Samoilovskoye and Krasnoselskoye Oilfields Development Projects Summary

Nowadays oil market - global as well as Russian - seem to be one of the most attractive for investors. Prices for crude oil hit the new maximum in October 2007 exceeding $90 a barrel and continue to rise up.

The world oil reserves estimate has been reduced by 7% annually, while the demand grows by 2 % a year, yet it is expected that the demand triples in the next 20 years.

According to analysts’ estimation, oil price may exceed $150 a barrel in 2008-2009. No matter how close the forecast is to this target, it is quite obvious that oil will not be cheap any more.  

Due to some favorable macroeconomic factors, “second level” oil companies in Perm Region, like Permoblneft, can show significant growth in operations, getting substantial profit of oil export and supplies to domestic market while oil prices growing. Additional competitive advantages to Perm Region are provided by the quality of Perm oil (which is considered to be “above average”) and a well developed infrastructure.

The project below focused on the development of Samoilovskoye and Krasnoselskoye oilfields having test exploitation as the first step and moving on to industrial extraction of oil on a 20-year basis.

Key data of the project.

Samoilovskoye oilfield (License ПЕМ № 00790 НЭ dated 03.11.2005) is located in Chernushka District of Perm Region covering the surface area of 22.8 sq.km.

Estimated oil reserves, category C1 and C2 – 2 508 thousand tons (appr.17.56 mln.bbl.), recoverable – 502 thousand tons (appr.  3.5 mln.bbl.) of Kashiro-Vereisky deposits (bedding depth 1015-1080m). Gas-oil ratio – 10 m3 / m3 (backwash gas)

The project is set to put into re-operation oil-well No 250 (already in operation), re-entry of one abandoned and drilling of two new wells; establish a pipeline leading to a loading facility.

Total investment in this project is estimated as 205.162  thousand rubles (8.4 mln.USD)

These activities would allow to increase Samoilovskoye field recoverable reserves 2.3 times up to 1 175 thousand tons (appr.  8.2 mln.bbl.). It is planned to recover 160 thousand tons as a result of the test exploitation phase (14% of total recoverable reserves).

Krasnoselskoye oil field (License ПЕМ № 00798 НЭ dated 03.11.2005) is located in Uinskiy District of Perm Region covering the surface area of 7.9 sq.km.

Estimated oil reserves, category C1 – 198.0 thousand tons (appr. 1.4 mln.bbl.) in Tulskiy deposit (bedding depth – 1547.6 – 1551.4 m), and Malinovskiy deposit (bedding depth 1607.7 – 1610.0 m), category C2 – 79 thousand tons (0.55 mln.bbl.) in Turneyskiy deposit (bedding depth 1616.6 – 1639.8 m) Total geological estimate of category C1 + C2 is 1 451 thousand tons (10.16 mln.bbl.). Gas-oil ratio – 20 m³ / m³ (backwash gas).

The project is set to put into re-operation oil-well No 218, drilling of the three new wells, construction of pipeline and a loading facility.

Total investment in this project is estimated as 176.997 thousand rubles (7.22 mln.USD).

These activities would allow to increase Krasnoselskoye field recoverable reserves 2.4 times to 653 thousand tons. It is planned to recover 172 thousand tons as a result of the test exploitation phase (26% of total recoverable reserves).

Investment period is 4 years. Total amount of investments is 382 159 thousand rubles (15.62 mln.USD), the highest peak of investment is planned for year 2009 – 44.9% of the total. Investment plan for initial period has been implemented in full.

Total cumulative production as a result of the test exploitation phase is 331.7 tons (2.32 mln.bbl.)

Financial Indices of the project

The project was estimated on a moderate-pessimistic basis using DCF methodology: 

§  crude oil sales were calculated based on demonstrated recoverable reserves recovery factor of 42.5%. Average recovery factor in the industry is not less than 77% for reserves of category C1

§  sale price was estimated on a basis of 6 500 rubles per ton (265.30 USD per ton or 37.9 USD per bbl.) while  Perm regional market shows the price range of 7200-8300 rubles per ton

Two wells in Samoilovskoye oilfield No 245 and No 250 are already in operation. Part of the investment flow needed will be covered by the production cash flow from the existing oil-wells as well as by introducing the new oil-wells into production in accordance with the project schedule.

For evaluation of the project efficiency, WACC rate was used  in the amount of 10.3% as put in Goldman Sachs, Section “Russia:Energy:Oil”, Report “Great Expectations – Overview of Small Russian Oil Companies: Urals Energy “buy”, Siberia Energy “sell” (September 2007):

Begin quote - “Our WACC assumption for the Russian small caps is 10.3% (vs. 9.6% for the Russian majors) as our observations indicate a higher corporate debt premium for small-caps vs. the majors.” – End quote.

Test exploitation phase financial estimates key indices are shown below:

Real options estimates

on the 02 july 2009

We have also used Black–Scholes model for real option analyses to assess the value of the company projects. Based on the analyses the value of the test exploitation phase is assessed as:

Thus, the value of the project calculated using both DCF and real option methods is on the level to prove enough efficiency to investors also putting the company on a good competitive basis for continuous expansion of its production.