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Hongliang Zhang

Heritage Oil Plc is an oil and gas exploration and production company. Formed to take advantage of oil and gas deposits in Africa, Heritage Oil has over 120,000 square kilometers of exploration licenses as of the 2008 fiscal year with sites in the Middle East and production sites in Russia.^[1] In the 2008 fiscal year, Heritage Oil made significant progress in developing its exploration sites, having further success in drilling in Uganda which it expects to gross 600 billion barrels.^[2] In May 2009, Heritage Oil announced that seismic tests in its Miran West license in the Kurdistan Region of Iraq reported an estimate of 2.3-4.2 billion barrels of oil with a 50-70% chance of recovery. ^[3] Though Heritage Oil has continuously produced negative earnings for both the 2007 and 2008 fiscal year, Heritage Oil has made many recent discoveries that it hopes to turn into profit.^[2]

In the middle of the 2008 fiscal year, Heritage announced that it would be halting its acquisition of exploration licenses in favor of consolidating its gains in Iraq. This announcement was underscored by Heritage's sale of its Oman exploration sites in order to fund development of its Miran West license in Kurdistan. On June 2009, Heritage further consolidated its assets in Iraq by announcing a merger with Genel Energy, acquiring Genel's Taq Taq oil field. Though the plan has been stalled by an investigation into the deal by the British Financial Services Authority (FSA), Heritage expects the deal to boost revenue and help them repay debt. ^[4] As Heritage expands production of oil however, it will be exposed to the fluctuations in price from the global oil market. As oil prices fluctuate, Heritage may see dramatic decreases or increases in its revenues. Despite an overall drop in oil prices in 2008, Heritage increased its production increased by 125% and saw its realized price for oil increase by 3%. ^[5]

Company Overview

As of the 2008 fiscal year, Heritage Oil only has production sites in Russia with exploration sites in the Tanzania, Malta, Uganda, the DRC, Kurdistan, Pakistan, and Mali.^[6] As of the 2008 fiscal year, Heritage Oil has stopped its acquisition of new exploration licenses and has instead chosen to concentrate of tapping the reserves on its already explored sites.^[5] This shift in strategy was marked by its April 2009 selling of its Oman assets to help fund "development in core areas" such as its almost-ready production sites in Kurdistan, Iraq. ^[7]

Heritage-Genel Merger

On June 9, 2009, Heritage Oil announced a merger with Turkish oil exploration company Genel Energy International for $6 billion dollars. Though announced as a non-binding merger, Heritage is structuring the deal as a takeover of Genel for the purpose of creating an oil producer focused on Iraq.^[4] Among the assets that Heritage will receive is the operational Taq Taq oil field, which is expected to produce 60,000 barrels of oil per day. ^[8]. Heritage's proposed merger-acquisition has been delayed since due to investigations into the deal by England's Financial Services Authority as well as slow ratification of the deal by the Kurdistan leadership, which will own 20% of the merged business. ^[9] Heritage hopes to complete the deal by the end of 2009.

Business and Financial Metrics

Heritage Oil posted revenues of $5.1 million in the 2008 fiscal year up from $3.71 million in the previous fiscal year. This increase was due to the sales of its interests in Oman as well as $3.8 million in oil production in Russia, an increase in production of 124% from the last fiscal year. Heritage Oil reported a net loss of $41.8 million in the 2008 fiscal year though it was 50% less than the reported loss of $83.2 in the 2007 fiscal year. Despite this loss, Heritage Oil saw a 26% increase in its daily production, from 356 barrels in the 2007 fiscal year to 540 barrels a day in the 2008 fiscal year. Heritage Oil also saw a 31% increase in sales volume in the 2008 fiscal year as well, from 333 barrels per day in the 2007 fiscal year to 435 barrels per day. ^[5]

Business Segments

Heritage Oil divides its business segments based on its locations. As of the 2008 fiscal year, Heritage Oil's production sites include Russia and Oman, though Oman has been sold in April 2009. All other sites listed are in the exploration or evaluation phase with the exception of Heritage Oil's Kurdistan license.

Production Sites

Russia(75.3% of Revenue):^[10]

Heritage Oil's assets in Russia represent the bulk of its oil and gas production revenues. Assets include a 95% equity interest in ChumpassNefteDobycha Limited, a Russian company with a license to the hydrocarbon rich province of Khanty-Mansiysk. Since gaining 95% equity in the company, Heritage Oil has opened 3 additional drilling sites to the already existent 5 for a total of 8 wells in the area. While the site is valued at 20.7 million dollars, recent expeditions have revealed the area to be relatively untapped, with RPS energy, an independent geoscience consultancy valuing the area at 214.2 Million.^[10]

Oman(24.7% of Revenue):^[10] Heritage Oil's assets in the country include a 10% interest in a 423 square kilometer offshore area call Block 8 awarded to them in 1985, which it operates with its partners RAK Petroleum (operator and 40% interest holder) and LG International (50% interest holder). Revenues from Block 8 are derived from selling gas condensate from Bukha Field, located in Block 8.^[11] Heritage Oil recently sold its holdings in Oman for $28 million in April 2009 in order to help accelerate in core areas of Uganda and the Kurdistan Region of Iraq.^[11]

^[12]

Exploration Sites

Tanzania: Heritage Oil acquired 4 license areas totaling 25,000 square kilometers. In early 2009, Oil began 2-D seismic testing for potential sites, though no production sites have been identified.^[11]

Malta: Assets in Malta include 2 licenses that total about 18,000 sq kil awarded to them in December 2007 which Heritage Oil operates solely. As of the 2008 fiscal year seismic data is still being gathered with interpretation being capable by 2009/2010.^[14]

Uganda: Discoveries include Kingfisher filed in Block 3A in 2007 and the Buffalo-Giraffe field in Block 1 in January 2009, which included 48 square kilometers and oil column of 140 meters. To date, Heritage Oil has achieved 100% success rate in its exploration expeditions with 21 successful exploration and appraisal wells dug. The most important discovery so far, however has been the Albert Baisen, which is rated as multi billion dollar site. Earliest production is predicted in 2011. The other site that is predicted to go online is Pelican and Crane prospects that are expected to begin production at the first half of 2010.^[15]

Democratic Republic of the Congo (DRC): Heritage Oil's assets in the country include Blocks I and II, which are 3,825 sq km and 2,634 sq km stretches of land respectively in the Albert Basin. Heritage Oil was granted these rights in 2006 with its partners Tullow Oil and COHYDRO. These licenses for 5 years. Evaluation on the site has been halted in 2008 due to instability in the country as well as legal challenges to Heritage's claims to the area and the company along with its partners are waiting for a presidential decree before continuing their evaluation of the area.^[17]

Kurdistan Region of Iraq: Heritage Oil's exploration in the region have centered mainly around the Miran Block, which is predicted to have billions of gallons of oil on reserve. While drilling began in December 2008, 15 months after their acquisition of the block, production has been hampered by instability in the region as well as political ambiguity about Kurdistan's relationship to Iraq. Heritage believes, however, that these issues will be resolved and expects exportation of oil from the site to begin as early as 2009. ^[11]

Pakistan: Licenses in Pakistan cover 3,487 sq kil. Exploration has revealed multiple sites for gas and oil extraction though production sites have not yet been scheduled. Heritage Oil believes any production from the sites can easily be integrated into the existing Sui-Karachi pipeline fro fast import.^[19]

Mali: Heritage Oil's assets in Mali are 2 licenses that gross 72,000 sq kil acquired on March 2008. Recent surveys have revealed large deposits of gas and oil though there is no schedule for when production will begin.^[20]

Key Trends and Forces

By Concentrating on Development of Existing Licenses, Heritage Oil may lose out on Potentially Lucrative discoveries

In the 2008 fiscal year, Heritage Oil started to shift its policy from rapid expansion to consolidation with the selling of its assets in Oman.^[21] Though Heritage Oil was founded in order to exploit oil deposits in Africa, the company has benefited greatly from expanding out of Africa. In the 2008 fiscal year alone, Heritage expanded its portfolio to include assets in Tanzania, Mali, Pakistan. While this rapid expansion has given Heritage both first mover advantages in countries such as Mali and Kurdistan, and yielded lucrative results such as the multi-billion barrel reserve found in Kurdistan, Heritage has not had to time to consolidate its gains.^[22] While this move may be necessary for Heritage Oil to start production on its exploration sites and overcome its negative net income in the past years, slowing down exploration may cost Heritage in the future as potentially lucrative licenses are given to other companies.^[23] This threat can be seen in Iraq where the major oil companies such as BP (BP) and Royal Dutch Shell (RDS'A) are beginning to purchase licenses in the hopes of acquiring some of Iraq's estimated 100 billion barrel reserve. ^[24] While these major oil companies are new on the scene and must deal with governmental red tape as well as local resistance to their intrusion, Heritage Oil, which has been in Iraq for over 2 years, has already overcome these barriers and is in an ideal position to further expand in Iraq. By choosing to consolidate rather than expand, Heritage may see itself slowly squeezed out of the Iraq oil market by the larger companies.

Political Instability in Heritage Oil's Exploration Sites may Expose the Company to Unforeseen Risks

As of the 2008 fiscal year Heritage Oil has exploration licenses in places of political instability such as Kurdistan and the DRC. While operating in these areas has the potential to be lucrative, such Heritage Oil discovery of a billion gallon reserves in Kurdistan, it also poses many uncontrollable risks such as title disputes and operation sanctions. As in the case of its operations in the DRC, Heritage Oil has seen challenges to its exploration licenses and has been forced to halt its operations there until the situation clears up.^[17] While Heritage Oil remains confident that it can verify its licenses in court, these disruptions have the potential to be financially devastating for Heritage Oil's operations in Kurdistan. Though it has found oil reserves totaling billions of barrels of oil, Heritage has been forced to halt export from the site due to restriction posed on the Baghdad government as well as the political ambiguity of the Kurdistan's autonomy.^[25]

Increasing Government Regulations to Add Extra Layer of Operating Costs for Heritage Oil

As of the 2008 fiscal year, Heritage Oil primarily operates in developing countries such as Iraq. While these countries traditionally have not had stringent laws concerning oil operations, movements in these countries to secure oil rights and protect the environment could add an extra layer of operating costs to Heritage's operations. In Iraq for instance, Heritage has run into trouble over its oil contracts with the Kurdistan government. The Baghdad government chose to nullify Heritage's agreement with the Kurds and instead imposed regulations on how much oil can be exported and at what price they could be sold have significantly reduced Heritage's profit's in the region. ^[26]. In Heritage's soon to be acquired Taq Taq field, for instance, 52% of the oil produced was sold in the domestic market at below market rates without a definite payment mechanism from the government. The uncertainty of payment, has recently caused Heritage to stop exports from the field. ^[27]

Long Term Fluctuations in Oil Prices Will Impact Heritage Oil's Revenues

Heritage Oil posted record revenue in the 2008 fiscal year due in part to both an 125% increase in production in Russia as well as a 5% increase in its realized price of oil. While Heritage Oil has benefited greatly from the increasing price of commodities in Russia, it may encounter large fluctuations in price as it begins to start oil production in sites across the world. ^[5] With recent oil discoveries depressing oil prices as well as increasing demand for renewable energy, Heritage Oil may see its revenues increase or drop dramatically along with the larger players as it increases production. ^[28]

Competitors

Heritage Oil's main competitors are other players in the gas and oil market. Main competitors include Hunt Oil, Sterling Energy, and Tullow Oil. Though Heritage Oil competes with these companies in terms of obtaining licenses and selling their products, the company also shares many licenses with these companies in order to lower risk and expand quicker.

Sterling Energy: Sterling Energy is a publicly traded oil and gas company that is traded in the London Stock Exchange. Sterling Energy has production sites in the United States though it has many exploration interests in West Africa. Aside from competing in the oil and gas market, Sterling Energy competes with Heritage Oil for licensing of exploration sites in West Africa as Well. ^[29] Sterling Energy reported a 129 million dollar loss for the 2008 fiscal year primarily attributed to an expansion of testing on its exploration sites ^[30]

Tullow Oil: Tullow Oil is an independent oil and gas company with operations in Europe, Africa, South Asia, and South America. Though Tullow Oil shares licenses with Heritage Oil in areas like Uganda, Tullow also holds independent licenses as well and directly competes with Heritage in many of the same areas. ^[31]. Tullow Oil reported a 300,000 pounds sterrling net income for the 2008 fiscal year. ^[32]

Hunt Oil: Hunt Oil is one of the leading independent energy companies in the world. Hunt has production sites in both North and South America as well as exploration sites in the Gulf of Mexico and the Middle East.^[33] Hunt competes with Heritage Oil in the licensing of exploration sites across the world but particularly in the Kurdistan region of Iraq, where both companies have been active.

References

1. ↑ Heritage Oil 2008 Annual Report pg 13-23
2. ↑ ^{2.0 2.1} Heritage Oil 2008 Annual Report Page 2
3. ↑ Heritage Oil About
4. ↑ ^{4.0 4.1} Heritage Oil, Turkey's Genel agree $6 billion merger
5. ↑ ^{5.0 5.1 5.2 5.3} Heritage Oil 2008 Annual Report Page 28
6. ↑ Heritage Oil 2008 Annual Report Page 3
7. ↑ Heritage Oil 2008 Annual Report Page 7
8. ↑ Iraq's Taq Taq oil field to grow as it comes online
9. ↑ Heritage Oil Merger With Genel Delayed
10. ↑ ^{10.0 10.1 10.2} 2008 Annual Report page 71
11. ↑ ^{11.0 11.1 11.2 11.3} 2007 Annual Report page 5
12. ↑ Heritage Oil 2008 Annual ReportPage 67
13. ↑ 2008 Annual Report Page 17
14. ↑ ^{14.0 14.1 14.2 14.3 14.4 14.5 14.6} 2008 Annual Report page 23
15. ↑ 2008 Annual Report page 4-5
16. ↑ 2008 Annual Report Page 11
17. ↑ ^{17.0 17.1 17.2} 2008 Annual Report Page 19
18. ↑ 2008 Annual Report Page 11-15
19. ↑ ^{19.0 19.1} 2008 Annual Report Page 25
20. ↑ ^{20.0 20.1} 2008 Annual Report page 21
21. ↑ Heritage Oil 2008 Annual Report Page 8
22. ↑ Heritage Oil 2008 Annual Report Page 4
23. ↑ Gulf of Mexico oil underpins BHP multi-sector push
24. ↑ Why Oil Majors Are Coming Back to Iraq
25. ↑ Heritage Oil strikes big in Kurdish Iraq
26. ↑ The Reasons Behind Big Oil Declining Iraq's Riches
27. ↑ Heritage Oil: Taq Taq Production For Export Ceased
28. ↑ Oil Prices Higher or Lower in 2010
29. ↑ Sterling Energy Operations
30. ↑ Sterling Energy 2008 Page 33 Report
31. ↑ Tullow Oil Fact Sheet
32. ↑ Tullow Oil Financial Summary
33. ↑ Hunt Oil Operations Overview
34. ↑ Sterling Energy 2008 Annual Report Page 14
35. ↑ Sterling Energy 2008 Annual Report Page 13
36. ↑ Sterling Energy 2008 Annual Report Page 16
37. ↑ ^{37.0 37.1} Sterling Energy 2008 Annual Report Page 2
38. ↑ ^{38.0 38.1 38.2 38.3 38.4} Tullow Oil Financial Highlights