Kina Petroleum Limited (Kina Petroleum) has announced annual report for the year ended 31 December 2016.
The names of Directors in office at any time during or since the end of the year are:
Richard Robinson, Independent Non-Executive Chairman
Appointed 13 December 2013, Richard has 39 years industry experience, including 29 years in Papua New Guinea. His experience encompasses the management of both project developments and upstream operations and includes periods with a variety of contractors and Operators including ExxonMobil, BP and Oil Search.
He retired from Oil Search in early 2013 after more than 10 years employment with the company, the last three as Executive General Manager – Operations, where he was responsible for all of Oil Search’s PNG production and associated drilling operations.
Mr Richard Schroder - Managing Director
Appointed 1 June 2011, Richard Schroder has a Bachelor of Science degree, majoring in Geophysics, from the University of Sydney. He is experienced in Australian and international oil and gas exploration commencing with Conoco in the North Sea in 1975.
Richard’s 30+ years of experience extends to both UK and Norwegian sectors of the North Sea, Africa, Indonesia, PNG, NZ and onshore and offshore Australia. Richard has 20+ years of experience as an operator in the lowland and highland jungles of PNG and has managed junior companies such as Sydney Oil Company as well as majors such as Santos in the capacity of Exploration Manager, South East Asia.
Richard has drilled 11 wells in PNG and Papua Province Indonesia, resulting in 1 commercial oil field, and 3 other oil and or gas intersections, and helped pioneer the boutique seismic technology which was responsible for considerable savings and drilling success.
Dr Ila Temu, Independent Non-Executive Director
Appointed 1 June 2011, Ila achieved a distinguished career with the University of Papua New Guinea, the National Research Institution, the Australian National University and the University of California, Davis USA, where he was awarded his PhD. Ila entered the private sector in 1996 when he was appointed Managing Director, Mineral Resources Company and during 2000 he accepted the appointment as General Manager, Government Relations, Placer Niugini Ltd. Ila is President, PNG Chamber of Mines and Petroleum, Director Corporate Affairs, Australia Pacific, for Barrick PNG, Non-Executive Director Bank South Pacific Limited, Chairman of PNG Ports Corporation, Director Bank of South Pacific Capital Port Moresby and Council Member, Divine Word University.
Barry Tan, Non-Executive Director
Appointed 1st March, 2009 on the formation of Kina Petroleum Limited as the Executive Director, Barry Tan is a naturalised citizen of Papua New Guinea and has spent over 35 years in Papua New Guinea developing and operating various businesses in Papua New Guinea. Barry is currently Chairman of TST Trading, Chairman of the TST Group of Companies that span property development and running supermarket franchises in PNG and also diversified industry through Starland Freezers, Tanpac and Kokoda Tailoring.
Barry brings to the Company a wealth of knowledge in understanding the culture of PNG and the most efficient way to run the business. Barry also has a strong network of interpersonal relationships in commerce in PNG through his various associations.
David Vance, Independent Non-Executive Director
Appointed 6 November 2014, David is a corporate and project finance attorney and CFA charterholder with over 25 years of experience in Asia and the US. As a partner in private practice with two major US law firms, Mr. Vance represented some of the world's largest infrastructure and financial institutions in complex, first-of-itskind transactions, including numerous "Deals of the Year" for Asia, and was recognized as a leading lawyer for project finance in Japan by an industry publication. He also advised many small and medium size enterprises in a wide range of corporate and financial matters.
Mr. Vance moved in-house to InterOil Corporation and, more recently, Asian Oil & Gas Pte Ltd., an affiliate of PIE Holdings, LP, to focus on upstream oil and gas matters in PNG and other countries. Mr. Vance received an A.B. from Stanford University and his J.D., with honours, from the University of Texas School of Law. He lives in Singapore.
The Company Secretary as at the end of the financial year and at the date of this report is Mr Peter Impey. Mr Peter Impey is a Certified Practising Accountant and a full member of The Chartered Institute of Secretaries & Administrators. He holds a Bachelor of Business degree, majoring in Accounting from the University of Southern Queensland and a Graduate Diploma in Fraud Investigation from the Charles Sturt University in NSW.
Peter has worked in an accounting environment for over thirty years, and has worked in a Public Accounting Practice in Papua New Guinea for twelve of the last fifteen years involving preparation of accounts, taxation matters and secretarial responsibilities for companies utilising the registered office.
The principal activities of the consolidated group are to pursue, acquire and develop energy related assets in Papua New Guinea and overseas.
The net loss of the consolidated group after income tax for the year was US$ 2,783,811 (2015: US$ 3,088,936).
No dividends have been paid or declared by the consolidated group since the beginning of the year.
The net assets of the consolidated group at 31 December 2016 were US$32,983,540 (2015: US$35,706,404). At 31 December 2016 the Group had a cash balance of US$7,145,597 (2015: US$10,342,756).
STATE OF AFFAIRS
Other than matters detailed in the Review of Operations and Likely Developments, there were no significant changes in the state of affairs of the consolidated group.
REVIEW OF OPERATIONS AND LIKELY DEVELOPMENTS
Kina Petroleum Ltd (“Kina”, “KPL” or “the Company”) was formed in 2009 to participate in the exploration and acquisition of oil and gas assets in PNG, and since its float in late 2011, has raised a total of US$ 44 million with more than US$ 7 million cash on hand at the end of 2016. As it has always done, Kina continues to leverage its large exploration position to support growth related activity in its licenses. This is despite the two year period to the end of 2016 presenting significant challenges because of a well documented decline in Oil price, coupled with uncertainty over the timing of extension of licenses which are foundations of our acreage portfolio.
These circumstances drove Kina’s Board to cut expenditure in 2016 - both licence focused and administrative - to preserve its valuable capital. Obviously, in difficult times, the opportunity to farmout licence interests is very limited when all major companies are cutting back on expenditure, particularly exploration. However our industry has faced many such crises over the last 40 years and those companies that quickly adapt to the prevailing environment know that for every downturn there is a recovery.
Although the wait for licence extensions imposed operational limitations on Kina, the company was in fact fortunate that this occurred during a period of relatively low industry activity. In consultation with the Department of Petroleum and Energy in Papua New Guinea, the company was able to manage and renegotiate what would otherwise have been large capital expenditure programs.
Ultimately, we are involved in an industry that supplies a market that consumes close to 100 million barrels of oil a day. The lack of investment in both new developments and exploration means there is a gap developing between supply and demand and we are now seeing this reflected in an oil price which at the beginning of 2017 was almost twice the level that it was at the beginning of 2016.
Early in Calendar year 2017, extension of PPL 338 and grant of PPL 581 occurred, and the remaining licenses which the company applied for completed their passage through the PNG Government review process. Award of those other licences is imminent. The Extension of PPL 338 and award of PPL 581 were effective 31 January 2017 and accordingly, although the PPL 338 licence expired in September 2015, no time has been lost from the license period. A farm out effort can therefore commence with the industry far more buoyant and without the time pressures that might have arisen had the licence term begun immediately after the original expiry date.
The hiatus in activity was used to good effect. It allowed management to complete the analysis of many thousands of kilometers of seismic data that was either acquired or reprocessed in the final two years of the primary term of our licenses. Because our licenses span very broad regions of PNG, Kina was able to complete a full analysis of the new data set extending from Irian Jaya in the west to Port Moresby in the east. Kina has established a structural synthesis tying in the geology from Indonesia, Australia and PNG using sequence stratigraphic principles, and has achieved some spectacular results.
The work has also allowed Kina to rank its licenses, which resulted in PPL 337 being culled from its exploration portfolio in 2016 to reduce costs and focus on core areas. Given the geographical breadth of the analysis, we have also been able to establish how the prospectivity and structural trends of the areas immediately beyond our licence boundaries impacts the prospects and leads in our liences.
Overview of PNG Exploration Activities
The majority of the Company’s tenements are all located within the prospective Papuan Basin of PNG.
Exploration and Development activities conducted on these projects during the period together with planned activities are reported in the following sections.
PRL 21 (Kina 15%)
During the year Mitsubishi announced their intended withdrawal from PRL 21. It is intended that their participating interest will be distributed amongst the remaining joint ventures with Kina’s participating interest in the licence expected to increase to around 16.5%.
Over the past 12 months, the joint venture has focussed on confirmation of the licence’s resource base in light of seismic mapping work undertaken in respect of the Elevala and Ketu fields. Using a range of maps, the operator has completed initial phases of modelling of the fields to assess the most appropriate development plan and to maximise the rate of return and profitability of the development. The operator will integrate the results of this early phase work with maps produced by other Joint Venture partners so as to gain as clear as possible an insight into the subsurface properties of the fields.
Lower energy prices have obviously impacted the economics of a proposed PRL 21 development and accordingly, the PRL 21 and PDL 10 Joint Ventures have established a joint Working Team to plan for a combined and cooperative development to be achieved through aggregation of Western Province hydrocarbon resources. Western Province gas development was very much the focus of the recent PNG Mining and Energy Investment Conference held in Sydney in December 2016. Kumul Petroleum Holdings Limited announced its intent to evaluate the feasibility of building a pipeline to act as common carrier of Western Province gas fields. This is of commercial importance to Kina and also reinforces the importance of development of Western Province gas fields to the government of PNG.
Of the other key messages from the Conference, two key ones were the importance of hydrocarbon development to the PNG Government and the outstanding performance of PNG LNG. The fiscal terms and cost structure of PNG puts PNG in the lowest cost quartile of the cost curve for LNG according to Wood McKenzie. This factor has not been lost on the Government which is considering dropping the tax on liquids development to 30% to bring it into alignment with its treatment of gas. Such a move would be significant to PRL 21 which has condensate richness of 60bbl per million cubic feet of gas. Each well in PRL 21 has the potential to produce between 3,000 and 4,000 barrels of liquids per day and with improving oil price and cost deflation, the liquids project remains a priority for Kina’s management.
PRL 38 (Kina 25%)
PRL 38 is located offshore Gulf of Papua and incorporates the Pandora A and B reef gas discoveries. Towards year end, Kina gained access to the Pandora 3D seismic data and interpretation is now underway. It is premature to discuss the findings of this work but our knowledge of the field will be enhanced as will follow up prospectivity in PRL38.
Analysis of the 3D data has helped Kina to understand how the reefs grew through the Miocene and the impact they had on distribution of sediment coming into the basin from the west through the Miocene and Pliocene areas. Understanding of reef growth and linkage to reefs in the east and the Fly Platform in the west has helped explain the complex structuring that has occurred from west to the east and also helped unlock the potential for a number of reefs in PPLs 338, 339 and 340.
For PRL 38, development remains (at this stage) dependent on a form of aggregation with other discoveries in the Papuan Gulf. To this end, Kina continues to watch the development of Pasca with interest. But the move towards an aggregated approach for PRL 21 is also beneficial as it potentially opens the door for a Build, Own, Operate (BOO) production facility somewhere on the Gulf of Papua coastline which PRL 38 could feed into. Kina and Repsol’s involvement in both the Western Province and Gulf aggregation strategies should offer some synergies to the development of both assets.
Kina relinquished the PPL 337 licence in March 2016 after the review of results from the drilling of Kwila-1 and Raintree-1 demonstrated minimal remaining prospectivity.
PPL 338 (Kina 100%)
PPL 338 is located in the eastern Papuan Basin, to the west and south of the Elk-Antelope gas field in PRL 15. Extension of PPL 338 has been confirmed effective 31 January 2017 and the work program for PPL 338 is:
- Years 1 & 2 – gravity gradiometry
- Years 3 & 4 – seismic acquisition and a well
- Year 5 – licence review
From June 2015 to year end 2016 KPL completed its analysis of the reprocessed seismic data and confirmed prospects at Triceratops north, Triceratops West, Crocodile, Nipa, and Mangrove.
The benefits of gravity-gradiometry data in helping define structural framework and potential for reef build-ups has been demonstrated at Antelope and Triceratops. Phase 1 of the extension work program will be acquisition of gravity-gradiometry data over PPL 338. The scope of the survey is to link Triceratops, Antelope and PPL 338. Discussions have commenced with contractors to acquire the data and this activity will form part of Kina’s farm out process.
PPL 581 (Kina 100%)
PPL581 was awarded for 6 years effective 31 January 2017 and covers the Snake Lead, east of Mangrove, and Nipa. It is possible that Snake may be structurally linked into Kalangar to the east and it is proposed that gravity gradiometry data will be acquired over PPL 581. This also will form part of KPL’s farm out effort.
APPLs 596, 597 and 598 (Kina 100%)
Applications for APPLs 596, 597 and 598 were made at the same time as PPL 581. All 4 licences cover graticular blocks that were contained within the previous PPL 338 licence area. The APPLs have been offered and accepted by Kina and once awarded will form separate licenses each with 6 year terms.
These APPLs contain leads that extend up-dip of Crocodile and along trend from Triceratops West. Gravitygradiometry data will be acquired over the licenses and as with PPL 338 and PPL 581 will be farmed out.
PPL 339 (Kina 30%)
PPL 339 is located in the eastern Papuan Basin, south and east of Elk-Antelope.
Like PPL 338, the extension application for PPL 339 was submitted in June 2015. The Operator continues negotiation of the application which, like PPL 338, is expected to have a (new) anniversary commencing from the date of Ministerial approval.
KPL has completed its analysis of reprocessed seismic and gravity data within PPL 339 and established the possibility of a linkage between prospects in PPL 338, Antelope, Kalangar and Lizard Prospect in PPL 340. KPL continues to believe a platform and/or barrier reef system developed across the southwest of the licence at Kalangar and just as the Pandora reef dammed and controlled deposition of Miocene sediments in PRL 38, Kalangar and Lizard reefs appear to influence deposition of early to mid Miocene sediments in the Aure Trough and the Lakakamu Embayment.
Timing of drilling in PPL 339 will be impacted by delays in the extension process. KPL is partially carried through the well and in keeping with its policy of limiting exposure to high risk exploration activity, will farm out its participating interest in the well.
Success at Kalangar will significantly high grade the Cassowary and Bowerbird prospects which may be separate features, or may form one large reef complex separating the Aure Trough to the northeast and the late Miocene Trough to the south west.
Analysis of the seismic data suggests that inundation of Kalangar commenced first in the north east with sedimentation coming from the Aure Trough. Restricting the Aure Trough sediment to the north east allowed continued growth of carbonates at Bowerbird in the Upper Miocene.
This model of reef growth and progressive inundation from the north east, and anomalously high interval velocities seen on reprocessed seismic data to the south of Bowerbird has lead KPL to believe that a third reef trend exists updip of Hohoro 1 in PPL 339 where carbonate reef continued to grow into the early Pliocene. This model is consistent with the platform and reef system that KPL has developed for PPL 338 immediately to the west.
PPL 340 (Kina 100%)
PPL 340 is located in the eastern Papuan Basin, north west of Port Moresby across several blocks. In June 2015 Kina submitted its extension application for PPL 340 and at the time of writing has been offered and accepted the offer of a 5 year extension. We now await Ministerial approval of the licence to confirm the commencement date of the extension.
KPL has extended the proposed barrier reef system from Kalangar in PPL 339 to the south east through Kapuri 1 through Lizard Prospect and then the outcropping mid Miocene and upper Miocene reefs in PPL 340 and south of PPL 340 at Boera, the latter being located only a matter of kilometres from the ExxonMobil LNG plant. The Lizard and Port Moresby prospects are linked structurally with Port Moresby reef inundated first by mid Miocene sediments intersected at Kaufana 1 and Rorona 1.
Lizard is located less than 100km by road to Port Moresby and the LNG export infrastructure. The terrain is benign and drilling and seismic acquisition costs are low. Kina has designed a seismic program of 110km over Lizard and only awaits extension of the license to start farm out discussions.
PPLs 435 and 436 (Kina 100% in both licences)
PPLs 435 and 436 are two large areas located in the Western Province, structurally within the Papuan Foreland and both astride the Fly River between the Fly River delta and Lake Murray.
Kina’s proprietary interpretation of reprocessed seismic data has confirmed the company’s view that potentially giant structural prospects reside in the south of this very large license area. KPL’s regional analysis has extended multiple reservoir targets into Sturt and Alligator Prospects located on the Oriomo High. Oil seeping of 5 barrels of oil per day at Panakawa confirms an active hydrocarbon kitchen exists east of Panakawa with the location of the Oriomo High being optimally placed up dip from that kitchen, providing justification for an active petroleum system draining into the Oriomo High. The oil at Panakawa reaches the surface because of erosion of the Ieru sealing shales at that location. Regional seismic interpretation and presence of Ieru shale in wells at Magabu Is 1and Iamura 1 justify presence of Ieru sealing shale at prospects at Sturt and Alligator. The prospects are dependent on a series of down to the south faults recognised on reprocessed seismic lines. Kina is planning a seismic program that will confirm the presence and orientation of strike of these critical faults. The terrain is flat with open grass land cover or forest cover. Seismic acquisition costs are expected to be low and the costs of acquisition will form part of Kina’s farm out program.
Throughout each license, Kina’s tectonic synthesis integrated with proprietary gravity data has established a structural fabric which is very encouraging not only for PPL 436 but has also opened up a prospective trend to the north of Lake Murray-1 gas discovery in PPL 435. Lake Murray and Aiambak Prospects within PPL 435 remain highly prospective with multiple reservoir targets identified at Aiambak Prospect, a number of which appear to have gas effects visible on the seismic data. KPL is preparing a seismic program over Aiambak which will form part of its farm out effort. The program will include a line to the north of Lake Murray 1 to confirm the orientation of a fault interpreted to establish a fault controlled tend between Stanley and Lake Murray 1 discoveries.
Seismic and drilling costs in these licenses are much lower than the fold belt and, for that matter, PRL 21 south of the foldbelt. The identified prospects can be tested by a road supported rig with a likely drilling depth no deeper than two kilometres.
PPL 437 (Kina 57.5%)
PPL 437 is located in the Western Province of PNG, structurally within the Papuan Foreland and immediately north of PRL 21 (Ketu-Elevala).
KPL has identified the Malisa Prospect which is along trend from Tingu-1 but also east of Namar 1. Malisa is independently closed off from Namar 1 but believed to be stratigraphically down dip from Namar 1 thus offering potential for better reservoir. The eastern flank of the Malisa Prospect is on the down thrown side of the Ketu North Fault and seismic ties into Stanley field show some structural and stratigrahhic similarities with Malisa offering potential for good reservoir development for Toro and Kimu sands.
As mentioned above the establishment of a JWT for PRL 21 and PDL 10 is a positive development for PPL 437. An aggregation process for development of these fields will set a precedent that may open the door for inclusion of other discoveries close to what will become a PDL 10/PRL 21 hub. Furthermore, Malisa has the advantage that it is shared by the PPL 259 and PPL 437 joint ventures, and a joint well carried out as part of a future multi-well program could prove attractive as the two joint ventures include a number of participants in the JWT.
To the east of Malisa KPL has identified the Mango and Ebony Prospects which like Malisa has Elevala, Toro and Kimu reservoir objectives. KPL and Heritage Oil have designed a 150km seismic program over these prospects, which forms part of a joint farm out effort with Heritage.
Malisa, Ebony and Mango are significant prospects that will underlie proposed infrastructure to export gas to the east. The PNG Government has the aim of aggregation and development of the Western province gas, and gas discovered in PPL 437 will have significant incremental value to an aggregated development.
But gas is only part of the story. Malissa Ebony and Mango Prospects lie between P’nyang, Juha, Muruk and Hides in the north and Stanley, Tingu, Elevala, Ubuntu and Ketu in the south. Success rate for valid closures drilled in this area is very high and Ebony and Mango lie between Ketu/Elevala and Juha with the highest liquids richness in gas fields so far discovered in the Basin.
The Company is in material compliance with all applicable environmental regulations, and there have been no reports of breaches of environmental regulations in the financial year and at the date of this report
REMUNERATION REPORT Details of the nature and amount of remuneration for each Director of the Company and key management personnel are set out below.
Remuneration Policy and Practices
The Company’s policy for determining the nature and amount of remuneration of Board members and senior executives is as follows:
The Board’s policy is to remunerate non-executive directors at market rates for comparable companies for time, commitment and responsibilities. The Board determines payments to its Non-Executive Directors and will review their remuneration annually.
The maximum aggregate annual remuneration of Non-Executive Directors is subject to approval by the shareholders in general meeting. The shareholders have determined at a general meeting held on 9 March 2010 the maximum aggregate remuneration amount to be $350,000 per year. The Directors have resolved that the cash fees payable to non-executive directors for all Board activities are $185,000 per year plus, where required, superannuation guarantee contributions of 9% per annum where required by legislation. Additionally, and subject to shareholder approval, non-executive directors may receive an annual allocation of ordinary shares in the company. That allocation shall be $A 30,000 ($US 21,949, 2015: $US 22,569) worth for the Chairman and $A 20,000 ($US 14,633, 2015: $US 15,046) for each nonexecutive director.
ii. Key management personnel
To pursue the Company’s objectives, the Company has assembled a group of Directors which we believe have extensive experience in the Oil and Gas and finance industries. The Company will recruit appropriate key executive management personnel commensurate with the Company’s growth in activity. The remuneration structure for key executive management, including Executive Directors will be based on a number of factors, including qualifications, particular experience, general past performance of the individual concerned, overall performance of the Company and general human resources market pricing. There is no predetermined equity compensation element within the executive remuneration structure or predetermined performance conditions to be satisfied. However, ad-hoc grants of equity compensation (through issuance of stock options) have previously been made to key management personnel.
Company performance and director and executive remuneration
The aim of the Company’s remuneration policy is to achieve goal congruence between the Company’s shareholders, directors and executives.
Director and Executive Shares and Options
There were no Director or Executive Options outstanding at 31 December 2016. All previously issued Director options were exercised in 2013 and all previously issued Executive options had expired by 31 December 2015.
During the year the Company paid a premium of USD equivalent $24,851 (2015: $25,132) in respect of a contract insuring the Directors and officers of the Company against a liability incurred by such Directors and officers. The Company has not otherwise, during or since the end of the year, indemnified or agreed to indemnify the auditor of the Company, or of any related body corporate, against a liability incurred by such auditor.
No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year.
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
There were no other material events occurring post balance date.