x Abu Dhabi, UAEThursday 20 July 2017

Gas discovery backfires on Heritage

Canadian company discovers huge Iraqi gasfield. Investors dump stock.

Heritage Oil, a Canadian exploration firm, has made the biggest Iraqi gas discovery in more than 30 years. But investors hoping for an oil discovery punished the company for its surprise announcement yesterday, sending its share price down 17 per cent in London.

"Previously anticipated prospective oil resources … have proven to be wet gas/condensate," Fox Davies Capital in London said in a research note. "We would expect the announcement to have a negative impact on the share price."

In early afternoon trading in London, Heritage shares were priced at 360.9 pence, down from the previous day's close of 406.6 pence. The steep one-day drop wiped out most of the stock's gain of about 20 per cent during the past month.

"The discovery of a major gasfield of up to 12.3 trillion cubic feet in-place with exceptional flow rates makes this one of the largest gasfields to be discovered in Iraq," said Tony Buckingham, the chief executive of Heritage. "This well has substantially de-risked the field, so we have the confidence to accelerate the work programme."

The company valued its share of the gas in the Miran field in Iraqi Kurdistan, in which it holds a 75 per cent working interest, at about US$2.7 billion (Dh9.91bn). It said the gasfield was considered the sixth-largest discovered in Iraq.

"We are considering various development options including a tie-in to planned infrastructure that will achieve first production for both oil and gas in 2015," said Mr Buckingham. "This discovery has the potential to generate substantial further value for our shareholders and benefit the people of Kurdistan and Iraq."

The projected start-up date, however, is further off than would have been expected for oil and is dependent on others building an international export pipeline. Moreover, in the currently glutted global gas market, oil is fetching near-record price multiples to thermally equivalent volumes of gas.

Heritage said its gas could feed the proposed Nabucco pipeline, which, if built, would deliver Caspian and Middle Eastern gas to Europe via Turkey, bypassing Russia. A planned feeder line would allow Kurdish gas to contribute significantly to the project.

"Heritage has the opportunity to participate in the development of huge conventional gas reserves close to Turkey and European markets," the company said. "A number of integrated gas companies, including [Nabucco partners] OMV, RWE and MOL, have entered Kurdistan with a view to creating a route to market for Kurdistan's major gas reserves." The six Nabucco backers, however, which also include Bulgarian Energy Holding, the Romanian utility Transgaz and Turkey's Botas, have yet to make a final investment decision. OMV, RWE and MOL are respectively Austrian, German and Hungarian energy companies.

The Heritage test well produced 40 million cubic feet per day (cfd) of gas. The company said the well was capable of pumping more than 100 million cfd when placed on production.

There is still a possibility of a commercial oil discovery in a zone above the gasfield, but Heritage indicated the prospective reservoir rock was "tight", meaning any oil would be difficult to extract. The presence in its gasfield of significant volumes of gas liquids, which are prized as petrochemical feedstock, is nevertheless a bonus for the company.

Other uncertainties facing Heritage are when, whether and on what terms Baghdad will allow oil and gas exports from Kurdistan. Abdul Kareem Luaibi, the new Iraqi oil minister, has indicated Kurdish oil exports may restart next week after an agreement was reached between Baghdad and the Kurdistan regional government. Any such agreement may not immediately apply to gas, as Baghdad may take the view that at the moment all Iraqi gas is needed for domestic power generation.