Increased Reserves:
The independent reserve evaluator, McDaniel and Associates Consultants Ltd. reported Songo Songo reserves as at December 31, 2008 demonstrates that Orca Exploration’s gross proven (1P) and proven and probable (2P) reserves in Songo Songo to the end of the license period raised by 26% to 389 Bcf and 4% to 491 Bcf correspondingly during 2008. On a life of field basis the proven and proven and probable reserves have increased by 18% to 433 Bcf and 17% to 649 Bcf correspondingly. Orca Exploration will look at ways to accelerate field deliverability such that increased reserves can be allocated to the proved category, or seek to extend the existing license period. Ever since production from Songo Songo started in 2004 there has been a 125% raise in Orca Exploration’s proven reserves and a 92% raise in the proven and probable reserves on a life of field basis.
Based on these reserves and deliverability profiles produced by Orca Exploration and McDaniel, the company is looking to develop gas markets that can consume about 100 – 120 MMscfd of additional gas. To meet these sales levels, it is assessed that there is a need to drill two new development wells in the field and install field compression.
Orca Exploration expects that reserves can be additionally be raised by the drilling of the Songo Songo West exploration prospect. In September 2008, McDaniel evaluated this prospect and assessed it to contain unrisked mean resources of 552 Bcf. This prospect will be drilled as soon as practical given the availability of capital.
Success In Increasing Gas Processing Capacity
In fourth of 2008, the company effectively concluded the installation of a new Joule-Thompson valve on each of the gas processing trains and related pipework, with no major disruption of gas supply to Dar es Salaam. In first of 2009, Lloyds Register certified the two processing trains at 45 MMscfd each and Songas Limited approved the re-rating to 90 MMscfd. Each of the trains was tested to 55 MMscfd and Lloyds register may yet certify the plant at 110 MMscfd after having effectively inspected the gas heat exchangers later in 2009. If this level of processing is confirmed, it is unlikely that infrastructure capacity would be a constraint until 2011/2012, which allows enough lead time for further processing and pipeline expansion.
Since 2006, Songas has been looking to increase the gas processing infrastructure by installing two further gas processing trains. This expansion is intended to raise gas processing capacity to a minimum of 160 MMscfd. With re-rating of all four trains to 55 MMscfd, the plant would be capable of delivering in excess of 200 MMscfd.
Existing delays in the implementation of this expansion involve issues raised by the energy regulator, EWURA, in approving the economic and contractual terms. Songas is currently reviewing its position in relation to the latest order issued by EWURA on 27 February 2009. All Parties are working towards resolving the remaining issues to allow this to happen. In the event that the currently planned expansion does not proceed, the company is developing a contingency plan to expand the entire system (gas processing and pipeline) to 200 MMscfd. The company will look for a third party to finance this expansion with the objective of it being in place by the end of 2011, in line with the requirement for additional capacity.
Expanding Markets and Downstream Distribution
During 2008, Orca Exploration extended its downstream low pressure gas distribution system extending it by seven kilometers to 42 kilometers. Three new customers were connected during 2008. This brings the total number of customers on line to 20 as at 31 December 2008. Additionally, eight new contracts were signed in 2008 and these customers will be connected during the course of 2009. There is currently major surplus system capacity that can accommodate further growth.
The most significant industrial contract signed in 2008 was with Tanzania Portland Cement Company (TPCC) for the supply of gas to a new $100 million kiln at its Wazo Hill cement plant. The supply of gas commenced ahead of schedule in first quarter of 2009 at a rate of about 2 MMscfd. This is forecast to increase to 4 MMscfd by 2010 given the major growth in cement demand in Tanzania.
Initialing Of Long Term Power Contracts
In June 2008, Orca Exploration agreed commercial terms and initialed two long term power contracts with TANESCO, the owner of the Ubungo power plant, Songas Limited and the ministry of energy and minerals for the supply of additional gas for power generation. The first contract provides for the supply of gas to the sixth turbine at the Ubungo power plant to a maximum of about 9 MMscfd until July 2024. The second initialed contract covers the supply of additional gas to the remaining gas powered generation now in Tanzania. Beginning in November 2010, the take or pay contract volume in this contract is set at 32 MMscfd through to July 2023, with a maximum daily quantity of 36 MMscfd.
The quantum of the gas sales volumes to the power sector in the short term under these initialed contracts will rely on the availability of the 561 MWs of Tanzania’s hydro generation, the timing of any further raise in the Songo Songo infrastructure capacity and the level of installed and operational gas fired generation.
The same contract price applies to both contracts. It is mainly composed of a wellhead price and an amount that is paid to Songas for the use of the gas processing and pipeline infrastructure that is subject to approval from the energy regulator, EWURA. The wellhead price is fixed at about $1.95/mcf which will increase at an anticipated 2% per annum from July 2009. From July 2012, there will be a step change in the wellhead price to a forecast $2.83/mcf which will then rise at 2% per annum. Retail downstream burner tip price will be the wellhead price plus processing and transportation tariff. This protocol protects Orca Exploration from any increases in the gas processing and pipeline infrastructure tariffs.
These contracts are now interlinked with the building of the third and fourth gas processing trains. Final signature will take place once Songas commits to the EPC contract for these trains. In the event that Songas does not reach agreement with EWURA on the economic and contractual terms, the contracts will need to be modified to delink them from the gas processing expansion. In the meantime, gas continues to be supplied to the power plants, and payment is received on a monthly basis under an interim arrangement.
Insulation Of Cash Flows From Oil Price Volatility
Orca Exploration’s cash flows are not considerably depicted to oil price volatility as a result of negotiating fixed prices and pricing floors with its customers.
During 2008 Orca Exploration extended the term of six of its largest contracts accounting for the majority of the industrial gas sales volumes. The extensions cover an additional five years from the dates that existing contracts were due to expire with the earliest contract termination date being September 2014. In return Orca Exploration agreed to cap the price of gas to these customers whilst also incorporating a floor price. This is anticipated to keep the price of gas to these industrial customers in the range of $7.38/mcf to $11.49/mcf (increasing at 2% per annum).
Power contract prices are fixed as per the initialed power contracts. This also applies to the new gas supply contract with TPCC, the cement manufacturer at Wazo Hill.
