Dear Fellow Stockholders,
PETROENERGY AND THE GLOBAL ECONOMIC PICTURE The global economic crisis during 2008 to 2009 threw energy markets into turmoil, and plunged oil prices from a high of US$147 to lows deeper than US$40. This, expectedly, affected your Company’s 150
I C E B R E N T C LO S I N G P R I C E 2007-2010, US $
140 130 120 110 100 90 80 70 60 50
Since then, the global economy began to cautiously recover, but still lagged behind the 75% increase of the oil price. Some economists, in review, currently see a considerably improving situation during 2010, although uncertainties remain amidst fears of a double-dip recession. But the rise of oil price hardly relented throughout 2010, and at yea-rend it broke through the high 90s. Attempts to explain the discordance of global recession and the strengthening of oil markets varied. Some looked at the short supply side, citing depleting reservoirs and the high cost of maintaining production. Others saw increasing demand particularly from the emerging markets in Asia, which seemed to have found opportunities at the misfortunes of the European and US economies.
40 30
2007
2008
2009
2010
2011
revenues. However, that was only for a short while. Even before 2008 ended, the price of oil found bottom. It had bounced by the middle of 2009 to the high 60s, and touched US$80 by the end of 2009.
We are inclined to view the oil markets from the latter perspective. The Philippines’ GDP grew in 2010 at a 34-year record of 7.3%. Sovereign ratings by Moody’s of Asia-Pacific countries reflected an upbeat outlook and posted upgrades for China, HongKong, Indonesia, Thailand and the Philippines. These all augur and justify the continuous climb of the oil price. Ironically, this high cost of energy for the Philippines is a boon to PetroEnergy and translates to higher earnings for the company stockholders.
Table of Contents Message from the Chairman and the President
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Financial Highlights x Statement of Management’s Responsibility for Financial Statements x Independent Auditors Report x Financial Reports x Notes to Financial Statements
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Board of Directors x Corporate Directory x
PetroEnergy Annual Report 2010 | 1
GABON Oil Operations and Financial Performance Our Gabon operations saw a very robust year in 2010, as we drilled back to back four exploration wells and three production wells from March to December with the jack-up rig Sapphire Driller. Our joint venture spent US142.98 million in this effort, where PetroEnergy contributed US$3.60 million for its 2.525% participating interest.
In spite of this decrease in production, our operating income rose by 24% to US$10.78 million from the previous year’s US$8.68 million. This resulted from the sustained rise of the oil price (see chart above), which yielded to us a net average selling price of US$78.07 per barrel.
Production in our three oilfields during the year averaged about 22,000 barrels a day for a total of 7.33 million barrels of oil. This is 10.3% lower from the previous year’s cumulative production of 8.17 million barrels.
The net income after tax of PetroEnergy, the Parent Company, jumped by 102% to US$3.5 million after softening to US$1.72 million because of the oil price slump in the previous year. This spelled a corresponding improvement of 37.5% in our earnings per share (EPS) from US$ 0.013 to US$ 0.017. Our book value, continued to show a healthy growth in the past four years, rising further in 2010 by 20.8% to US$0.186 from US$ 0.154 of the prior year.
2 | PetroEnergy Annual Report 2010
2011 GABON Plan of Operations Maintain High Oil Production Most of the activities in 2011 will center on maintaining a high oil production rate in spite the increasing water cut in the wells. This will be accomplished through various methods of engineering intervention like well work over, installing and commissioning a water knockout facility in the Avouma platform that should be operational in November, and drilling new infill wells. Some wells with high water cut will be recurrently shut in to allow pressure to build up and then be re-opened to let oil flow to the FPSO.
Infill Production Wells One infill production well will be drilled in each of the Ebouri field and the Avouma field. These will be the horizontal wells EEBOM-5H that will come on-line in September and AVOUMA-3H, which should come on line by the end of the year.
Sustain Production Given all these engineering plans and new production wells, our oil production will be sustained at an average daily rate of 20,000 barrels per day for a cumulative 7.3 million barrels of oil during the year.
PetroEnergy Annual Report 2010 | 3
Outlook of GABON Oil Operations Etame Reserves
Etame Expansion Project
Production in our oil fields has completed its eighth year, having commenced in 2002. The fields, therefore, fall in the category of the so-called brownfields. The three oil fields have produced 57.2 million barrels as of the end of 2010 while the present remaining producible reserves that are certified by Netherland Sewell Associates (NSA), a reputable international engineering firm, is another 50 million barrels that could be extracted with our current production facilities.
Aware of the limitations of the current production infrastructure and processing facilities, the JV organized and provided a budgetary support to the Etame Expansion Project Team, which would evaluate the entire Etame production system and recommend appropriate redevelopment options.
Etame Reserves Bigger In 2009 a task force composed of all the technical staff of the JV partners was organized to do an in depth study of the possible bigger re-serves within the delimited production area. A detailed review of the remaining producible reserves in the three oil fields was completed with the cooperation of NSA. The task force reported early in December 2010 that oil in place within the brownfield production area is as large as 261 million barrels. These are exclusive of what might be discovered by exploring the undrilled structures outside of the delimited production area.
4 | PetroEnergy Annual Report 2010
During 2010 and until the first quarter of 2011, the team worked out of the Houston, London and Geneva facilities of the major partners to find out ways to increase oil production up to 50,000 barrels a day and economically extract the maximum volume of oil from the reserves in place. Out of numerous redevelopment options that were identified, six cases on how to expand the production facilities were distilled as of the beginning of 2011. The options involved various combinations of possible changes in the FPSO capacity, additional production platforms, subsea and surface production facilities, water treatment facilities and gas flaring controls. The choice of the optimum method will be made by the Joint Venture in a March 2011 technical meeting. The economic returns that result from each of the methods of redevelopment are expected to weigh heaviest on the final choice.
Philippine Oil Operations Etame Expansion Project
Service Contract 14-C Linapacan Block offshore Palawan Pitkin Petroleum completed the engineering assessments of the West Linapacan old wells and structural fairways of the reservoir under the Sub-Phase I of the Service Contract (SC) work program. It, then, directed its efforts towards getting the financial support to start development drilling under the SubPhase 2 work program.
GPC Investments SA (formerly Vitol GPC Investments SA) gave notice in November 2010 of its decision not to exercise its option on the farm in interest in SC 6A. This followed the failure of the Galoc Consortium to commit to the second development phase of the Galoc Field. Thereafter, Philodrill re-assumed the Operatorship of the Octon Block.
Pitkin has found a yetunnamed financier with whom it is negotiating to farm out 50% of its assigned interest. However, Pitkin’s December 31, 2010 deadline to elect to proceed to Sub-Phase 2 was fast approaching. On the assumption that the potential investment contract would be sealed, Pitkin was concerned that the Dept. of Energy approval of the transaction may not be given before the Dec. 31 deadline.
To maintain the validity of the service contract, the Octon Joint Venture submitted to the Dept. of Energy in December a US$546,000work program for 2011. It consisted of the reprocessing of 400 square kilometers of the 1997 3D seismic data. Reprocessing would enhance the quality of the seismic information, which would enable the mapping of potential structural drilling targets in the northern portion of the contract area.
PetroEnergy Annual Report 2010 | 5
Philippine Oil Operations Pitkin, thus, requested the Joint Venture (JV) to extend the Dec. 31 deadline concurrently with the approval of the DOE of the formal transfer and assignment of the 50% participating interest to the potential investor. The JV partners consented to the extension of the deadline on the condition that Pitkin will pay, as part of its farmin cost under Sub-Phase 1, Pitkin’s and the JV’s share of obligations that the Energy Department might require during the interim.
Service Contract 47 Offshore Mindoro
Service Contract 51 Cebu-Leyte During the third quarter of 2010, NorAsian sought to transfer 50% of its rights and obligations to Swan Oil & Gas Ltd (Swan) of Western Australia through an amendment to the Farmin Agreement. The Joint Venture (JV) agreed on October 18 to the entry of Swan to the Service Contract and to modify the work obligation to include the drilling of an onshore exploratory well called Duhat-1 in the town of San Isidro in northwest Leyte. The well would also satisfy the work commitment under SubPhase 3 of the Service Contract. The Farmin Amendment also provided for an option for NorAsian and Swan to elect to drill either the offshore Argao well or drill a second onshore well to comply with Sub-Phase 4 of the Service Contract. The DOE approved the proposed Duhat-1 well and also extended by seven months or up to July 31, 2011 the time for the JV to drill the well.
In the aftermath of the non-commercial outcome of the Kamia-1 drilling in 2008, the SC-47 Joint Venture (JV) sought to refine the mapping of the remaining potential structures in the exploration block. A 2D seismic survey that consisted of 1,100 line-kilometers was undertaken in late 2009 and these were processed and interpreted during 2010. Six structures were defined, but all were in deep waters and the JV agreed to find a farminee to drill a well that would fulfill its 2010 Service Contract work obligation. However, the farmout was hampered by legal constraints on the Operator PNOC-EC and the well commitment was unfulfilled as of July 2010, the expiry date of the contract. The JV sought, through a written request to the Energy Secretary, for an extension of the service contract. The contract extension was granted by the DOE on January 12, 2011. A drilling program is being drafted by the Operator PNOC-EC to comply with the contract obligation. 6 | PetroEnergy Annual Report 2010
Drilling services were subsequently procured and the required coordination was made with the San Isidro local government. Preparation of the drill site began on the third quarter of 2010. Spudding of the well is scheduled on March 28 and will be witnessed by the Regional DOE officials and representatives of the local government. The primary objective in Duhat-1 is the sandstones in the Middle Mi-ocene Tagnocot Formation. The secondary targets are the Upper Miocene Barili Limestone and the sandstones in the Lower Miocene Taog Formation. The Duhat-1 Prospect has a mean recoverable resource potential of 25.6 mmstb based on a probabilistic calculation that used correlated da-ta from the older wells Calubian-1 and Tagharigue-1, both of which en-countered oil shows while drilling.
Highlights of Renewable Energy The tightening supply and increasing price volatility of crude oil have made renewable energy (RE) more compelling and increasingly competitive. Public support for government policies and private investments for RE has also widened and deepened, further validating PetroEnergy’s venture into the sector. In 2010, we made great strides in advancing our RE in-vestments towards eventual commercial operations through our 100%-owned RE subsidiary – PetroGreen Energy Corp. (PGEC) – formed in March, 2010.
Maibarara Geothermal Power Project After the Department of Energy (DOE) awarded us the Maibarara geothermal service contract in February, 2010, we entered into a joint venture agreement in May, 2010 with private firm Trans-Asia Oil and Energy Development Corporation (TAO) of the PHINMA Group and state-owned PNOC Renewables Corporation (PNOC RC) to jointly develop and operate the 20 MW Maibarara Geothermal Power Project. The SEC approved the incorporation of the joint-venture company Maibarara Geothermal, Inc. (MGI) in August, 2010 capitalized at P1.125 Billion with PGEC owning 65%, TAO 25%, and PNOC RC 10% of the company. Several experienced and wellregarded geothermal technical professionals were then engaged as Consultants and as MGI organic personnel.
Our corporate structuring was paralleled by our focused ground operations to meet our target of commissioning and operating an integrated 20MW geothermal steamfield and power plant by the 3rd Quarter of 2013. In August, 2010, the Department of Environment & Natural Re-sources Region IV-A (DENR-4A) approved the Environmental Compliance Certificate (ECC) for the entire scope of the project: well work-over and drilling, construction of the steamfield pipelines, power plant construction, and erection of the transmission facilities. Rehabilitation of existing cellars and geothermal wellheads soon followed and was completed by early December. Towards the end 2010, DESCO Rig 30 that will rehabilitate three existing geothermal wells had arrived on site. We are optimistic that the work-over drilling and subsequent flow-testing of the wells in early 2011 will be successful.
PetroEnergy Annual Report 2010 | 7
Highlights of Renewable Energy Maibarara Geothermal Power Project In our Nabas (Aklan) and Sual (Pangasinan) wind service contract areas, installation of a 60 m-high meteorological mast in February, 2010 marked the start of a two-year feasibility study. Wind resource characteristics are being recorded and analyzed to validate that either block can sustain the operation of a 30 MW wind power plant. The wind data are recorded digitally and electronically transmitted from the field sites to our Ortigas office and to Copenhagen, the base of our consultant, the Danish engineering firm COWI, Inc. Data gathered thus far have been sufficiently encouraging prompting us to erect a second 60-m mast in Nabas to in-crease confidence in our data and analysis.
Our wind energy projects will only proceed to development and operation if an appropriate FiT is granted by the NREB and approved by the Energy Regulatory Commission (ERC). It is expected that the NREB will determine its acceptable FiT before the end of the second Quarter of 2011 and the ERC approval will come by mid-2011. As in any business venture, the understanding and support of host communities and local government officials are critical. Hence, in 2010 we continued coordinating with concerned barangay, municipal, and provincial officials in our Nabas and Sual projects. We have been fortunate in receiving assistance, advice and cooperation in both sites.
Even as we build the technical foundations of our wind energy venture, we are engaging national government agencies for a favorable wind power tariff, local government officials for continuing support for our projects, and foreign investors as potential foreign equity partners and contractors.
Photo, from left to right of COWI Consultant Soren B. Gjerding, Aklan Governor Carlito Marquez, PGEC Consultant Carli M. Recio, and PERC Vice President F.G. Delfin Jr.
Installing a second 60-m high wind mast in Nabas, Aklan
8 | PetroEnergy Annual Report 2010
We are also using the two year period from February 2010 to February 2012, while we collect and analyze wind data, to engage potential equity partners and contractors. Non-disclosure agreements (NDAs) have been signed with various foreign firms interested in potentially becoming minority equity partners, EPC contractors, or suppliers of wind turbines and equipment in our wind projects.
Corporate Social Responsibility In our deep and abiding belief that education is the key to individual, community, and national growth, PERC has put support for public education at the heart of the company’s corporate social responsibility (CSR) initiatives. We implement these programs with equally dedicated and capable private and public partners, targeting both students and instructors, and focused on specific geographic jurisdictions.
Laguna & Batangas Adopt-A-School Program Since 2007, PERC has worked with the Department of Education (DepEd), Malayan Colleges of Laguna (MCL), and ABS-CBN Foundation, Inc (AFI) to improve competencies in math and science teaching of public high schools. Specifically, we conducted workshops to improve teachers’ understanding of core science and mathematical concepts, training sessions to enhance teachers’ skills in teaching science and mathematical principles, and seminars for enhancing school-based management for principals, assistant principals, and senior instructors. This pro-gram has catered to more than 100 public high schools and more than 200 teachers in the region.
To help break this vicious cycle of lack of education and poverty, PERC has partnered with the Puerto Princesa City government for a school assistance program (SAP) that lighten the educational burden for rural families. Our SAP provide transportation stipends to third- and fourth-year high school and grade six students of selected national high schools and elementary schools of Puerto Princesa to help them attend school regularly. Since 2008, PERC has contributed P 1.2 Million per year which has helped to significantly in-crease student attendance in the partner schools. In addition, PERC has adopted three high schools in Puerto Princesa – Marcelino A. Javarez National High School, San Rafael National High School, and Inagawan National High School – under the DepEd’s Adopt-ASchool program. Tapping private partners like National Bookstore, MCL, and the InterActive Asia Group, PERC donated textbooks and educational materials, conducted trainings on values enrichment, and seminars for Math, Science, and English teaching to high school teachers.
National Capital Region In 2009, PERC provided a financial gift to the College of Home Economics at the University of the Philippines (UP), Diliman to establish the PetroEnergy Resources Corporation’s Professorial Chair in Family Life and Child Development. This stems from PERC’s belief that good education starts early in a child’s home and family. PERC’s support for education also funds fundamental research. We contribute to the Palawan Paleohistoric Research Project being conducted by UP Diliman’s Archaeological Studies Program. The program aims to understand the rich history of early human settlement in the Philip-pines, specifically in Palawan, by undertaking archaeological excavations and mapping in select sites of the province.
Puerto Princesa Student Assistance & Adopt-A-School Program Many parents, especially in rural farming communities, are forced to stop their children’s education for lack of financial resources. Rather than provide money for such basic need as transportation to schools, parents use their children as additional farmland helps. PetroEnergy Annual Report 2010 | 9
WAY FORWARD These are challenging and exciting times in the energy industry, locally and globally. Your Company has continued to adapt and profit from these opportunities with the hard work, loyalty, and dedication of our officers and staff and the unfailing support of our shareholders. Over the next few years as we move to enhance our oil production in Gabon, seek new oil discoveries in the Philippines, and generate power from clean and renewable energy in the country, we hope for your continued trust and understanding.
Rizalino S. Navarro Chairman
10 | PetroEnergy Annual Report 2010
Milagros V. Reyes President
Financial Highlights
PETROENERGY RESOURCES CORPORATION FINANCIAL HIGHLIGHTS (In thousand US dollars, except per share and ratio values) Consolidated 2010 Assets
Parent 2010
2009
Change
40,503
39,889
22,085
80.62%
1,618
1,582
858
84.44%
Stockholder's Equity
38,884
38,307
21,227
80.46%
Oil Revenue
10,784
10,784
8,682
24.21%
Operating Income
6,463
6,463
5,431
19.00%
Net Income
2,672
3,500
1,723
103.16%
Book Value per Share
0.183
0.187
0.155
20.31%
Earnings per Share
0.014
0.017
Current ratio
17.78:1
16.28:1
11.39:1
Debt-to Equity ratio
0.042:1
0.041:1
0.040:1
Average Crude Oil Price
$78.07
$78.07
$59.38
Liabilities
0.013
30.77%
31.48%
PetroEnergy Annual Report 2010 | 11
Board of Directors
PetroEnergy Resources Corporation
OFFICERS President: Vice President: Treasurer: Corporate Secretary:
Milagros V. Reyes Francisco G. Delfin, Jr. Yvonne S. Yuchengco Samuel V. Torres
CORPORATE DIRECTORY Auditors
SGV & Co 6760 Ayala Ave, Makati City
Bankers Rizal Commercial Banking Corporation Ortigas Malayan Plaza Ground Floor corner Opal Road ADB Avenue, Ortigas Business Center Pasig City United Coconut Planters Bank Ground Floor, Emerald Building F. Ortigas, Jr. Ave., Ortigas Business Center Pasig City Transfer Agent Telephone Nos.
Rizal Commercial Banking Corporation Ground floor, Grepalife Building 221 Sen. Gil J. Puyat Avenue Makati City (632) 892.4156; 892.1461
Executive Office
PetroEnergy Resources Corporation 7th Floor JMT Corporate Building, ADB Ave. Ortigas Business Center, Pasig City
Telephone Nos. (632) 637 .2917; 637. 5799; 637. 4032; 637.4362 Fax (632) 634.6066; 633.8584 Email petro_energy@petroenergy.com.ph URL http://www.petroenergy.com.ph
PetroEnergy Resources Corporation 7th Floor JMT Corporate Building, ADB Ave. Ortigas Business Center, Pasig City
Tel: (632) 637-2917; 637-5799; 637-4032; 637-4362 Fax: (632) 634-6066; 633-8584 Email: petro_energy@petroenergy.com.ph URL: http://www.petroenergy.com.ph