Interim Report 31 December 2016

DIRECTORS’ REPORT

The directors present their report together with the condensed interim financial report of the Group comprising of Oilex Ltd (the Company) and its subsidiaries for the half year ended 31 December 2016 and the auditor’s review report thereon.

Interim Financial Report 31 December 2016 

Directors

The directors of the Company at any time during the interim period and until the date of this report are detailed below.  All directors were in office for this entire period unless otherwise stated.

Mr Bradley Lingo Non-Executive Chairman from 23 February 2017 (previously Non-Executive Director)
Mr Max Dirk Jan Cozijn Non-Executive Director from 23 February 2017 (stepped down as Non-Executive Chairman 23 February 2017)
Mr Jonathan Salomon Managing Director

Financial

The Group incurred a consolidated loss after income tax of $3,243,406 for the half year (31 December 2015: loss of $23,307,742). Revenue for the period has decreased due to Bhandut-3 being shut in from 6 October 2016, Cambay-73 was on production test from 2 July to 24 July 2016, and Cambay-77 was shut in after June 2016. The prior period results included the impairment of development and exploration and evaluation assets of $15,039,632, with no impairment recorded in the current period. The impairment of receivables owing from Gujarat State Petroleum Corporation (GSPC) has decreased with $908,518 being impaired in the current period. Administration expenses includes the recovery of $693,400 arising from the insurance claim relating to the Zeta Resources Limited litigation. Other income includes the recovery of $190,853 relating to assets previously impaired. Cash and cash equivalents held by the Group as at 31 December 2016 was $1,886,040 (30 June 2016: cash and cash equivalents $5,158,361).

Review of Operations 

During the period, the Company continued to focus on evaluating and commercialising the extensive Eocene low permeability (tight) reservoirs in its onshore Cambay Field project located in the state of Gujarat, India. Oilex also continues to hold preferred bidder status over a large position in the onshore Canning Basin, Western Australia. 

Cambay Field

Oilex continues to focus its resources on unlocking the multi-TCF in-place tight gas potential in its onshore Cambay Block, Gujarat State, India, with the current focus on unconventional (tight) Eocene reservoirs which are known to be gas charged and referred to as the EP-III/IV or X and Y Zones.
Commercialising the EP-IV tight gas
Analysis of core data is required to provide an optimised reservoir stimulation design that suits the geological make-up of the EP-IV section, and to advance the project.  Two horizontal stimulated wells have been drilled in this project over the last 6 years: C-76H failed for operational reasons and while C-77H produced and sold gas, improved flow rates are required for a commercial development to proceed.  Core is available from the C-23z well, drilled by Oilex in 2008 as part of a multi-well program to test and develop Oligocene OS-II and Eocene EP-IV reserves. The EP-IV core included a seven metre section of carbonaceous shale related to a channel fill sequence which is restricted to a small part of the Cambay PSC area. The thin carbonaceous zone affected the seismic response and lead to the previous conclusion that the core was not representative of the EP-IV zone over the wider area. A subsurface study of the region recently completed for this purpose, has confirmed the non-channel sections of the core from C-23z are representative of the broader EP-IV reservoir.  Importantly, an inspection of the core by the Company and its consultants has confirmed that it retains the integrity required for the purposes of geo-mechanical and proppant embedment studies. This provides a low cost solution to advance the project.
In October 2016 Oilex reached an agreement with GSPC under which Oilex can progress the drilling of a new well by undertaking sole liability for all associated expenditure. Subject to the exercise by GSPC of prescribed back-in rights, as detailed in the Company’s announcement on 17 October 2016. Oilex will be entitled to receive 100% of any revenue arising from this well. 
Whilst a new vertical well is included in the planned work programme for 2016/17, the timetable for this well is uncertain pending the outcome of the core analysis of C-23z. Additionally GSPC is running a sale process of its 55% interest in Cambay in which Oilex submitted a conditional offer.  Completion of this process may result in a new partner entering the project or the Company increasing its participating interest.  In addition to GSPC’s agreement to any potential sale, Indian regulatory approvals will be required to effect the sale/transfer of GSPC’s interest in Cambay. Oilex as Operator holds a pre-emptive right in respect of the possible sale of GSPC’s interest in Cambay to a third party. 
Cambay-73 and Cambay-77H Approval from the regulator is being sought to bring previous producing wells C-73 and C-77H back on line. Production was terminated in mid-2016 as the government approved period for test production had expired. Production Sharing Contract (PSC) Term The current PSC term expires on 23 September 2019.  The Company has commenced preparation of documentation to support a request for grant of extension to the Cambay PSC, under a recent Government of lndia policy, for a period of up to an additional ten years. The application for extension must be submitted by 23 September 2017. This new policy remains untested.

Cambay Joint Venture Management

GSPC, the Joint Venture partner approved the Work Programme & Budget (WP&B) for the Cambay Field for FY 2016-17. This is currently awaiting government approval. 
The WP&B for FY 2017-18 has been tabled and is awaiting Joint Venture and subsequent regulatory approval. 
As at 31 December 2016 the Joint Venture partner owed ~US$6.7 million to the Cambay Joint Venture. Oilex continues to engage with its Joint Venture partner to resolve the unpaid cash calls.  Oilex as Operator, continues to bear the ongoing costs of the Joint Venture and has managed payment of the Cambay Joint Venture creditors.

Bhandut Field

Oilex is the Operator and holds a 40% equity in the Bhandut Field, with GSPC holding the remaining participating interest. During the period the Government of India approved the extension of the Bhandut Petroleum Mining Lease (PML) for a further three years to 22 September 2019. The extended Bhandut PML end date is consistent with the remaining PSC term. Production was shut in during October 2016 due to increasing water cut. The Company continues to investigate options to re-open production.
The field has ongoing exploration potential, coupled with existing production facilities. The Company is currently in discussion with a number of parties, seeking expressions of interest for a possible sale of its participating interest in the PSC.

Wallal Graben - Western Australia (Canning Basin)

The Wallal Graben asset is located adjacent to the Pilbara, a global resource centre for iron ore and LNG in Western Australia.  
The Wallal Graben blocks are currently under application with the Department of Mines and Petroleum (DMP). They are frontier exploration blocks that represent a potential low cost entry to an underexplored area. Oilex continues to investigate low cost exploration techniques, de-risking tools and approaches that address the geological uncertainties in this basin and potentially provide an alternative lower cost work programme to the currently offered levels which were determined in a higher oil price environment. 
Final award of the blocks requires signing of Heritage Agreements with the Nyangumarta and Njamal People and is linked to a request to the DMP that all three blocks be awarded simultaneously. Consultations on the Heritage Agreements are nearly complete following which the DMP will make an offer to grant a Petroleum Exploration Permit for each of the three blocks to Oilex for its final acceptance. Oilex can review its interest in pursuing these applications up to time of final acceptance. 

JPDA 06-103

Oilex as operator, and on behalf of the JPDA 06-103 Joint Venture participants, continues to seek a resolution to the dispute with Autoridade Nacional do Petroleo e Minerais (ANPM) in relation to matters associated with the termination of JPDA 06-103 PSC. In July 2015, the ANPM rejected the Joint Venture request to terminate the PSC by mutual agreement in good standing and without penalty, and the ANPM sought to impose a penalty of US$17,018,790 upon the Joint Venture. The Joint Venture undertook significantly more exploration expenditure than required during the PSC term and believes the excess was not properly accounted for in accordance with the terms of the PSC.  

Notwithstanding the Group’s belief that no penalty is applicable, both parties have made a number of offers to settle the matter, none of which have been mutually acceptable. In view of ongoing discussions to resolve this matter, the Group has elected to make a provision of US$600,000 as at 31 December 2016, being the Group’s share of a possible settlement of the JPDA matter. The provision, timing and or settlement, if any, is subject to variation dependent upon ongoing negotiations with the ANPM.

The Joint Venture continues its discussions with the ANPM and remains hopeful an amicable settlement will be reached. If the parties are unable to reach an amicable settlement, any party may refer the matter to arbitration. If this occurs, the obligations and liabilities of the Joint Venture participants under the PSC are joint and several, with parent company guarantees provided by all Joint Venture participants. Oilex has a 10% participating interest in the Joint Venture and is the Operator.

West Kampar

Oilex continues to pursue the enforcement of the Arbitration Award and a commercial settlement with respect to its interest in the West Kampar PSC, onshore Sumatra, Indonesia.

At the end of 2016 the Indonesian Operator applied in the Indonesian courts for a debt payment obligation suspension. This was denied and the operating company, PT Sumatera Persada Energi was declared bankrupt. Oilex has received confirmation from the Indonesian Government regulator that Oilex still retains its original 45% participating interest in the PSC. Oilex has instructed its legal advisors to continue to protect Oilex’s claims, as well as its interest in the PSC.

Emphasis of Matter

The auditor’s review report contains an emphasis of matter in relation to the potential uncertainty regarding continuation as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and settlement of liabilities in the normal course of business.  The Group will require funding in order to continue its exploration activities and progress the Cambay Field drilling programme.

The funding requirements of the Group are reviewed on a regular basis by the Group’s Chief Financial Officer and Managing Director and are reported to the Board at each board meeting to ensure the Group is able to meet its financial obligations as and when they fall due. Until sufficient operating cash flows are generated from its operations, the Group remains reliant on equity raisings, joint venture contributions or debt funding, as well as asset divestitures or farmouts to fund its expenditure commitments.

The Company continues to actively develop funding options in order that it can meet its expenditure commitments and its planned future discretionary expenditure, as well as any contingent liabilities that may arise.

Further information is provided in Note 2 (b) of the consolidated financial statements.

Corporate

Oilex settled its claim with the Company’s insurers to recover part of the costs associated with the Zeta Resources Limited litigation with the proceeds from the settlement of $693,400 received in January 2017.

The Company implemented additional material cost reduction initiatives during the period reflecting the proposed activity level for 2017 and the requirement to direct cash resources to the planned activity programme at Cambay. The cost reductions, undertaken in both Perth and India, included a 30% overall reduction in the number of personnel and a 14% average reduction in salaries and wages for existing personnel. 

Significant Events After Balance Date

On 23 February 2017 Mr Bradley Lingo was appointed interim Chairman. Mr Cozijn stepped down as Chairman and continues as a Non-Executive Director.
On 15 March 2017 as part of the placement and planned appointment of Cornhill Capital Limited (Cornhill) as its AIM broker the Company was required to terminate its annual corporate advisory services from Paterson Securities Limited, effective July 2017. In addition to all other accrued amounts as at this date, the Company is required to prepay fees for this period in the amount of $225,205.

On 15 March the Company executed a Placing Agreement with Cornhill to complete a two (2) tranche placement for 488.8 million ordinary shares to raise approximately £1.1 million ($1,783,400) before costs. Tranche 2 is subject to shareholder approval. It is anticipated that following the successful completion of Tranche 1, the Company will appoint Cornhill as its AIM Broker.
There are no other significant subsequent events occurring after balance date.