The FINANCIAL — Despite the conflict in Georgia, CanArgo Energy Corporation intends to increase investments in the Georgian oil and gas business.
“We are committed to our Georgian operations and moving this projects forward. We are in the middle of a USD 25 million financing and we plan to invest the majority of these funds in our appraisal and development programs in Georgia,” Vincent McDonnell, Chairman, President and Chief Executive Officer of CanArgo Energy Corporation, told The FINANCIAL.
CanArgo Energy Corporation is a US oil and gas exploration & production company with its shares listed on the American Stock Exchange in New York and the Oslo Stock Exchange in Norway. CanArgo’s oil and gas operations are located in Georgia where it has invested over USD 190 million in the Georgian Oil and Gas industry since 1996.
“For a long time Georgia has provided an important transportation corridor for trade from the east to the west, and I do not see the recent events having a significant negative impact on the importance of this route for future oil and gas transportation,”
Q. In an interview with Reuters CanArgo said it believes the field has significant potential reserves remaining, both within and around the main field, and that production can be enhanced. Can you specify your plans?
A. We believe that there is significant potential in the Ninotsminda Field area to increase the level of oil and gas production. For some time we have been working on a production enhancement strategy for the Ninotsminda Field and we have identified a number of operations which have the potential to significantly increase production at the field. These operations might include: Drilling new wells, both vertical and horizontal, in unproduced parts of the field; Utilizing new technology to target trapped oil and gas; Performing workover activities such as adding new perforations and water isolation techniques.
Q. CanArgo stated oil production from the Ninotsminda Field is sold on a batch basis with the last sale at the end of July and the next scheduled sale not due until late September. What is the capacity of new sales? Is safety guaranteed?
A. Oil production at the Ninotsminda Field has remained steady for the past several months, and we would anticipate the next sale to be comprised of approximately 2,000-2,500 Metric tonnes. The oil is generally sold at the oil treatment facility at Sartichala to oil traders who are then responsible for onward transportation. The oil is generally transported by rail to the Black Sea port of Batumi for further shipment to the Mediterranean area. We understand that rail transportation has returned to normal in Georgia so we do not expect our buyers to have any problems with transportation.
Q. How do you manage your staff in Georgia? Who is in charge of management and administration?
A. CanArgo Energy has its Representative Office in Georgia headed by our Georgian Representative and staffed by local employees. The Representative Office arranges all the administrative issues and coordinated the works implemented by CanArgos’ offices in Georgia.
All of CanArgo’s oil and gas operations are performed through its wholly owned operating company, CanArgo Georgia, which again is entirely Georgian staffed and managed and employs around 250 experienced employees. CanArgo Georgia has its own drilling rigs and equipment and drills most of its own wells.
Q. You said oil production from the field is generally sold at the field gate, transported by the buyer via rail and exported through the Black Sea port of Batumi which has not been affected. Does it mean you do not use Poti port?
A. Correct, our production is exported by international oil traders via the port of Batumi, we have no business with Poti port.
Q. Is there any alternative route to export CanArgo production?
A. As long as there is a will, there is always a way, but right now we are happy with our current arrangement.
Q. In June you reported operating revenues from continuing operations (oil and gas sales) – USD 2,640,234. What is the financial outlook for the full year 2008?
A. The revenue you quote was for the three month period ending June 30, 2008. Operating revenues from continuing operations for the six month period ending June 30 2008 was USD 5,230,996. Revenue for the rest of the year will, of course, depend on the oil price and the level of production which is expected to be stable for the remainder of the year. Since 1996 we have produced 5 million barrels of crude oil and 238 million cubic metres of natural gas with our share of crude oil sales generating approximately USD 55 million revenue for the company.
Q. How does the production sharing contract work and how is the state benefiting from that?
A. Basically the investor takes 100% of the risk by investing money into different exploration projects and if successful recovers these costs from future oil and gas production. A portion of the oil and gas is made available to the investor to recover its costs, with the balance of the production being split between the investor and the state. For example, at the Ninotsminda Field, once CanArgo has recovered its investment, the state’s share of oil and gas produced from the field will increase from the current 30% to 70%. Out of the total oil produced by CanArgo to date at Ninotsminda, approximately 50% has been delivered to the state under the terms of our production sharing contract, which is approximately 2,5 million barrels (approximately 330,000 metric tonnes).
Q. What is the amount of investments made by CanArgo in Georgia?
A. CanArgo has been in Georgia since 1996 and is a major investor in oil and gas in Georgia with over USD 190 million invested to date. We have a 100% interest in four production sharing contracts covering some 600,000 acres.
CanArgo was the first to introduce modern western drilling technologies in Georgia such as horizontal drilling. We currently produce oil and gas from 11 wells on the Ninotsminda Field and we have drilled 6 deep exploration wells with combined depth of more than 25,000 metres.
Q. What are the potential oil fields in regions where CanArgo operates?
A. Historically oil and gas exploration in Georgia has focused on the Middle Eocene and shallower reservoirs such as at Ninotsminda and Samgori, and this geological sequence continues to be an important reservoir target today. However, underlying the Middle Eocene is the Cretaceous interval where oil and gas potential has long been recognised from limited drilling, surface outcrop and by analogy to the Cretaceous in nearby Chechnya and Dagestan, where there has been very significant production from Cretaceous age reservoirs. This interval has been poorly explored in Georgia due to its depth (4,500-5,000 metres) and difficulty in drilling, and it was not until the completion of a deep exploration well by CanArgo at Manavi in 2003 that the presence of oil was proven in the Cretaceous. In essence, our efforts have opened up a new oil and gas play fairway in Georgia.
Geological and geophysical work conducted by the company together with exploratory drilling has identified a very large structure at Manavi at the Cretaceous level which has the potential to contain many millions of barrels of recoverable reserves, but this needs to be verified by further appraisal drilling. Two wells have been drilled on the structure to date, and a potential oil column of the order of 170 metres to 330 metres has been identified. Further well testing will be required to demonstrate that oil can be produced at a commercial rate from these rocks.
Another potentially large oil discovery was made more recently at Norio, northeast of Tbilisi, by exploration well MKT-72. Here the potential producing horizons encountered are the Middle Eocene and Oligocene stratigraphic intervals (these are the main producing intervals at the Ninotsminda and Samgori Fields). The structure is similar in size to the nearby Samgori Field and Ninotsminda Fields which have produced approximately 200 million barrels of oil to date. The company tested the shallower Oligocene interval in the MK72 well which has flowed light oil to the surface but not at commercial rates so far. Our technical experts believe that the reason for this is a damage caused to the reservoir during drilling by heavy weight drilling mud and hence further appraisal will be required.
CanArgo has identified several other oil and gas prospects at various stratigraphic levels within its acreage which have yet to be drilled.
Q. Did you speak with your shareholders regarding the situation in Georgia and CanArgo’s business development? What is their opinion?
A. Yes. The events of the last few weeks do not change our view of Georgia. I still believe in its natural resource base and the untapped oil and gas potential of the areas in which we are exploring. I am currently actively working on increasing investments in the company and plan to further invest these into Georgian oil and gas production.
Q. What is the amount of taxes paid to the Georgian budget in 2007? 2008?
A. Total employee taxes paid by CanArgo companies to the Georgian budget during the period 1996-2008 is up to GEL 19 million. In addition to the taxes paid to the budget, CanArgo has also provided over GEL 707,000 to local charities as part of an ongoing social program. The company has also been supplying gas to the Sagaredjo and Patardzueli communities at a heavily discounted price of USD 25 per MCM for several years.
Q. As a foreign investor with close ties with Georgia, what are your personal thoughts about your business in Georgia, the future of Georgia, investment climate?
A. I think in the short-term there may be some disruption to foreign investment, but I firmly believe Georgia will remain attractive for foreign investors in the long run. We will continue our business in the same manner, and I hope with our joint efforts, it will be possible to return Georgia to the old lifestyle and Georgia will emerge as a stronger and better country.
Q. Kazakhstan said it had no plans to end its participation in the Baku-Tbilisi-Ceyhan, or BTC, pipeline, which channels oil through Georgia to Turkey's Mediterranean coast. Do you think all countries and big players are confident in Georgia’s future?
A. For a long time Georgia has provided an important transportation corridor for trade from the east to the west, and I do not see the recent events having a significant negative impact on the importance of this route for future oil and gas transportation.
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