ARC Energy Limited Annual Report 2007

ARC Energy Limited
CorporAte summAry ................................................................................................................4
CorporAte review .....................................................................................................................5
BAlANCe sheets As At juNe 2007 ..........................................................................................69
stAtemeNts of CAsh flows for the yeAr eNDeD 30 juNe 2007 ......................................70
stAtemeNts of ChANges iN equity for the yeAr eNDeD 30 juNe 2007 ..........................71
Notes to the fiNANCiAl stAtemeNts ...................................................................................72
DireCtors’ DeClArAtioN .......................................................................................................116
Directors of the Company
Company Secretary
Adrian Cook
Principal and Registered Office
Level 4 679 Murray Street West Perth WA 6005 Telephone: +61 8 9480 1300 Facsimile: +61 8 9480 1388 Freecall: 1800 337 330 Email: [email protected] Web: www.arcenergy.com.au
Public Quotation
Share Registrars
Advanced Share Registry Services 110 Stirling Highway Nedlands WA 6009
Auditors
KPMG Chartered Accountants 152-158 St George’s Terrace Perth WA 6000
Bankers
Commonwealth Bank Level 3 150 St George’s Terrace Perth WA 6000
BOS International Level 27 45 Clarence Street Sydney NSW 2000
The Board of ARC Energy Limited: David Griffiths, Emma Stein, Gary Jeffery and Eric Streitberg.
ARC Energy | Annual Report 2007
The Company’s exploration interests in the Canning Basin were also substantially expanded during the year giving us a very large exposure to an under explored onshore Australian basin with proven hydrocarbon generating systems.
ARC’s strategy is to ensure the early commercialisation of any reserves we find in the Canning Basin exploration program. As part of this strategy we were very pleased to enter an innovative gas sales contract with Alcoa which will provide a market for gas found in the Canning Basin and underpin its future development.
While the strategic focus of the Company remains in Australia we do have a measured program of diversification into international operations which included the acquisition of additional areas in the Republic of Yemen and continued investment in our associated company, Adelphi, which
has a significant acreage position in the USA.
The Company has also continued its focus on maintaining production from its fields, and on cost control of its operations, and it is pleasing to note that production and operating margins for the year were similar to last year despite the very substantial cost pressures in the industry.
The strong operating results were, however, not reflected in the net profit for the year. The profit result was impacted by a number of factors including charges from the write off of exploration expenditure, unrealised charges from hedging taken to protect the Company’s acquisition of the Wandoo assets and a substantial increase in depreciation and amortisation charges related to the Company’s gas business.
Safety and environmental performance are a focus for the Board, particularly
I have pleasure in presenting to you the Annual Report of the Company for the 2006/2007 financial year. During the year the Company acquired two assets with strong production profiles and an exciting suite of high value appraisal and exploration opportunities. These acquisitions, the strong operating cashflows from our existing operations, together with the substantial cash reserves on hand place the Company in a very good position to exploit these opportunities.
The acquisition of an additional interest in the Cliff Head Oilfield in the offshore Perth Basin, taking our total interest to 30% of the joint venture, and a 12.5% interest in the BassGas project in the Bass Strait offshore from Melbourne from Wandoo Petroleum broadened the Company’s focus from its core onshore Perth Basin areas. Both assets include a number of high value exploration and appraisal opportunities.
David Griffiths – Chairman
ARC is fortunate to have a very capable and experienced team driving the exploration, production and operational activities of the business.C
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made in the offshore Perth Basin at the Frankland and Dunsborough wells have the potential to add substantially to the reserve base if appraisal drilling is successful. The substantial resources associated with the BassGas project also have the potential to more than double the currently developed reserves base of that project.
Two changes to the Board occurred during the year. As a consequence of the acquisition of the BassGas interest, Mike Harding, an independent Non- executive Director of the Company, resigned to ensure that no conflict of interest could arise from his other role as the Chairman of Clough Limited, the contractor for the BassGas project. Mike’s background in the upstream oil and gas business had allowed him to provide valuable service to the Board and shareholders. A recruitment process is currently underway to ensure that an appropriate mix of skills and experience is maintained on the Board. The Company was also
in relation to our contractors. Despite the improved performance of ARC operations, there is substantial room for improvement in the safety performance of our contractors, and additional ARC staff have been engaged to ensure we are properly resourced to assist our contractors to improve their performance. The expansion of the Company’s operations into the Canning Basin has substantially increased the scope and scale of our activity and will require continued vigilance to ensure we meet the highest standards of safety and environmental performance.
Reserves replacement remains one of the greatest challenges for the Company and for the industry as a whole. This year we experienced a substantial increase in reserves as a result of the acquisition of the Wandoo interests with net reserves increasing from 6.7 to 19.4 million barrels of oil equivalent as at the effective date of the purchase of 1 January 2007. In addition to this increase in reserves, discoveries
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fortunate to secure the services of Gary Jeffery during the year. Gary has joined the Board as Executive Director of Operations and has considerably strengthened the executive team.
ARC is particularly fortunate in the current extremely competitive employment climate to have a very capable and experienced team driving the exploration, production and operational activities of the business. The efforts of staff are greatly appreciated.
We look forward to a year of growth of the asset portfolio and success in our Canning Basin exploration program.
DAVID GRIFFITHS Chairman
Principal Assets
The Company’s foundation assets are in the Perth Basin, 360 kilometres north of Perth, and include diversified production operations with high equities and operatorship. ARC’s Perth Basin portfolio also includes extensive exploration and appraisal potential, including the recent Frankland 1 and Dunsborough 1 offshore discoveries where the Company acquired additional interests as part of its purchase of the Wandoo assets in June 2007.
The Company’s acquisition of the Wandoo assets included an interest in the BassGas project in the Bass Basin, offshore southern Victoria. The project incorporates the producing Yolla gas and condensate field along with excellent appraisal potential, including several adjacent discoveries. An additional interest was subsequently
acquired in the T/44P exploration permit adjacent to Yolla. This permit has similar exploration potential to the BassGas area.
The Company holds a very substantial exploration portfolio in the onshore Canning Basin of Western Australia and during the year these holdings were consolidated and expanded. Foundation Canning Basin production operations were also acquired via the purchase of the Blina production centre and associated oilfields and permits. The Company now holds interests in permits and licences covering in excess of 140,000 square kilometres in the Canning Basin.
The Company also has a number of international interests including three licences in the Republic of Yemen and an interest in Adelphi Energy providing ARC with additional
exposure to exploration assets in the USA, the Republic of Yemen and the Timor Sea.
Shareholder Communications
In common with all ASX listed companies, ARC provides shareholders with all relevant and price sensitive information during the year in accordance with its ASX continuous disclosure obligations. This communication includes regular shareholder updates and its quarterly and half yearly reporting obligations. All this information is made available on the Company’s website as soon as it is released to the ASX. The website, www.arcenergy.com.au, also contains details of the Company’s background and activities. Consequently, this report, as for previous annual reports of the Company, and in accordance with ASX recommended corporate governance practices, is focussed on reporting to shareholders the Company’s business philosophy, economic and financial condition, and future prospects. It also includes a brief review of the Company’s operations during the last financial year as these are set out in detail in the quarterly and half yearly reports of the Company, and also on the Company’s website and in regular corporate update presentations.
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Trading History
Share price range for the 2006/2007 financial year $1.24 - $1.82
Liquidity (annual turnover as % of issued capital) 94%
Average number of shares traded per month ~ 25 million
Location of the Company’s Assets (including Adelphi Energy)
The Company’s vision is to use its assets, people and operating capability to
become a globally significant long term energy business.
The Managing Director is responsible for the overall operation and direction of the Company and for achieving the strategic aims set out by the Board. This year the principal achievements for the business were:
• A record operating result; • Operating margins in line with
last year; • Steady production of oil and gas; • Participation in 18 exploration and
development wells; • Two significant offshore discoveries
and one potentially commercial onshore discovery;
• Industry standard safety and environmental performance for the Company’s operations;
• A major acquisition of the producing assets of Wandoo Petroleum including a substantial capital raising and bank debt facility. These assets have already shown the potential to add significant value;
• Increase and consolidation of the Canning Basin acreage position and commencement of the regional exploration program; and
• Execution of a major gas sales contract with Alcoa which entailed a $40 million pre-payment for gas from the Canning Basin.
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Eric Streitberg – Managing Director
This activity was carried out in the context of the Company’s Board agreed strategy and objectives and business philosophy.
The Company’s Vision and Strategy
The Company’s vision is to use its assets, people and operating capability to become a globally significant long term energy business.
The Company’s overall Corporate Strategy is to;
• Maintain our core values of focus, discipline and perseverance;
• Ensure we meet our objective of safety and environmental excellence; and
• Source new projects where our business model and core values enable us to add value.
The Company’s Business Philosophy
The Company’s previously articulated philosophy of being involved in projects where it is the operator, has high equity positions, and where established infrastructure or markets
allow early commercialisation of the oil and gas reserves that it identifies, has remained the cornerstone of the Company’s business philosophy during the year. As the Company has expanded its activities, particularly into the offshore environment, it has been necessary to modify these principles to align with the available opportunities. The following criteria have been adopted for projects outside the Company’s core areas:
• The interests are in areas where ARC’s commitment to health and safety and corporate, environmental and social responsibility will not be compromised;
• The operator of the joint venture is competent and commercially aligned with ARC;
• The joint venture is cohesive and commercially aligned;
• The level of expenditure commitment is such that it is able to be funded without compromising ARC’s core operations; and
• The size and prospectivity of the interest is such that the expected discovery size will make a material increase in ARC’s value.
Business Development
ARC’s business development process is under the direct control of the Managing Director together with a small number of internal and contract staff. In association with Adelphi, numerous commercial, technical and corporate business development opportunities were reviewed during the year. The relationship with Adelphi is controlled by a formal memorandum of understanding which ensures that any potential conflicts of interest are resolved in a transparent manner and in practice, by a general co-operative management approach to projects.
The continued highly active nature of both the resource sector and worldwide equity markets meant there were numerous potential opportunities made available to the Company. Opportunities reviewed were generally too heavily promoted by the vendors, commercial terms requested were onerous, or the prospectivity was low and the technical risks high, and consequently activity focussed on the Wandoo asset purchase and the Canning Basin consolidation both of which added significant value to the Company. A general conclusion that can be drawn from the active business development process is that Australia, despite its perceived low geological prospectivity, has excellent commercial, political and legal systems which ensure transparent operations and certainty of shareholder returns.
The successful completion of the purchase of the Wandoo assets was particularly pleasing in this regard as it was the result of a competitive process, the outcome of which was influenced not only by price, but by the certainty of completion and funding within tight time frames. ARC’s reputation and ability to deliver on these aspects is
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ARC Operator Steve Radford at the Hovea Production Facility
Members of ARC’s Commercial Team, Bill Ristevski, Paul Rose and Robert Ierace
believed to have been instrumental in its successful acquisition of the assets.
The acquisition of the interest in the T/44-P permit adjacent to the BassGas licences also demonstrated the Company’s ability to move quickly and effectively to consolidate its position in a new area of interest.
The establishment of the Canning Basin position has also demonstrated the ability of the Company to deliver an integrated, high value asset in a timely and cost effective manner. Together with the acquisition of the interests in the New Standard Exploration portfolio in September 2007, the Company now has interests in areas covering in excess of 140,000 square kilometres of the Canning Basin. Further details of these acquisitions are set out in the exploration section of this report. As part of its focus on commercialisation of any gas that it finds the Company also entered into a gas sales agreement with Alcoa for up to 500 petajoules of gas reserves. The agreement included a gas purchase prepayment by Alcoa to ARC of A$40 million which was made in September 2007. The prepayment will be used to accelerate ARC’s regional Canning Basin exploration program.
Funding, Commitments and Prospects
The Company as far as practicable ensures that it can fund its activities from its cash flows and tailors its exploration and development activities accordingly. The acquisition of the Wandoo assets required a capital raising which was undertaken via a placement and a share purchase plan. The purchase also required a bank debt facility that provided the opportunity to leverage the Company’s strong balance sheet. The bank debt facility was also supported by a hedging
program which provides certainty over the repayment and terms of the debt facility.
The funding requirements of the Company are tested through detailed internal cash flow models which are continuously updated for “real world” conditions. The internal cash flow models are also used to review business development opportunities and to test investment decisions including exploration and development decisions.
Formal control over the Company’s activities is maintained through a budget process with annual budgets considered in detail by the Board and forming the basis of the Company’s performance and planning strategies. Budgets are tested under various scenarios to ensure projected cash flows are such that expenditure commitments are able to be met under all reasonably likely scenarios and sufficient exploration expenditure is budgeted to ensure a realistic probability of reserves replacement.
The Company’s major non- discretionary commitments are joint venture exploration and development
activities. The acquisition of additional non-operated interests in the offshore Perth and Bass Basins will expose the Company to higher levels of expenditure than it has previously experienced, particularly in relation to drilling costs. Offshore drilling costs have risen sharply as industry activity and oil prices have increased and now represent a major component of offshore development costs. Onshore drilling costs have generally not been subject to similar levels of escalation.
Members of ARC’s finance team Naomi Mossman, Neroli Chapman and Leanne Forgione
ARC Operator Matt Jacobs at the Hovea Production Facility
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The Company’s longer term prospects are dependent on its ability to replace its reserves through exploration and its ability to complete value adding acquisitions. The Wandoo acquisition has the potential to be strongly value adding through the near term appraisal potential in the offshore Perth Basin and in the discovered resources adjacent to the Yolla Field. The extensive regional exploration programs in the Perth Basin and the Canning Basin have the potential to add significantly to the Company’s reserve base if they are successful.
Business Risk and Its Management
Management of business risk, particularly exploration and operational risk, is an essential tool for successful resource companies. The structured identification and management of risk across the business also assists in optimising business processes as it leads to focus on the value adding components of the business. The Company manages risk through a formal risk identification and risk management system consistent with the Australian and New Zealand Standard on Risk Management AS/ NZS 4360:2004. The review of the Company’s risk profile during the year identified additional risks associated with its increased exposure to offshore operations and to its taking on of debt. However, these risks were considered to be in the normal course of business and the internal processes of the Company were considered sufficient to manage them.
The Company’s internal commercial and financial risk management system is subject to a process of continual review and is also subject to external audit and Board review.
In addition to these controls, the Managing Director and the Chief Financial Officer are required to state to the Board in writing that:
• The statement given to the Auditors on the integrity of financial statements is founded on a sound system of risk management and internal compliance and control, which implements policies adopted by the Board; and
• ARC’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects.
Strengths and Weaknesses
The Company has numerous strengths including:
• A diversified portfolio of long term oil and gas production assets;
• Scale and liquidity in the Australian context;
• Strong revenue, cashflow and balance sheet;
• Excellent appraisal and exploration upside;
• Demonstrated deal capture and execution ability; and
• Commercial innovation and value adding.
The major weakness of the Company continues to be its comparatively small size which makes it more difficult to compete for assets, particularly in the international arena.
Corporate Governance
The Board of the Company aspires to “best practice” in corporate governance and the ASX core principles of corporate governance have been integrated into the governance policy of the Company, together with specific principles for ARC. The detailed compliance system of the Company is set out in the Directors Report.
As the Board does not currently have a majority of independent Directors it does not fully comply with its corporate governance policy. This situation has arisen subsequent to the resignation from the Board on 25 May 2007 of Mike Harding, a non-executive, independent Director was appointed to ensure no conflict of interest could arise from his role as Chairman of Clough Limited, the contractor for the BassGas project. On 5 June 2007 of Gary Jeffery as an Executive Director of the Company. Gary is responsible for the day to day operations of the Company and his
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experience and track record adds considerable depth to the Company’s management team.
The Board is actively seeking to recruit a suitably qualified Independent Director to ensure compliance with its policies and that there is an appropriate mix of skills and experience on the Board.
Compensation and Retention of Staff
The retention and appropriate remuneration of staff is a key driver for the Company as it strives to remain competitive during a period of extraordinarily high demand for oil and gas professionals and technically skilled staff.
Although staff turnover during the year was higher than desirable, it was comparable to industry peers and has had no significant effect on operations. As part of the focus on staff, there was continuing review of the structure of the Company’s incentive schemes subsequent to the revised remuneration and incentive packages adopted and approved
by shareholders at the 2005 AGM of the Company.
Corporate Responsibility
The Company’s responsibilities toward the community and its shareholders is supported by a detailed code of conduct, the details of which are available on the Company’s website.
ARC provides support to community groups in its operating areas, and to more general community groups such as the WA Police Service and the Royal Flying Doctor Service. Its involvement in community affairs recognises the need to support education and training with its participation in the WA apprenticeship scheme amongst other targeted initiatives.
A major part of the Company’s activity in the Canning Basin involves the indigenous communities in the area and in particular access to lands under the control of the traditional owners. The Company has a strong commitment to assisting Aboriginal people to achieve economic independence through
Neil Thompson of ARC and Dickey Cox sign the Heritage Agreement at Noonkanbah Station
Gary Jeffery – Executive Director, Operations
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employment, business development and training and gives strong support to activities that are sustainable in the longer term. The Company is currently formalising a policy that will provide clear guidelines for its working relationships with traditional owners.
The Company’s activities in the Canning Basin encompass a large part of the Kimberley region of northern Western Australia which was the birthplace of Australian indigenous land rights. ARC and the traditional owners have agreed access terms to allow exploration over the majority of its lease areas and in particular, ARC and the Noonkanbah people recently signed an agreement for oil and gas exploration. This was subsequent to the end of a 27 year struggle for the Noonkanbah people which culminated in the signing of a watershed agreement with the Western Australian government at a ceremony officiated at by Mr Dickey Cox, who was the leader of the Yungngora People at the time of the original 1980’s confrontation with the Western Australian state government.
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Health, Safety and the Environment
The health and safety of ARC personnel and contractors, as well as protection of the environment, are principal values within the ARC business philosophy and it is recognised that these objectives can only be achieved with the full commitment of all personnel and contractors.
It is disappointing to note that safety performance of ARC’s contractors has not improved from 2006 to
2007 despite the focus on safety improvement throughout 2007. ARC has now encouraged the adoption of its internal policies by contractors and put in place strategies for managing the safety of its contractors. The Company will continue to drive for improved performance in the next year.
Injuries
During the year ARC in its own right achieved a significant reduction in the overall numbers of injuries in its operations from seven in total in 2006 to two first aid treatable injuries in 2007, however, our major contractor’s performance was seen to be declining in the early part of the year. Subsequently the Company focused attention on contractor’s performance through implementation of contracts that reward good safety performance. Coupled with a regular audit process focusing on the safe execution of key contracts, the safety performance of the contractors improved in the latter half of the year, however, the improvement only brought the contractor’s performance
back to being comparable to the previous year.
Environmental Incidents
ARC’s ongoing effort to reduce environmental incidents resulted in a reduction in reportable environmental incidents from eleven in 2006 to two in 2007. The two incidents in 2007 were 700 litres of diesel leaking from a storage tank into the surrounding bunded area, and a water overflow dam seepage.
There were ten minor non-reportable incidents including five minor oil spills of between 10 and 50 litres and four of between 50 and 500 litres.
Near-Misses
Recorded near-misses are an important indicator of the safety management system working effectively to prevent a major incident. A total of ten near-misses were recorded of which 2 were from ARC’s operations and 8 from contractor operations. Corrective actions were assigned to all incidents.
Manhours Total Injuries MTI’s LTI’s ADI’s FAI’s Reportable
Environmental Near
Contractors
Total
Investments for Future Performance
The Company continues to invest for the future with the acquisition of additional exploration areas in the Perth and Canning Basins and the acquisition of areas with high value near term appraisal potential in the Perth and Bass Basins. These areas provide both near term and longer term potential and a spectrum of risk from close-in appraisal potential to pure wildcat exploration. Given the long term nature of the business, the acquisition and development of exploration programs has a three to five year cycle as evidenced by the Company’s three exploration program plans in the Canning Basin.
The Company’s drilling activities during the year were focused on maintaining production levels, however the discoveries at Frankland and Dunsborough and the appraisal potential in the BassGas project
means there is a probability that these resources will be converted to reserves in the next 12 to 18 months.
Details of the Company’s investments in exploration and production are set out in the next section.
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Financial Highlights
The 2006/2007 financial year delivered record operating cash flows for the Company through steady oil and gas production, careful control of operating costs and strong oil prices. These cash flows, together with the Company’s cash reserves, enabled it to acquire several high quality, potentially high growth assets during the year. The Company is well positioned to fund its continued growth initiatives using its current financial resources together with its projected surplus operating cash flows.
The comparative financial performance of the Company is set out in the following table:
Adrian Cook – Chief Financial Officer and Company Secretary
The 2006/2007 financial year delivered record operating cash flows for the Company through steady oil and gas production, careful control of operating costs and strong oil prices.
00/0 AIFRS $’000
00/0 AIFRS $’000
00/0 AIFRS $’000
00/0 AGAAP $’000
00/0 AGAAP $’000
EBITDAW * 69,351 81,322 72,669 40,982 19,604
Net Profit After Tax 6,075 15,456 34,439 20,091 8,791
Operating cash in flows 72,471 71,464 69,866 38,916 12,069
Investing cash out flows 270,736 60,127 50,772 33,986 17,640
Revenue
Revenue from operating activities was $122 million and exceeded the previous year’s record of $118 million by 3%.
Steady oil production at a total of 1.158 million barrels together with steady oil prices of an average A$78.89 per barrel, kept revenue from oil sales in line with the previous year, but gas production was lower than in the previous year due to natural field declines, despite the Company’s development drilling activities.
Despite the decrease in production volumes, gas sales revenues were higher than the previous year due to
increased gas trading driven by higher customer demand and higher average contract sales prices. Contract renewals during the year resulted in increases in gas prices in the range of 45% to 50% and the Company has the opportunity to sell any future uncontracted gas at these higher prices.
Operating Cash Flows
Net cash inflows from operating activities were a record $72.5 million compared with $71.5 million for the previous year. This result was underpinned by record cash receipts of $132 million (including interest income) compared with the previous year result of $128 million. Payments to suppliers and employees were also
* Earnings before interest, tax, depreciation, amortisation and write-offs
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higher than the previous year at $47 million compared with $44 million, but operating margins were held at over 61% which was a significant achievement given the inflationary pressures in the Australian resource sector.
The Company continued to re- invest cash flow into exploration and development. Total exploration
expenditure for the year was $18.7 million compared to expenditure in 2005/2006 of $27.7 million. This expenditure resulted in the discovery of two significant offshore accumulations and one potentially commercial onshore accumulation at Drakea. Development and appraisal drilling during the year incurred total drilling costs to the Company of $22.1 million ($14.5 million in 2005/2006).
In addition to this development drilling expenditure, $7.0 million ($18.1 million in 2005/2006) was spent on infrastructure assets during the year.
Earnings
The Income Statement reflects the more complex affairs of the Company compared to previous years as a result of the acquisition of the Wandoo assets on 29 June 2007. Additional items included the business risk management strategies arising from the financing of the asset purchase, oil hedging to a level sufficient to enable the repayment of borrowings, forward exchange contracts providing certainty over funding of the US dollar denominated acquisition, and conversion of US dollar cash reserves maintained for debt servicing purposes.
The main items impacting earnings during the year were:
• A $5.0 million unrealised loss on the oil price hedge that became effective on 1 July 2007, essentially representing a mark to market valuation at 30 June 2007 on the entire hedged volume. This hedge provides certainty of debt repayment and assists with debt sizing and ratios. It represents approximately 26% of the Company’s liquids production over the five year period;
• $3.5 million in realised and unrealised foreign exchange losses, of which $1.3 million was from unrealised losses on the holding of US dollar cash reserves maintained to service US dollar denominated debt commitments and $1.6 million from a realised loss on the forward exchange hedge used to protect the currency risk on settlement of the Wandoo asset acquisition;
Operating cash costs Free cash from operations
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
Gas Revenue Oil Revenue
Gross Revenue (A$ million)
• Substantially higher depreciation and amortisation charges arising from additional development wells to accelerate oil and gas production together with ongoing reserves adjustments at the non-operated Jingemia Oilfield; and
• Exploration expenditure writeoffs that continue the Company’s more conservative policy in relation to carrying values of exploration expenditure which was introduced during the previous financial year.
Financial Position
On 29 June 2007 the Company acquired assets from Wandoo Petroleum for a total consideration, including transaction costs, of $215.7 million. The assets included:
• A 24% interest in the producing Cliff Head Oilfield in the offshore Perth Basin, together with associated exploration acreage which includes the recent Frankland and Dunsborough oil and gas discoveries; and
• A 12.5% interest in the BassGas Project in the offshore Bass Basin which includes the producing Yolla gas and condensate field and the White Ibis, Trefoil and Aroo discoveries, together with associated exploration acreage.
The acquisition was funded through a combination of new equity and senior debt with three components:
• A placement of 28% of issued capital to institutional investors on 9 May 2007 raised $90 million at $1.40 per share;
• A share purchase plan offered to all ARC shareholders at $1.30 per share which raised $34 million with a participation rate in excess of 50%; and
• A drawdown of senior debt of $118 million from BOSI.
These movements led to total assets increasing 124% year on year from $214 million to $479 million. Cash reserves also increased substantially from $51 million at 30 June 2006 to $93 million at 30 June 2007.
The outcome of the Company’s activities during the year is that it is in a sound financial position and is expected to fund its operations in the foreseeable future from operating cash inflows and cash reserves.
Hedging, Derivatives and Risk Management
On 24 April 2007 the Company entered into a oil price swap covering 1.275 million barrels deliverable over five years at a fixed price of US$68.15 per barrel.
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The swap effectively commenced on 1 July 2007.
The Company also entered into a forward exchange contract to provide certainty over funding of the US dollar denominated Wandoo asset acquisition which was closed out at completion of the transaction.
Dividends
The Board considers that franked dividends will be paid in the future as long as the Company’s need for capital growth can be met and dividends can be paid on a sustained basis. The Board has carefully reviewed the Company’s activities and in view of ARC’s exploration and development plans, the Board decided not to declare a dividend in respect of this financial year.
Premium Wilcraft Rig on location in the Offshore Perth Basin
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Marie Malaxos is responsible for the production, development, drilling and administrative activities of the Company. Her responsibilities include all facets of the Company’s operations except for exploration and finance.
Production and Development
The Company’s production portfolio has been substantially diversified by the purchase of the Wandoo assets and now comprises three principal producing areas. The onshore Perth Basin where it operates a number of oil and gas fields, the offshore Perth Basin where it has a 30% interest in the ROC operated Cliff Head Oilfield and the Bass Basin where it has a 12.5% interest in the Origin operated Yolla Gasfield. In addition to these areas, initial production was established in the Canning Basin with the purchase of the Blina production facility and associated fields and licences.
Onshore Perth Basin Fields
ARC owns and operates a number of fields in the onshore Perth Basin and is also a participant in the Jingemia Oilfield and Beharra Springs Gasfield operated by Origin.
Marie Malaxos – Chief Operating Officer
The Company’s production portfolio has been substantially diversified by the purchase of the Wandoo assets and now comprises three principal producing areas.
Perth Basin Production Areas
Oilfields
The ARC operated onshore oilfield facilities are essentially fully developed, and during the year activities focused on cost reduction and production enhancement, principally gaslift and chemical injection optimisation at the Hovea Oilfield.
A reserves optimisation and acceleration program involved the drilling of several oil development wells including Hovea 12, Eremia 6 and Eremia 7. These wells were subsequently tied into the production facilities and helped to arrest the natural production decline of the fields.
Activities at the Origin operated Jingemia field included the installation of the second phase of the artificial lift system and improvement of the chemical injection system. Re- perforating of Jingemia 4 and nitrogen lifts of Jingemia 4 and Jingemia 8 were undertaken in an effort to increase production. The Jingemia 11 production well was drilled and completed to both increase production and access additional reserves. Despite these activities, the
field again underperformed against budget and a review of the production data suggested that reserves were potentially less than predicted, and a small downgrade was considered appropriate. The reserves will be reviewed again once further mapping and production history for the field is obtained.
The Mt Horner Oilfield was recommissioned during the year. Mt Horner had been shut-in for some time while the Company focused on higher value development opportunities. Several of the previously producing wells were refurbished and brought into production, and the production facility was recommissioned. Production recommenced at levels of around 80 bopd.
Gas Fields
Dongara
Production at the Dongara Gasfield was maintained at previous levels by a program of development drilling and facility enhancements. The facility enhancements included fuel gas management, compressor upgrades, a
workover on Dongara 34, and remote monitoring from the Hovea Production Facility. The Dongara 36 and Dongara 37 production wells were also drilled and tied into the facility. These wells targeted the Arranoo Sandstone reservoir and provided immediate increases in gas production but did not add significantly to the reserves of the field.
The Xyris Area Gas Gathering System (XAGGS) which collects and processes
ARC Operator Darren Chandler, Production Superintendent Mark Royle and Hovea PIC Marko Caleta at the Hovea Production Facility
Xyris Production Facility
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gas from the Hovea 2, Apium and Xyris fields continued to produce reliably for the year. Debottlenecking and the installation of a compressor at the Xyris Processing Facility were completed to allow deliverability to be maintained. A tubing changeout on Xyris South was also completed to ensure long term deliverability.
Cool Energy
ARC has also entered into an agreement with Cool Energy Limited for it to conduct field trials at the Xyris site of Cool Energy’s gas sweetening technology (CryoCell), in association with a field test of a new gas dehydration technology being evaluated by Woodside which aims to remove water from natural gas streams.
The CryoCell system removes carbon dioxide from natural gas streams as a liquid that can be readily used for geosequestration or miscible flood enhanced oil recovery. The CryoCell Technology was developed at Western Australia’s Curtin University of Technology. The founding shareholders of Cool Energy, including ARC, are providing funding for the project in association with the Australian Government which is providing financial assistance for the CryoCell through an AusIndustry Innovation Grant.
Testing of the technology continued during the year with CO2 removal rates achieved in accordance with predictions, and further tests are planned during the next year that will increase CryoCell efficiency with the objective of reaching CO2 content specification for LNG processes. Discussions have also commenced between Cool Energy and ARC regarding other research related to carbon capture and storage.
Woodada
The Woodada Gasfield is a mature production operation that produces at low but consistent rates. Operations at Woodada were confined to maintenance of existing facilities and minor production enhancements with production maintained at marginally economic levels.
Beharra Springs
The Beharra Springs Gasfield lies to the south of ARC’s main producing areas in the Perth Basin and is operated by Origin Energy. Production is from both the Beharra Springs Gasfield which is near the end of its productive life and the associated Tarantula Gasfield. Both fields are mature and facility maintenance and minor improvements were carried out during the year with work also commencing on preparation for delivery of gas from the Beharra Springs 4 development well. This well
was drilled to the top of the reservoir during the year and suspended for deepening into the reservoir using a coiled tubing unit in late 2007. The Beharra Springs Deep exploration well is expected to be drilled in 2008 and would add significantly to reserves if it is successful.
Offshore Perth Basin
Following the Wandoo asset acquisition, ARC increased its interest in the Cliff Head Oilfield from 6% to 30%.
The Cliff Head field lies some 11 kilometres offshore from Dongara in some 15 metres of water and is operated by ROC Oil. Oil production is through an unmanned monopod then by pipeline to the onshore Arrowsmith stabilisation plant. Production is from six wells with two water injection wells with the oil produced via electric submersible pumps. Oil is trucked to
Cool Energy’s Facility at the Xyris field
the BP Kwinana refinery south of Perth by the same contractor that transports ARC’s onshore crude production.
The production system design capacity is 15,000 bopd and production during the year has averaged some 8,600 bopd due to a combination of electrical problems and production and trucking constraints. Production at year end was some 12,000 bopd and the 4 millionth barrel of oil was produced from the field in September 2007.
Bass Basin
ARC acquired a 12.5% interest in the BassGas project which includes the producing Yolla gas/condensate field with the completion of the acquisition of the Wandoo Petroleum assets on 29 June 2007.
The BassGas project is 150 kms offshore from Melbourne in 80 metres of water and includes the producing Yolla gas condensate field and adjacent gas condensate and oil discoveries. Gas is produced from two wells through a wellhead platform and is transported
to the onshore Lang Lang plant where it is processed to sales quality.
The Yolla field has initial 2P reserves in excess of 300PJ of gas and is in its early stages of production with the processing plant just completed commissioning. Current production is in excess of 60 TJ per day of sales gas and 3,000 bbls of liquids per day.
The BassGas Project has had a number of start-up problems which have now
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BassGas Project – Lang Lang Gas Processing Plant
been resolved and the contractual dispute with the construction contractor was also resolved after the completion of the purchase of the interest in the field by ARC.
Canning Basin
The Blina production facilities and associated oilfields, located in the Canning Basin, were acquired during the year. The Blina Oilfield was discovered in 1981 and brought into
Cliff Head Alpha Platform Bass Basin Interests
production in 1983 and the Blina and associated fields have produced some three million barrels of oil. The fields are generally all at the end of their lives and production levels have declined to less than 30 bopd with the oil trucked to Perth. A program to workover wells and upgrade the facility is underway with production being steadily increased.
Preliminary engineering design work also commenced on gas production facilities and a gas re-injection project for future gas discoveries in the Canning Basin. Preliminary engineering studies were also commenced for the Great Northern Pipeline which would provide gas transport from the Canning Basin to Port Hedland. Feasibility studies for the coastal transport of gas by LNG were also commenced with the execution of an MOU with Energy World Corporation to review a small scale LNG project that would process and ship LNG from the Kimberley to southwest markets.
Oil Production
Oil production for the year was above last year’s levels due to an active and successful development drilling program offsetting the natural decline of the fields. Field production levels are set out in the following table.
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
Oil Sales (Barrels)
Hovea/Eremia (50%) 568,157 689,524
Jingemia (44.141%) 378,326 421,849
Dongara (100%) 6,704 12,435
Mt Horner (100%) 11,473 -
0 ARC Energy | Annual Report 2007
Gas Production and Sales
Gas production was lower than in the previous year due to natural field declines which were not fully compensated for by the Company’s development drilling activities. The Company’s gas production from the Perth Basin is keenly sought after by Perth gas customers and it is a primary business objective of the Company to increase its gas sales. The discovery of gas at the Frankland 1 well in the offshore Perth Basin and the potential for a number of other prospects in the area to contain both gas and oil will be a focus for development and exploration in the coming year.
Reserves
The Company undertakes a comprehensive annual review of the reserves of its fields and the predicted production levels from these fields. The reviews are carried out internally by ARC staff, including fully qualified and experienced reservoir engineering specialists. The reserves categories are defined in accordance with SPE classification on the basis of information available at the date of the determination. The reviews are primarily used for planning and budgeting purposes and also assist in identifying the potential for additional development opportunities and production enhancements. As fields become more mature, the reserves estimates also become much more dependent on the
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Purchased ProducedGas (Terajoules)
As at 30th June 2007, the remaining recoverable reserves of the Company on a net (working interest) basis were estimated as follows:
economic assumptions used for forward operating, capital and abandonment costs.
The purchase of the Wandoo assets has substantially improved both the Company’s reserve base and its reserves cover.
BOE approximate conversion is 1bbl of oil = 6 mscf of gas, (1 mmscf gas = 1.055 TJ of gas), 1 bbl of oil = 0.12 tonnes of LPG and 1 bbl of oil = 1 stb of condensate.
Category Sales Gas
Gas sales 00/00 ARC
share (TJ) 00/0 ARC
share (TJ)
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Adelphi Energy Limited
Adelphi is an ASX listed company with a market capitalisation of approximately $70 million with operations in USA, Yemen, and in the Timor Sea of Australia. During the year ARC exercised 8,750,000 options in Adelphi at $0.25 per share to increase its holding in Adelphi to 32%.
Eric Streitberg, the Managing Director of ARC, acts as ARC’s representative on the Adelphi Board and ARC and Adelphi work co-operatively to source new ventures and business development opportunities.
The principal exploration activity of Adelphi during the year was the drilling and testing of the Sugarloaf 1 well onshore Texas. This well has identified a major gas/condensate resource and testing of the well and drilling of a horizontal well to identify flow potential and to prove reserves is expected to be completed in late 2007.
Kennedy 1 Well Onshore Texas
Adelphi Energy Project Locations, Texas

(metres) Type Result
Jingemia 8 13 Aug 06 Century Rig 18 L14 2,565 Development Oil producer
Hovea 12 * 19 Sep 06 Century Rig 18 L1 2,482 Development Oil producer
Eremia 5/6* 19 Oct 06 Century Rig 18 L1 2,315 Development Oil producer
Lyginia 1* 24 Nov 06 Century Rig 18 L1 2,345 Exploration Dry hole
Dongara 36* 15 Dec 06 Century Rig 18 L2 1,896 Development Gas producer
Dongara 37* 7 Jan 07 Century Rig 18 L2 1,691 Development Gas producer
Eremia 7* 3 Feb 07 Century Rig 18 L1 2,291 Development Oil producer
Jingemia 11 28 Feb 07 Century Rig 18 L14 2,489 Development Oil producer
Beharra Springs 4
28 Mar 07 Century Rig 18 L11 3,269 Appraisal Suspended
Drakea 1 and 2*
11 May 07 Century Rig 18 L1 2,880 Exploration Cased and suspended for
possible re-entry
Apium 2* 29 Jun 07 Century Rig 18 L1 2,793 Appraisal Gas producer
Moondah 1 24 Jul 06 Ensco 67 TP/15 1,450 Exploration Dry hole
Frankland 1 6 April 07 Wilcraft WA286P 2,340 Exploration Gas discovery P & A
Perseverance 1 11 May 07 Wilcraft WA325P 1,774 Exploration Gas discovery P & A
Dunsborough 1 31 May 07 Wilcraft WA286P 1,755 Exploration Oil discovery P & A
Republic of Yemen
Al Magrabah 1 19 Apr 07 Joeco Rig Block 35 3,039 Exploration Hydrocarbon shows Plugged and abandoned
Reeb 1 10 Aug 07 Joeco Rig Block 35 3,580 Exploration Hydrocarbon shows Plugged and abandoned
* ARC operated well
Century Rig 18
ARC’s 2007 exploration drilling program was focused in the Perth Basin with participation in five exploration wildcat wells, two onshore and three offshore. In addition, two wells were drilled in Block 35 in Yemen, one of which was subsequent to the end of the financial year.
The Company’s exploration program had a high rate of success with three discoveries offshore in the Perth Basin and one onshore.
Two of the offshore wells were potentially commercial discoveries at Frankland 1 and Dunsborough 1, and two of the discoveries either need further appraisal or were sub-commercial, Perseverance 1 and Drakea 1/2. This was a success rate of approximately 30% for potentially commercial discoveries and success rate in excess of 50% for technical success. If the offshore discoveries are commercially developed this would lead to a substantial reserves replacement rate.
In addition to the exploration drilling program, which was at historically low levels for the Company, an emphasis was placed on identifying opportunities for future growth, with significant enhancement of the portfolio of prospective exploration and appraisal opportunities through
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The Company’s exploration program had a high rate of success with three discoveries offshore in the Perth Basin and one onshore.
Andy Padman – General Manager Exploration & Business Development
Perth Basin Permit Interests
the discoveries referred to above, the Wandoo acquisition, and the Canning Basin consolidation.
Onshore Perth Basin
In the onshore Perth Basin, the Company’s drilling program focussed on appraisal and development drilling in the existing fields to access incremental reserves and to accelerate production to take advantage of historically high oil prices. This resulted in the arrest of the natural decline of production rates from the fields, but constrained the availability of the Century 18 drilling rig which was only available to drill two exploration wildcat wells in the onshore Perth Basin, Lyginia 1, and Drakea 1/2.
Lyginia 1 targeted an Eremia style structure identified from the 3D seismic reprocessing program. The well was dry and this was attributed to subtle velocity variations distorting the structure. Drakea 1, and its sidetrack appraisal Drakea 2, discovered oil in the High Cliff Sandstone and extended the prospectivity of this reservoir significantly beyond the only previous effective trap at this level which was the gas identified in Hovea 2. The log, core and oil samples acquired in the Drakea wells are being analysed, and this is expected to result in additional activity to appraise the Drakea hydrocarbon pool.
In addition to these operated wells, the Company participated in the drilling of development wells at the Jingemia Oilfield and Beharra Springs Gasfield operated by Origin.
Offshore in the Perth Basin, ARC participated in the drilling of three exploration wildcat wells, Frankland 1 and Dunsborough 1 in WA286P,
and Perseverance 1 in WA325P, all operated by ROC Oil.
All three wells encountered hydrocarbons. Perseverance 1 intersected a relatively small gas column that contained over 40% CO2 and this level of CO2 is too high for commercial development. In light of this result, continuing expenditure and effort could not be justified in WA325P or WA327P and these blocks have now been relinquished.
In WA286P (and also in WA31L), ARC’s equity position was increased
from 6% to 30% with the Company’s acquisition of the Wandoo assets. Subsequent to the agreement to purchase the interest, the exploration program discovered gas at Frankland 1 and oil at Dunsborough 1. These discoveries are very positive as not only are they likely to be commercially viable (subject to appraisal), but they also establish a new oil and gas play fairway where there are already several prospects and leads mapped on the relatively sparse seismic data coverage. Planning for new seismic acquisition across the area is underway, and additional appraisal and exploration
Location of 2006/2007 Perth Basin Drilling Program
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drilling to evaluate the discoveries and the prospects in the area is likely to be undertaken during 2008.
The Company’s interest in the WA368P permit in the southern Perth Basin increased to 50% subsequent to the Wandoo purchase. Interpretation of the 3D seismic data acquired on the permit during the year has confirmed the presence of the large Yingling oil prospect and it is planned to drill this prospect in 2008. The Company increased its interest in the WA226P permit in the northern Perth basin to 65% during the year. Drilling on this permit has proven the presence of an active petroleum system and the prospectivity will be reviewed in the next year.
Canning Basin
The Company has made a major commitment to exploration of the Canning Basin in Western Australia’s Kimberley region. The Canning Basin is one of the largest under-explored Palaeozoic basins in the world. Similar basins globally host major petroleum accumulations and the Company has committed to a three year, 20 well program to explore the basin in a systematic and rigorous fashion.
During the year the Company’s principal exploration activity was the interpretation of the existing 2D seismic data (of numerous vintages and qualities), and correlation of the existing wells to confirm play types and fairways and to identify prospects and leads. This work has initially been focussed on the Lennard Shelf and Fitzroy Trough areas of the basin where most of the wells have encountered gas, and there has been widespread oil shows and recoveries. Century Rig 18 was mobilised to the Canning Basin from the Perth Basin in late July 2007 and spudded the first well in the
program, Valentine 1 in EP104/R1 on 12 August 2007. An additional four wells are planned during the 2007 drilling season.
Acquisition of some 1,100 kilometres of 2D land seismic data was also commenced in September 2007 with the objective of refining prospects for the 2008 drilling season.
The consolidation of the Company’s interests in the basin was the other
major activity. Up to June 2007, the Company had secured over 75,000 square kilometres of interests through numerous farmins, purchases and new acreage applications. Subsequent to the year end, an agreement was entered into with New Standard Exploration to acquire an additional 65,000 square kilometres of interests bringing ARC’s interests in the Basin to over 140,000 square kilometres. ARC now holds a dominant strategic position in the basin, and continues
Valentine 1 Well
to work towards securing tenure to those additional areas it views as prospective.
The Canning Basin acquisitions during the year included:
The acquisition from Golden Dynasty Resources Ltd., a TSX Venture Exchange (“TSXV”) listed company, of:
• 100% of the EP129, L6, L8, PL 7 permits and licences;
• 100% of the Application for Exploration Permit 7/05-6; and
• Associated plant and equipment and infrastructure.
A further four blocks were acquired on the western side of the basin in January 2007. Two of the blocks (App 3/06-7 and App 4/06-7), were subsequent to successful work program bids and the other two blocks (EP438 and EP 448) were via farmin to areas held by an Empire Oil led joint venture. The acquisition of the European Gas interests in EP371, EP390, EP391, EP428, EP431, EP436 (each 100%), L98-1 (12%), EP104 (8%) and R1 (8%) was also completed in January 2007.
The Company also increased its interest in the EP 104 permit containing the Valentine/Stokes Bay prospects to 38.95% prior to the spudding of the Valentine 1 well.
Subsequent to year end the Company announced another major agreement with New Standard Exploration to earn up to a 75% interest in their permits in the Kidson Sub-basin by the acquisition of 1,000 kilometres of seismic data and the drilling of up to three wells. This acquisition substantially completed the Company’s acreage consolidation program in the basin.
Permit Interests – Bass Basin
As part of the focus on commercialisation of the basin, the Company also entered into a gas sales agreement (GSA) with Alcoa for up to 500 petajoules of gas reserves. The GSA included a gas prepayment by Alcoa to ARC of A$40 million which was made in September 2007. The prepayment will be used to accelerate ARC’s regional Canning Basin exploration program.
Bass Basin
ARC acquired a 12.5% equity in permit T/18P (the Yolla block) as part of the Wandoo asset purchase. The Company had identified the potential for significant appraisal and exploration upside in T/18P. This has been confirmed by subsequent joint venture review and mapping of the
BassGas Project – Yolla Platform
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Permit Interests – Yemen
permit with most likely potential of in excess of 400 PJ of gas being identified. These resources exceed the current reserves of the producing Yolla Field. It is anticipated that appraisal drilling will be conducted during 2008 with potentially a development decision being taken in late 2008.
The Company has also entered into an agreement to acquire a 40% interest in T/44P in the Bass Basin, adjacent to T/18P. T/44P was awarded to Origin in January 2007, and the acquisition of 3D seismic data is planned in early 2008 prior to drilling later in 2008. This permit contains similar structures and has similar potential to the T18/P permit.
Yemen
The Company has interests in Blocks 35, 7 and 74 in the Republic of Yemen.
The Al Magrabah 1 and Reeb 1 wells which were recently drilled on Block 35 encountered good oil and gas shows but were plugged and abandoned after testing did not produce commercial flows.
Blocks 7 and 74, which have been awarded to joint ventures that include ARC (21.25% equity interest) and Adelphi (8.5% equity interest) have still not been formally ratified, although there was some progress during the year. There is an expectation these blocks will be awarded before the end of 2007.
Perth Basin Interests
Dongara and Yardarino Fields ARC Energy Limited
Other Fields & Exploration Area ARC Energy Limited Origin Energy Developments Pty Limited
100%
ARC Energy Limited Origin Energy Developments Pty Limited Victoria Petroleum Offshore Pty Ltd Norwest Energy NL ROC Oil (WA) Pty Limited John Kevin Geary
44.141% 49.189% 5.000% 1.278% 0.250% 0.142%
L11/EP320 (Beharra Springs) *
ARC (Beharra Springs) Pty Ltd Origin Energy Developments Pty Limited
33% 67%
EP368 * ARC Energy Limited Origin Energy Developments Limited Westranch Holdings Pty Ltd
75% 15% 10%
50% 50%
TP/15 *
ARC Energy Limited ROC Oil (WA) Pty Limited AWE Oil (Western Australia) Pty Ltd Westranch Holdings Pty Ltd
45% 20% 25% 10%
WA31L *
ARC (Offshore PB) Limited ROC Oil (WA) Pty Limited AWE Oil (Western Australia) Pty Ltd CIECO Exploration & Production (Australia) Pty Ltd
30.00% 37.50% 27.50% 5.00%
WA286P *
ARC (Offshore PB) Limited ROC Oil (WA) Pty Limited AWE Oil (Western Australia) Pty Ltd CIECO Exploration and Production (Australia) Pty Ltd
30.00% 37.50% 27.50% 5.00%
WA226P * ARC (Offshore PB) Limited Mitsui E&P Australia Pty Ltd
65.00% 35.00%
50.00% 50.00%
18.3188% 81.6812%
Canning Basin Interests
Interest holders Interest
EP104/R1 * ARC Energy Limited Gulliver Productions Pty Ltd Indigo Oil Pty Ltd First Australian Resources Limited Pancontinental Oil & Gas NL Emerald Oil & Gas NL Phoenix Resources PLC
38.95% 14.80% 5.50% 8.00% 10.00% 12.75% 10.00%
EP129 * ARC Energy Limited 100.00%
L6/L8/PL7(Blina) * ARC Energy Limited 100.00%
EP371 * ARC Energy Limited 100%
EP438 * ARC Energy Limited Maneroo Oil Company Limited Gulliver Productions Pty Ltd Indigo Oil Pty Ltd
5.0%** 57.0% 19.0% 19.0%
EP448 * ARC Energy Limited Maneroo Oil Company Limited Gulliver Productions Pty Ltd Indigo Oil Pty Ltd Kjirt Exploration Services Pty Ltd
5.00%** 42.75% 23.75% 19.00% 9.50%
** earning program for an equity of up to 75%
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Bass Basin Interests
T/L1 * ARC (Bass Gas) Pty Ltd Origin Energy Resources Limited AWE Petroleum Pty Ltd CalEnergy Gas (Australia) Limited
12.5% 42.5% 30.0% 15.0%
T/RL1 * ARC (Bass Gas) Pty Ltd Origin Energy Resources Limited AWE Petroleum Pty Ltd CalEnergy Gas (Australia) Limited
12.5% 42.5% 30.0% 15.0%
T-18P * ARC (Bass Gas) Pty Ltd Origin Energy Resources Limited AWE Petroleum Pty Ltd CalEnergy Gas (Australia) Limited
12.5% 41.4% 22.6% 23.5%
T-44P ª * ARC (Bass Gas) Pty Ltd Origin Energy Resources Limited
40% 60%
Yemen Interests
Permit/Licence Operator (*)
Blocks 7 & 74 * ARC Energy Holdings Limited Oil Search (Yemen) Limited Kufpec (Aden) Limited Yemen General Corporation for Oil & Gas Adelphi Energy (Yemen) Limited
21.25% 34.00% 21.25% 15.00% 8.50%
Block 35 * ARC Energy Holdings Limited Oil Search (Yemen) Limited Virgin Resources Limited MND Exploration and Production Limited The Yemen Company
15.00% 32.50% 37.50% 10.00% 5.00%
S C H
G LO
Abbreviations Used in this Report
$ Australian Dollar ADI Alternative Duty Incident Adelphi Adelphi Energy Limited Alcoa Alcoa of Australia Limited AIFRS Australian International Financial Reporting Standards ARC ARC Energy Limited ASX Australian Securities Exchange bbl Barrel BOE Barrels of Oil Equivalent (energy equivalence) bopd Barrels of Oil per Day Company ARC Energy Limited Century Century Drilling Limited EBITDAW Earnings before interest tax, depreciation, amortisation and write-offs EP Exploration Permit FAI First Aid Treatable Injury HSE Health, Safety and Environment km Kilometre L1 Production Licence 1 L2 Production Licence 2 L11 Production Licence 11 L14 Production Licence 14 LTI Lost Time Injury MTI Medically Treatable Injuries Origin Energy Origin Energy Developments Pty Limited Period The twelve months from 1 July 2006 to 30 June 2007 PJ Petajoule ROC ROC Oil (WA) Pty Limited SPE Society of Petroleum Engineers TJ Terajoule WA Western Australia Wandoo Petroleum Wandoo Petroleum Pty Ltd
Conversion Factors
1 Kilolitre = 6.29 barrels 1 Terajoule (TJ) = 1 x 1012Joules 1 Petajoule (PJ) = 1 x 1015 Joules 1 Terajoule = approximately 1 million cubic feet 1 Petajoule = approximately 1 billion cubic feet 1 Square Kilometre (sq km) = 247.1 acres
33ARC Energy | Annual Report 2007
The Directors present their report together with the financial report of ARC Energy Limited (the “Company”) and of the
consolidated entity, being the Company and its controlled entities (“ARC”), for the financial year ended 30 June 2007
(“Current Period” or “Year”) and the auditors’ report thereon.
DIRECTORS
The names and details of Directors of the Company at any time during or since the end of the financial year are:
Mr David Griffiths (appointed 8 July 2005)
Ms Emma Stein (appointed 1 April 2005)
Mr Eric Streitberg (appointed 1 July 1997)
Mr Mike Harding (resigned 25 May 2007)
Mr Gary Jeffery (appointed 5 June 2007)
Names, qualifications, experience, special responsibilities and other directorships
David Charles Griffiths BEc (Hons), MEc, Independent Non-Executive Chairman. Age 56
David Griffiths has over 25 years experience in senior financial executive roles in a wide range of industries.
Until June 2005 David was a Division Director of Macquarie Bank, a position he held since March 1999 when
Macquarie Bank acquired Perth stockbroker Porter Western, where he was Executive Chairman.
He is Chairman of Great Southern Limited (Director since July 2005) and of Advanced Nanotechnology Limited
(Director since December 2003). He is also a Director of Think Smart Limited and Automotive Holdings Group Limited and
was appointed Pro-Chancellor of the University of Western Australia in November 2006. He is also Chairman of its Strategic
Resources Committee and sits on the Board of the Perth International Arts Festival
David was appointed Chairman of the Board of the Company on 8 July 2005. He is a member of the Remuneration
Committee and Audit Committee.
Emma Rachel Stein BSc Hons Physics, MBA, Independent Non-Executive Director. Age 47
Emma Stein has prior executive utilities experience in energy retailing, asset and stakeholder management
(including regulators, consumer watchdogs and governments), international business operations, strategy
development and implementation, acquisitions and divestments.
Her other directorships are as a Non-Executive Director of Diversified Energy and Utility Trusts (“DUET”),
Integral Energy and the NSW Growth Centres Commission. She is also a member of the University of Western Sydney
Strategy and Resources Board Committee. She is the NSW President for the National Association for the Prevention of Child
Abuse and Neglect and an Ambassador for the Guides.
She was formerly UK Managing Director of Gaz de France Energy, a UK Non-Executive Director for Cofathec Heatsave
and UK Divisional Managing Director for British Fuels and was a Non-Executive Director of Merlin Petroleum Limited, an
Australian oil and gas exploration and production company.
Emma was appointed a Non-Executive Director of the Company on 1 April 2005. She is Chair of the Audit Committee and
a Member of the Remuneration Committee.
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Eric Charles Streitberg BSc (App Geoph), FausIMM, Managing Director. Age 59
Eric Streitberg has over 30 years experience in petroleum geology and geophysics, petroleum exploration
and production company management. He is a Fellow of the AusIMM and the Australian Institute of
Company Directors, a member of the SEG, PESA and the AAPG, a Certified Petroleum Geologist of the
AAPG, a former member and Vice Chairman of the APPEA Council, and Chairman of the Marine Parks and
Reserves Authority of Western Australia.
His other listed company directorship is as Non-Executive Director of Adelphi Energy Limited (“Adelphi”) since
January 2005.
Eric was appointed Managing Director of the Company on 1 July 1997.
Richard Michael Harding MSc (Mech Eng), Independent Non-Executive Director and Deputy Chairman. Age 58 (Resigned 25 May 2007)
Michael Harding has over 25 years of extensive international experience with BP in exploration, production
and business management. He has been responsible for significant upstream businesses in Australia,
Azerbaijan, PNG and the UK. He has held numerous other senior executive positions particularly associated
with human resource management, gas strategy, business performance and governance in the Asia
Pacific region.
His other directorships are as Non-Executive Director of Santos Limited since 2004, Non-Executive Director and Chairman
of Clough Limited since May 2006 and Chairman of the Ministry of Defence Project Governance Board – Land Systems
Division (Army).
Michael was appointed a Non-Executive Director of the Company on 26 August 2003. He was Chairman of the Remuneration
Committee and a member of the Audit Committee.
Michael resigned as a Director on 25 May 2007 to ensure that there was no perception of a conflict of interest arising from
his role as Chairman of Clough Limited and ARC’s intended participation in the BassGas Project as a result of a legal dispute
between the two parties.
(Appointed 5 June 2007)
Gary Jeffery has over thirty years of experience in the oil, gas and mining industries working for both large
and small organisations in over thirty countries worldwide. He has over twenty years of geological and
geophysical mapping and exploration management experience.
He was most recently Tap Oil Limited’s General Manager. Previously he worked for Griffin Energy as
Executive General Manager Business Development with responsibility for promoting the Griffin Energy Enterprise and held
senior management positions at Normandy Mining (now Newmont Mining), Hadson Energy (now Apache) and WAPET.
Gary is a member of the Australian Institute of Energy and the Industry Advisory Board of the School of Oil and Gas
Engineering at UWA, and was a member of the Business Council of Australia Energy Working Group and the WA Greenhouse
Council Energy Supply & Use Technical Panel and other industry advisory groups.
COMPANY SECRETARY
Adrian Cook B Bus, CA, MAppFin, (Chief Financial Officer and Company Secretary). Age 40
Adrian has been Chief Financial Officer of ARC since 26 April 2006 and Company Secretary since 7 July
2006. Adrian has over 19 years experience in finance and accounting, including positions with accounting
firms Deloitte and Ernst & Young and senior roles with Rio Tinto Limited. Most recently, he was the Chief
Financial Officer of Clough Limited’s Oil and Gas Business Unit.
Adrian is a member of the Institute of Chartered Accountants in Australia and a Fellow of the Financial Services Institute
of Australasia.
DIRECTORS’ MEETINGS
The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30
June 2007, and the numbers of meetings attended by each Director were:
Director
Mr David Griffiths 21 21 4 4 4 4
Mr Mike Harding 18 18 2 2 3 4
Ms Emma Stein 21 21 4 4 3 4
Mr Eric Streitberg 21 21 * * * *
Mr Gary Jeffery 3 3 * * * *
A = Number of meetings attended
B = Number of meetings held during the time the Director held office or was a member of the committee during the year
* = Not a member of the relevant committee
The Remuneration Committee also acts as the Nomination Committee.
PRINCIPAL ACTIVITIES
The principal activities of ARC during the course of the financial year included:
• Exploration for oil and gas;
• Appraisal and development of oil and gas properties; and
• Production and sale of oil and gas.
There were no significant changes in the nature of the principal activities of ARC during the year.
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OPERATING AND FINANCIAL OVERVIEW
Summary of Financial Performance
A summary of the key financial indicators for the Company, with previous years for comparison, is set out in the following table:
2006/07 AIFRS $’000
2005/06 AIFRS $’000
2004/05 AIFRS $’000
2003/04 AGAAP $’000
2002/03 AGAAP $’000
EBITDAW * 69,351 81,322 72,669 40,982 19,604
Net Profit After Tax 6,075 15,456 34,439 20,091 8,791
Operating cash in flows 72,471 71,464 69,866 38,916 12,069
Investing cash out flows 270,736 60,127 50,772 33,986 17,640
* Earnings before interest, tax, depreciation, amortisation and write-offs
• Revenue from Ordinary Activities for the Year increased 3% to a record $122.5 million.
• Oil production was 1.158 million barrels for the Year compared to 1.148 million barrels during the previous year.
• The average price received per barrel of oil decreased from A$80.17 in 2006 to A$78.89 this year as a result of movements
in the exchange rate offsetting the increase in the US dollar oil price.
• Operating cash inflows of $72.5 million were in line with the previous financial year and demonstrate the underlying
strength of the operational business.
• EBITDAW of $69.4 million decreased 15% on the prior year primarily due to a number of charges arising from the
purchase of assets from Wandoo Petroleum Pty Ltd (‘Wandoo”). The accounting charges outlined below were the result
of business risk management strategies arising from the financing of the asset purchase from Wandoo and includes
hedging oil prices to a level sufficient to enable the repayment of borrowings, forward exchange contracts providing
certainty over funding of the US dollar denominated Wandoo asset acquisition and conversion of US dollar cash reserves
maintained for debt servicing purposes. The main items impacting EBITDAW were:-
- $5.0 million unrealised loss on the oil price hedge that became effective on 1 July 2007, essentially representing
a mark to market valuation at 30 June 2007 on the entire hedged volume of 1.275 mmbbls, deliverable over 5 years,
swapping a variable oil price for a fixed price of US$68.15/bbl;
- $3.5 million in realised and unrealised foreign exchange losses, of which $1.3 million pertained to unrealised losses on
the holding of US dollar cash reserves maintained to service US dollar denominated debt commitments and $1.6
million pertained to a realised loss on the forward exchange loss used to protect ARC’s currency risk on settlement of
the Wandoo asset acquisition; and
- $4.5 million in higher operating costs, primarily the consequence of market conditions in the Western Australian
resource sector.
• Net profit after tax, being net profit after tax attributable to members, was $6.1 million. This was a 61% decrease on the
prior year due to the items outlined above coupled with the following:-
- higher depreciation and amortisation charges arising from additional development wells used to accelerate production
and cash flow together with ongoing reserves adjustments at the non operated Jingemia oil field; and
- exploration expenditure writeoffs that continue with the Company’s more conservative policy on carrying values of
exploration expenditure introduced during the previous financial year;
• Investing cash outflows, adjusted for the $215.7 million Wandoo asset acquisition discussed below, were $55.0 million
and included ongoing development wells ($22.1 million), exploration activities ($18.7 million) and the acquisition of new
plant and equipment ($7.0 million).
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• On 29 June 2007 ARC acquired assets from Wandoo for a total consideration, including transaction costs, of $215.7
million. The assets included:-
- A 24% interest in the producing Cliff Head Oilfield in the offshore Perth Basin, together with associated exploration
acreage which includes the recent Frankland and Dunsborough oil and gas discoveries; and
- A 12.5% interest in the BassGas Project in the offshore Bass Basin which includes the producing Yolla gas and
condensate field and the White Ibis, Trefoil and Aroo discoveries together with associated exploration acreage.
Summary of Financial Position
ARC’s financial position, including its cash reserves of $92.6 million, is very sound with total assets increasing 124% on the
previous year. The acquisition of the Wandoo assets contributed significantly to the increase and are expected to provide
ARC with a sound financial base for the future. On 29 June 2007 ARC obtained borrowings of $118 million to partially fund
the Wandoo asset acquisition. These borrowings constitute a relatively conservative 25% of total assets and the Company
has put in place sufficient oil price hedging to ensure oil price changes do not affect repayment of the debt. The balance
of the acquisition consideration was funded through a placement of new shares and a share purchase plan to existing
shareholders.
Consolidated Consolidated 2007 2006
Net tangible assets backing per ordinary share * 0.61 0.65
* Net tangible assets = net assets excluding deferred tax assets and exploration expenditure
Review of Operations
Production and Development
Oil production was 1.158 mmbbls (average 3,174 bopd) for the Year compared to 1.148 mmbbls during the previous year
(average 3,147 bopd).
Gas sales were marginally lower at 7,364 TJ’s (average 20.18 TJ/day), compared to 7,644 TJ’s (average 20.95 TJ/day) in
the previous year.
Subsequent to the Wandoo purchase ARC’s additional interests in the Cliff Head oil field (24%) and BassGas Yolla gas and
condensate field (12.5%) will contribute to the Company’s production commencing from 1 July 2007.
Drilling activity
Development and appraisal ARC participated in 10 development and appraisal wells during the period; 8 of which added to either reserves or production
or both. The Beharra Springs 4 appraisal well was suspended at year end awaiting the specialised equipment required for a
safe reservoir penetration. The wells, in order of drilling, were Jingemia 8, Hovea 12, Eremia 5 and 6, Dongara 36 and 37,
Eremia 7, Jingemia 11, Beharra Springs 4 and Drakea 2.
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Exploration
ARC operated or participated in 7 exploration wildcat wells as set out below in order of spudding.
Well name Permit Operator Status
Moondah 1 TP15 Roc Oil Dry hole
Lyginia 1 L1 ARC Dry hole
Frankland 1 WA 286P Roc Oil Gas Discovery
Al Magrabah 1 Block 35 Oilsearch Limited Dry hole
Drakea 1 L1 ARC Oil discovery
Perseverance WA 325P Roc Oil Gas discovery
(uneconomic)
Dunsborough 1 WA 286P Roc Oil Oil discovery
In addition to its active drilling programs the Company has substantially increased its exploration portfolio with the acquisition
of in excess of 75,000 square kilometres of permits in the Canning Basin where a major drilling program is underway during
the first half of the next financial year. The Bass Basin assets acquired via the Wandoo purchase contain very substantial
appraisal and exploration upside and the Company has moved quickly to consolidate its position with the acquisition of an
interest in the adjacent T/44P permit.
Corporate Activity
On 29 June 2007 ARC announced the completion of a US$175.1 million asset acquisition from Wandoo Petroleum Pty Ltd.
The assets include an additional 24% in the Cliff Head Oilfield and a 12.5% interest in the BassGas Project. Funding for
the acquisition was through a combination of new equity and senior debt. The acquisition has transformed ARC through a
substantial increase in reserves, production and cash flow.
The Company also completed a number of corporate and asset transactions as part of its strategy to consolidate its holdings
in the Canning Basin.
The Company continued its support for its associated company, Adelphi with participation in a rights issue undertaken by
Adelphi and through the exercise of 8,750,000 options in Adelphi at an exercise price of $0.25 per option. The exercise of
these options took ARC’s interest in Adelphi from 26.3% to 32.4%. Adelphi’s participation in the Sugarloaf project in the
onshore Gulf of Mexico Basin in Texas has resulted in what could be a substantial gas and condensate discovery which is
currently undergoing appraisal.
Strategy and Future Performance
There was no change in the Company’s strategy during the year, which was to drive organic growth through an aggressive
exploration and development drilling program and to make targeted acquisitions which have good upside potential. As
part of this strategy the Wandoo acquisition enhanced the geographic diversification of ARC’s production and exploration
portfolio through the acquisition of additional interests in the offshore Perth Basin and offshore exploration and production
interests in Tasmania’s Bass Basin and an exploration permit in the Carnarvon Basin offshore Western Australia.
Future activities expected to be undertaken during the next financial year include:-
• Exploration activities in the Canning Basin comprising the acquisition of seismic data and the drilling of 4 to 6 wells;
• Further exploration and development activities in the onshore Perth Basin;
• Additional production from the Cliff Head oilfield and the BassGas gas and condensate field;
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• Exploration activity in Yemen including drilling of one well and initial exploration on Blocks 7 and 74; and
• Further targeted and strategic acquisitions.
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
As outlined above, ARC acquired assets from Wandoo Petroleum Pty Ltd for $215 million funded through the issue of new
equity and senior debt. The acquisition price of $215 million was adjusted for the value of the underlying activities between
1 January 2007 and completion on 29 June 2007. The acquisition has transformed ARC through a substantial increase in
reserves, production and cash flow.
DIVIDENDS
No dividends have been paid or declared since the end of the previous financial year.
The Board considers that franked dividends will be paid in the future as long as the Company’s need for capital for growth
can be met and dividends can be paid on a sustained basis. The Board has carefully reviewed the Company’s activities
and in view of ARC’s extensive and aggressive exploration and development plans, the Board has decided not to declare a
dividend in respect of this financial year.
EVENTS SUBSEQUENT TO REPORTING DATE
Alcoa gas contract On 11 July 2007, ARC and Alcoa of Australia Limited (“Alcoa”) entered into a major gas sales agreement (“GSA”) for the
delivery of up to 500 petajoules of gas from future discoveries on ARC’s interests in the onshore Canning Basin. The GSA
includes a gas prepayment by Alcoa to ARC of $40 million in September 2007 that will be used to accelerate ARC’s regional
Canning Basin exploration program. The prepayment will constitute unearned income in ARC’s Financial Statements until
ARC supplies gas under the GSA, from the Canning Basin or elsewhere, or until the prepayment is repaid in the event no
gas is supplied under the GSA.
Farm-in to EP 438 and EP 448 On 10 July 2007 ARC completed the recordings of two aeromagnetic surveys over each of the EP 438 and EP 448 exploration
permits located in the Canning Basin, Western Australia, to obtain a 5% interest in each permit. ARC can earn up to 75% in
each permit by undertaking additional exploration including seismic and/or drilling with associated expenditure of $3 million
in EP 438 and $3 million in EP 448.
LIKELY DEVELOPMENTS
In the opinion of the Directors, the provision of information regarding likely developments in the operations of ARC in future
financial years and the expected results of those operations would be likely to result in unreasonable prejudice to ARC and
accordingly, has not been included in this report.
ENVIRONMENTAL REGULATION
ARC is subject to significant environmental regulations under both Commonwealth and State legislation in relation to its oil
and gas exploration and production activities. The Directors actively monitor compliance with these regulations and have
adopted a best practice environmental compliance system. As at the date of this report, the Directors are not aware of any
material breaches of these regulations.
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DIRECTORS’ INTERESTS
The relevant interest of each Director in the shares options and performance rights of the Company, as notified by the
Directors to the ASX in accordance with Section 205G(1) of the Corporations Act 2001, at the date of this report is as
follows:
Directors Options over ordinary shares Rights of ordinary shares Ordinary S

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ARC Energy Limited Annual Report 2007

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