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Victoria Oil & Gas ready for Logbaba go-ahead

The company is awaiting formal approval for its landmark gas and condensate project in Cameroon. Once the go-ahead is given to commercialise the Logbaba field, near the city of Douala, the company expects things to move at a fairly rapid clip.

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Victoria Oil & Gas (LON:VOG) is in a holding pattern as it awaits formal approval for its landmark gas and condensate project in Cameroon.

Once the go-ahead is given to commercialise the Logbaba field, near the city of Douala, the company expects things to move at a fairly rapid clip.

VOG is unperturbed by the near three-month wait as Cameroon officialdom dots every ‘i’ and crosses every ‘t’ before granting the two-part authorisation.

However, the company’s mainly retail investor base has become a little jittery.

The share price is down almost 30 per cent since the start of the year, though analysts expect it to rebound sharply when permission is finally granted. 

“We expect the licence in the very near future,” Martin Devine, Victoria’s general manager, told Proactive Investors. 

“This is a very big deal for them. This is the first ever domestic gas supply project.

This is the first energy discovery that will be fed into a domestic pipeline. It is tremendously exciting.

“But on the permitting side there have been many fact finding missions from ministries taking an interest in this high profile project.

“We are dealing with a number of ministries – there is the government wing and the presidential wing.”

When the green light is finally shown the company is only four to five months from producing first gas – and of course becoming a cash-generative operation.

The build-out of the 31 kilometre underground gas network is a modest project in civil engineering terms and uses lengths of heavy duty plastics pipes, a device that seals them together and earth movers.   VOG’s production facilities, meanwhile, are being constructed in fields on the outskirts of Cameroon’s largest city.

A total of 9 customers, including a major textile firm, have signed up to take gas from Victoria’s network. These are companies that are currently using expensive butane, heavy fuel oil, or worse waste oil to power their operations.

The initial requirement is expected to be 8.5 million cubic feet of gas a day, a fraction of the capacity Victoria will actually have on tap.

Victoria’s two wells flowed at a combined 77 million standard cubic feet a day, although the network has a ceiling of 60 million at a pressure of 5.5 bars.
Over time the group will sign up more industrial customers – and existing users are expected to increase their usage as Victoria proves itself as a reliable and cheap supplier.

The cost of conversion to natural gas is around 100,000 euros for a new user, which will be covered in a matter of weeks after making the switch to the cheaper energy source.

Beyond that the emergence of natural gas in Cameroon may create a whole new market.

The country, like most developing African nations, is plagued by brown-outs – periodic stoppages in power supply as the grid struggles to meet demand for electricity.

The company reckons if it can build a track record for reliability and value for money, then local businesses will take the relationship a step further. Specifically, they will be persuaded to invest in on-site, gas powered generating equipment that makes brown-outs a thing of the past.

Victoria estimates that thermal demand for gas in Douala will grow quickly to around 15 million cubic feet a day, with feed power adding potentially a further 30 million cubic feet over the next  few years.

Beyond that, the group may look to partner up with an independent power generator, which would see a step change in production, though this is some years away.

Its plans are to get output up to around 40 million cubic feet a day by 2015-16 based on current estimates of customer industrial demand only.

But even at the initial rate of around 8.5 million cubic feet, the economics are compelling, with analysts predicting that Victoria will generate in excess of US$50 million in sales a year.

The cost of the build will be funded from VOG’s recent cash calls. It raised £9.2 million from investors via a placing in September followed by a further £10.8 million in November.

Devine believes this be ought be enough to get the company over the finishing line to profitability.

Victoria acquired its 60 per cent stake in the Logbaba asset when it bought the cash strapped exploration firm Bramlin in 2008. The other 40 per cent is held by RSM Production Corp.

In total there are six holes, including the two drilled by AIM-listed VOG. The first four were bored in 1950s by Elf and each one of the holes struck gas. The company has 212 billion cubic feet of proven and probable reserves (2P) based on 10-20 per cent of the licence block. The prospective resource is in the order of 1 trillion cubic feet.

“In our base case, it is likely we will drill two appraisal wells in back end 2012,” Devine said. “But this is a function of demand.

Away from Cameroon, Victoria has applied for five oil blocks off the coast of Liberia, an area which has begun to attract some of the bigger names in oil and gas.

Of course it also owns West Med in northern Russia, which is right next door to the super-giant Medvezhe field.

An independent report by the respected DeGolyer & McNaughton estimates West Med’s gross resource base to be 1.1 billion barrels of oil equivalent, which is mainly gas and gas condensate.

“We have done passive seismic and gas tomography, and we have Russian seismic,” Devine says.

“All that work is being assimilated this year and we are looking to run conventional seismic on certain prospects that will be announced in the future.”

He said the company would like to train more financial firepower on Russia, but the focus is on creating a cash generating asset in Cameroon.

“We would be happy to talk to farm-in partners. It is an enormous, costly and big undertaking,” he adds.

However he added that VOG needs to increase the value of West Med before these talks take place.  This in turn means further work on the project.

Elsewhere the long legal battle continues over the ownership of the Kemerkol oil field in Kazakhstan. 

“I can’t say too much but it is ongoing, we are still pursuing full recourse for that licence and we do remain confident we will get a positive outcome,” Devine reveals.

“Like any legal process it is time consuming. We haven’t forgotten about it, although we have done a full write-down (of the value of the project).”

In the meantime, it is a case of watching and waiting as the Cameroon authorities sift meticulously through Victoria’s application.

“We can’t give a definitive time-line, we are in regular contact with the Cameroon authorities and we are confident we are nearly there”.

Quick facts: Victoria Oil & Gas PLC

Price: 7.42 GBX

AIM:VOG
Market: AIM
Market Cap: £19.06 m
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