Philippine Galoc Oil Project to Help Fund Drilling

The Philippines' offshore Galoc oil project, set to almost double the nation's oil output when it starts up this month, will help fund exploration targeting much larger discoveries, said Otto Energy Ltd. (OEL), a venture partner.

Galoc, found off northern Palawan province in 1981, should reach peak output of about 20,000 barrels a day within four to six weeks, Otto Chief Executive Officer Alex Parks said yesterday. The Perth-based company's investment in the $115 million project will pay for itself in ``a couple of months'' at current oil prices, he said.

Advances in technology and higher crude-oil prices have enabled the development of fields such as Galoc that earlier weren't considered economic. Otto expects to reach agreement by July with partners to help fund drilling, targeting prospects in the Philippines that may hold several hundred million barrels, more than the country's existing reserves, Parks said.

``The combination of the farm-out and the funding from Galoc means we're going to be able to fund about 10 exploration wells in the Philippines over the course of the next two to three years,'' Parks said in a telephone interview. The Philippines ``is going to be a much more active area for exploration over the course of the next few years.''

Galoc, with proven and probable reserves of 23.5 million barrels, is the first offshore petroleum project in the Philippines for about seven years, Nido Petroleum Ltd. (NDO), a partner in the field, said in September. The Philippines has 150 million barrels of proven oil reserves, Perth-based Nido said in a February presentation.

Philippine Output

The nation produces about 23,000 barrels a day of crude oil, relying on imports, primarily from the Middle East, to meet its consumption of 288,000 barrels a day, Nido said in September.

Otto Energy, which has gained 35 percent so far this year in Sydney trading, today rose 9.1 percent to 42 Australian cents on the Australian stock exchange, beating a 0.5 percent drop in the exchange's benchmark energy index.

Otto holds its 18.3 percent interest in Galoc through a one-third stake in Galoc Production Co., the field operator.

Nido has a similar strategy of using cash flow from Galoc to fund an exploration program in the North West Palawan Basin, the location of Royal Dutch Shell Plc (RDSA)'s 535 million barrels of oil equivalent Malampaya field, the Philippines largest gas producer.

Nido said yesterday in a statement its exploration prospects in the North West Palawan Basin showed the potential to hold 11.6 billion barrels of oil and said it is seeking a partner to help fund drilling. Nido today jumped 41 percent in Sydney.

Chevron, Exxon

Chevron Corp. (CVX), Exxon Mobil Corp. (XOM) and Malaysia's Petroliam Nasional Bhd. are among larger oil and gas companies exploring in the Philippines.

The low level of exploration carried out so far still means the drilling must be considered risky, said Gavin Wendt, resources analyst at Fat Prophets Funds Management in Sydney.

``The place is prospective. The problem has always been turning that prospectivity into commercial reality,'' Wendt said.

Otto also has interests in exploration licenses in Turkey, including stakes in five successful wells out of six drilled. While the discoveries are ``relatively modest,'' they can be rapidly commercialized, with the start of production expected by mid-2009, Parks said.

``Otto has a nicely diversified portfolio, so it's not all the Philippines,'' Wendt said.

Oriental Petroleum

Galoc is owned 58.29 percent by Galoc Production Co., a venture owned 68.62 percent by Vitol Group, the Rotterdam-based commodity trading company, and 31.38 percent by Otto. The rest is held by partners including Nido, Philodrill Corp. (OV) and Oriental Petroleum & Minerals (OPM) Corp.

Otto may start up the smaller six-million-barrel Calauit oil field at the northeast end of the Palawan Basin in an initial test project in 2009, Parks said.

``Galoc and Calauit are a means to an end,'' Parks said. Otto's main focus in the Philippines is to drill the Argao prospect in the East Visayan Basin, which may hold as much as 150 million barrels of recoverable oil, and the Marantao prospect that has the potential to be triple the size of Malampaya.

The drilling at Argao has about a one-in-three chance of success, making it lower risk than the worldwide average of one-in-four or one-in-five, ``even with the best seismic,'' Parks said. The likelihood of a discovery at Marantao, a deeper-water site, is less, Parks said.

Otto expects to reach agreements by the end of July with companies to help fund drilling at Argao and Marantao, Parks said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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