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2 May 2006
Austral Pacific Energy Ltd. has filed its unaudited interim financial statements and associated Management Discussion & Analysis for the March 2006 quarter. Copies are available on the Canadian securities administrators' website at www.SEDAR.com and on the company's website at www.austral-pacific.com
MANAGEMENT DISCUSSION & ANALYSIS
Unless otherwise noted, dollar amounts refer to US dollars throughout this filing
The date of this filing is April 28, 2006, for the quarter ended March 31, 2006.
Please refer to the Company's initial Form 51-102F1, filed on May 27, 2004, for further information, which is updated below.
The Company is engaged in oil and gas exploration in New Zealand and Papua New Guinea. This activity comprises:
The permits and licenses held by the Company are typically large and lightly drilled by North American standards. It is in the normal nature of the business that a portfolio of projects is pursued at any time, and that individual projects may never justify drilling. It is also the nature of the business that a large proportion of such exploration wells that are drilled will be unsuccessful. The Company typically acts as a member of a joint venture group of participants; where the joint venture holds an exploration permit or license through a phased work program agreement, entered into with the appropriate regulatory body. In each of New Zealand and Papua New Guinea, the regulatory body is a state agency charged with administering the exploration for hydrocarbons within its jurisdiction, on behalf of the state as the owners of the resource. The phased work program consists of a series of work steps, typically on an annual interval, in which the subsequent step is often contingent on the success of the previous step. For example, the commitment to drill a well in the up-coming permit year may be contingent on the success in defining a drilling target by seismic exploration in the previous year. The permit holders will often (but not always) have the right at the end of a work year, to continue into the next permit year, or else to freely relinquish their permit rights. In this manner, the work program forms the basis of an agreement between the joint venture.
The Company held cash and short-term deposits amounting to $11.7 million as at March 31, 2006. Cash held by the Company decreased in the quarter by $3.7 million. This was a consequence of meeting operational and overhead commitments. The Company is capable of meeting all its obligatory commitments as at the date of this report.
The Company has incurred a loss for the quarter ended March 31, 2006 of $2.3 million.
Extended production testing of the Cheal wells ceased in December 2005. This decision was approved by the joint venture in anticipation of site and field development commencing. As at the date of this report the field development plan and associated budget has been presented to the joint venture. The first phase in the development concept is an early production scheme which will enable limited production, and accelerate associated cash flows, to commence prior to full field development. This will include the workovers of Cheal wells A3X and A4 to replace steel tubing with chrome. This will enable access to the producing Mt Messenger interval and isolation of the Urenui interval. Oil will be transported from site by road tanker and associated gas will be used to generate electricity.
A minimum of two further wells are planned from the Cheal A site and the appraisal of the northern portion of the field is planned by drilling the Cheal B1 well from the B site, approximately 1 kilometre north of the Cheal A site. Further development wells will ultimately be required from the Cheal B site to fully develop the field.
After consideration of well fluids and well performance a hot oil pumping facility has been recommended to cater for the field production. This can utilise conventional venturi type jet pumps or hydraulic piston type pumps downhole, both of which operate via the supplied external power fluid. This system has the advantage of reducing the pour point of the produced crude so that it becomes transportable.
The site design will accommodate 2,000 barrels of oil production and 2 MMCF of gas per day from several wells in parallel production and all driven by jet pump. Sufficient pump and storage capacity is intended to cater for this level of production. The existing onsite gas engine genset can utilise ? MMCFD per day of associated gas. Excess gas will be exported as it is neither practical not commercially viable to consider on site power generation for the quantities above ? MMCFD per day that are anticipated. Several gas pipeline routes are currently under consideration.
Local council consents are currently being progressed through the various legal processes. The joint venture also anticipates that a petroleum mining permit in respect of the Cheal area will be granted in the near future. Full production is expected to be achieved by the end of this year.
The Company is the operator of the Cheal project on behalf of the joint venture, and owns a 36.5% beneficial interest in the Shallow Rights of the PEP 38738 permit, which incorporates all the mapped extent of the Cheal field. A Sproule International Ltd report dated December 31, 2005, estimates Proven Undeveloped Reserves in Cheal at 1.417 million barrels (100%).
A 3D seismic survey over the Cheal and Cardiff structures commenced in the quarter. Data acquisition commenced in late April and it is anticipated that this will take approximately 4 weeks. Following data processing the results will be used to finalise well placement within the Cheal and Cardiff structures.
The Cardiff-2A deep gas well is within the same PEP 38738 permit as the Cheal Field. Cardiff-2A was drilled (with one sidetrack) to a depth of 4,931m (16,178 feet), and successfully logged and cased in March 2005. The joint venture agreed to production-test the three main reservoir intervals within the Kapuni Formation. The three primary test zones are all established producer sandstone in offsetting wells and fields.
All test zones were hydraulically fractured over May/June 2005. However, during the latter part of the lowest test zone operation, fracturing sand backed up inside the production tubing for approximately 300 metres (1,000 feet). Severe delays in equipment availability prevented the removal of the sand until October. Flow testing commenced in October but, despite an initial clean-out of sands from the lower test zone, the zone blocked again with a viscous oily residue mixed with further 'frac' sand. Initial average test flows of gas (one million cubic feet plus per day) is interpreted to be dominantly from the uppermost test zone, the McKee. The middle zone, the K1A, was interpreted to be flowing water. The well was re-entered with coiled tubing in early November to clear the obstruction above the lowermost test zone. A series of flow and pressure build-up tests on the McKee sandstone formation have indicated an improvement in well productivity. This was reflected in flow rates which have at times exceeded three million cubic feet per day of gas and 100 barrels per day of light oil and condensate. Testing flows indicated that the higher pressure middle zone, the K1A, was not fully isolated from the uppermost zone and water was inhibiting the flow rates from the uppermost zone. An inflatable plug was set late April to fully isolate the middle and uppermost zones. Following this the joint venture is optimistic that commercial viability will be demonstrated and a mining permit issued over the Cardiff area.
The bottom zone, the K3E, will be isolated and tested fully following the test on the uppermost zone.
No reserves have yet been assigned to this property. A Sproule International Ltd report dated April 30, 2005, estimates probabilistic 'resource in place in reservoir' associated with the Cardiff structure within PEP 38738 as having 50% (10%) probabilities of exceeding 215 (341) BCF gas plus 12.8 (21.5) million barrels of condensate. These estimates are not reserves, which by definition are those quantities deemed economically recoverable to surface, which have yet to be determined. The resource estimates are made at equivalent surface temperature and pressure.
The Company holds a 25.1% share of the Deep Rights in PEP 38738, which includes the mapped extent of the Cardiff field.
The Company continues to evaluate its exploration portfolio to identify high impact prospects for drilling. The permit areas that the Company has an interest in contain a number of promising leads and prospects.
A seismic survey within permit PEP38258 (Offshore Canterbury - Company share 75%) commenced early April and has acquired 483 km of 2D data. The data will be processed within the next two months and will be used to further mature the Whaler prospect.
Consideration for the license interests included reimbursement of past well costs totalling approximately $400,000 and an overriding royalty arrangement. The Company also acquired drilling and completion inventory in consideration for payment of approximately $450,000. The agreement is subject to regulatory approval and is expected to be confirmed unconditional in the second quarter.
The Company participated in one exploration well, Heaphy-1, in onshore Taranaki, New Zealand during the quarter. The well was drilled to a depth of 1,450m (4,760 feet) and encountered good reservoir quality sandstones at the predicted target levels. However, due to the absence of any significant hydrocarbon indications, the decision was made to plug and abandon the well.
An exploration drilling operation in Papua New Guinea (PPL235) was announced in February 2005. An unlisted British public company, Rift Oil plc, committed to fund the first $6M of expenditure on the Douglas-1 well, which will test a large, seismically defined structure in the foreland area of the proven productive Papuan Basin. The joint venture acquired a heli-portable drilling rig which was mobilised from the United States to Papua New Guinea within the quarter. Douglas-1 was spudded on April 4th and will be drilled to a depth of 2000m (6,500 feet). Primary reservoir targets for the well are the Jurassic aged Alene, Toro and intra Imburu sandstones.
Forward expenditures for the year 2005 are likely to be dominated by Cheal and Cardiff activities and the drilling of Douglas-1.
Funding and risks
The Company considers it can meet all obligatory work requirements out of existing funds; although it may elect to farm-out portions of certain commitments as part of its ongoing exploration portfolio management.
The Company is currently earning very small amounts of revenue from the sale of Cardiff condensate. This will continue while production testing continues. The Company does not anticipate receiving any significant revenue until production is re-established from the Cheal field - currently anticipated in the third quarter. Following the Cheal-A site development, significant reductions in operating costs are expected which will provide the Company with improved net income per barrel.
The Company faces a variety of business risks. The principal ones relate to exploration failure, oil price, exchange rates and the cost and availability of services. If current high oil prices continue the Company will benefit from this following the recommencement of Cheal production. The Company's exploration costs are made principally in both NZ dollars and US dollars. The NZ dollar has appreciated markedly against the US dollar over the last two years, but recently has weakened considerably. Within the quarter the US:NZ exchange rate fluctuated between a high of 0.7001 and a low of 0.5990. The contrarian effects of exchange rate fluctuations on cost of services and on revenues in NZ dollars or as converted to US dollars, provide natural offsets. Exchange rate movements cannot be predicted. The Company maintains the bulk of its cash reserves in US dollars.
Due to the recent high level of oil exploration activity worldwide and in the Company's principal areas of business, exploration services have increased significantly in cost and are in greater demand than previously.
Results of Operations
Update for the Quarter Ended March 31, 2006
The Company's share of test production from Cardiff 2A has generated revenue of $20,887 for the quarter ended March 31, 2006. The only other significant revenue was joint venture recoveries and interest which totaled $427,945 for the quarter.
General and administrative expenses were $1,394,877 for the quarter ended March 31, 2006. This was an increase of $949,162 when compared to the quarter ended March 31, 2005. The increase was primarily attributable to:
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