    Understandably, that application generated more media interest than
    is usually the case. ROC welcomes the decision to approve the
    application but we're also totally sympathetic to the concerns of the
    people who live in the area. Naturally, many of them have little or
    no knowledge as to how ROC goes about its business; perhaps they may
    even have been influenced by popular media and movie portrayals of
    how a bog-standard, big, bad oil company might behave towards local
    communities. They may not realise that ROC just isn't that sort of
    company.

    The reality is that every oil company in the world is now acutely
    sensitive to local community and environmental issues. ROC is no
    exception. In fact, we spend a great deal of time handling these
    matters in an appropriate manner in various parts of the world. When
    we operate offshore Australia we go to great lengths to take into
    account the needs of the local lobster fishing industry while at the
    same time we gather extremely useful scientific data for people who
    are concerned with gaining a better understanding of the behaviour of
    the Humpback whales which migrate down the coast of Western Australia
    about this time each year. In Mongolia, we interacted with and
    assisted nomadic herdsmen when their livelihood was threatened by an
    outbreak of foot and mouth disease a couple of years ago, while
    offshore China our seismic survey was conducted with minimum
    disruption to the local fishing community.


    Quite simply: many of us got into this business because our love of
    Geology which in many cases was the result of a genuine appreciation
    of the environment - at a time long before it became a cause celebre.
    Working in the oil industry doesn't require you to change your
    pro-environment outlook - in fact, it puts you in a better position
    to ensure that operations are conducted in a proper and practical
    manner which takes into account the interests of all concerned
    parties. I know that probably sounds like standard corporate-speak,
    but at ROC that really is how we try to conduct our business.

    CORPORATEFILE.COM.AU

    Thank you John.


    For previous Open Briefings by ROC visit www.corporatefile.com.au

    For further information on Roc Oil Company Limited visit
    www.rocoil.com.au

    --------------------------------------------------------------------------------

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