Tuesday, 5 November 2013

Caspian: Tethys in unexpected farm-out

Tethys Petroleum is continuing to surprise market-watchers, with an unexpected farm-out of its Kazakh assets to a Chinese oil company owned by a major private equity fund. The company had not hinted it was planning a farm-out, which will help fund its work programme there as well as free up cashflow for expansion elsewhere.

On 1 November Tethys said in a statement that it was selling 50% plus one share of its Kazakh business to SinoHan Oil and Gas Investment, part of Beijing-based HanHong, for $75 million. Tethys will remain the operator for the assets in question and the two sides will have equal representation on the board of the local company. HanHong has assets already in Kazakhstan through other branches – four gold mining licences in which HanHong is an investor or manager – but this is its first foray into the energy sector.

The deal is a boost for Tethys, which has found it something of a challenge to effectively monetise its valuable Kazakh assets, which have 2P reserves of 26 million barrels. Getting oil to market (the domestic market, for now, since the company has not yet acquired an export licence) has taken some time while the Aral Oil Terminal has been expanded. The terminal, with a current loading capacity of 4,200 b/d and a storage capacity of 1,300 b/d, is being significantly expanded to over 12,000b/d, which will cut the need for trucking crude and increase Tethys's production ceiling.

Although the Aral Oil Terminal provides good access to refineries and ports, Tethys is also considering the construction of an oil export pipeline which would almost certainly connect to the Kazakhstan-China oil pipeline (currently undergoing expansion). Although a pipeline depends on an oil export licence, that appears to be just a matter of time, and the SinoHan farmout will give Tethys a cash boost for a pipeline, as well as to fund its ambitious drilling programme for the coming year. The additional cashflow will also be useful for operations in Georgia, the latest addition to Tethys's portfolio.

Although it's a very different beast to the Chinese majors (Tethys has farmed-out to CNPC, and Total, for its Bokhtar PSC in Tajikistan), SinoHan's involvement nevertheless aligns Tethys towards China in terms of oil and gas export. If and when export pipelines for oil and – one day – gas get built from Tethys's contract area, they will almost certainly connect to the existing pipeline network to China.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2013 Menas Associates

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