21  June 2019

Andalas Energy and Power Plc

('Andalas' or the 'Company')

Services Agreement to Indonesian KSO: Betun-Selo KSO

Andalas Energy and Power Plc (AIM: ADL) is pleased to announce that it has entered into an operating services and option agreement ("Services Agreement") in respect of the producing Betun-Selo KSO in Sumatra, Indonesia and has also issued a £2 million unsecured, interest-free convertible loan note facility ("Convertible Note") arranged by Optiva Securities. The Betun-Selo KSO comprises the producing Betun field and the non-producing Selo field.

Highlights

·    Under the Services Agreement, Andalas is to undertake a 4-well workover programme (the "Work Programme") on the producing Betun field that will allow it to earn 90% of the proceeds of the sales of cost hydrocarbons and profit hydrocarbons derived from incremental production at the KSO until such time as the funds and services provided by the Company have been repaid in full.

·    Betun currently produces 70 bopd.  The Work Programme targets increasing production by an incremental 80 bopd to a total of 150 bopd

·    Selo is currently non-producing but has the resources set out below and up to 5 drilling locations

·    Andalas has an option to acquire a participating interest in the Betun-Selo KSO (excluding any right to existing production), as further detailed below, which has scope for further development

·    Work Programme expected to cost up to USD$650,000 to be financed by an immediate £500,000 (net of fees) drawdown from the Convertible Note

·    The Betun-Selo KSO is estimated to contain the following gross resources:

1.        Reserves volumes extracted from 2013 ITB GG&R Report provided by operator

2.        Reserves and resource volumes estimated using guidance provided by the SPE.  Refer to the March 2007 SPE/WPC/AAPG/SPEE Petroleum Resources Management System ("PRMS") and the 2011 SPE Guidelines for the Application of the PRMS.

3.        TAF: Talang Akar Formation

·    In addition, Andalas has issued the Convertible Note to provide up to £2 million of Group funding subject to draw-down conditions, which may be converted into Ordinary Shares on the election of the Company or Noteholder at an issue price being equal to the higher of 0.15 pence and a 5% discount to the closing bid price on the day immediately prior to draw down

Simon Gorringe, CEO of Andalas Energy and Power PLC said: "We are very excited by the Betun Selo KSO opportunity in Indonesia.  This provides Andalas with the potential to earn direct access to oil production and revenues, which has always been one of our key objectives.  Under the terms of our agreement, ADL may earn into the KSO by committing to workover the four existing Betun wells to increase production.  This opportunity plays directly to our strengths in rejuvenating and optimising late life fields and highlights the skills that exist in our team based in Indonesia.  In addition, we believe the Selo field offers substantial upside with a number of highly productive formations that can be accessed by one well.  We are very pleased to be working with PT Celebes Artha Ventura (CAV), the major shareholder in PT Petroenim Betun Selo (PBS), the Betun Selo KSO Contractor and are very positive about the opportunity to enter into more oil and gas development and production opportunities with CAV over the longer term." 

Hendrik Kolonas, President Commissioner and CEO of PT Celebes Artha Ventura said: "We are very pleased to invite Andalas Energy & Power to support us in the development of the Betun-Selo KSO.  For some time we have been looking for a strategic partner experienced in oil and gas in Indonesia to work and coinvest with us in optimising production from Betun and developing the Selo field.  We are also excited by the possibility of working with a strategic partner on other similar projects in Indonesia."

Services Agreement

Andalas has agreed to undertake a work programme and provide operating services and personnel (Services) to PT Petroenim Betun-Selo (PBS), the operator of the Betun-Selo field, on the terms of the Services Agreement.  PBS has agreed to pay for the Services by paying Andalas 90% of the proceeds of sales of cost hydrocarbons and profit hydrocarbons derived from incremental production at the KSO. 

The work programme will comprise the workover of four (4) existing wells located on the Betun field which will include perforating of untapped zones, scale squeeze of low productive zones, installation of casing gas compressors and pumps with increased capacity for an expected cost of US$650,000.

Furthermore, PBS has granted Andalas an option to acquire a participating interest in the Betun-Selo KSO. This participating interest will provide Andalas with an interest only in any future incremental production from the Betun-Selo KSO (excluding the existing production from Betun-Selo).  The amount of the interest will be determined in accordance with the following formula:

PI = WP/(WP+V) x 100%

Where:

PI is the Participating Interest to be transferred;

WP is the total expenditure incurred by Andalas in undertaking the work programme in accordance with Services Agreement; and

V is USD 3,600,000 (three million six hundred thousand United States Dollars) plus the cumulative cash contributions made by CAV to PBS from the effective date until the date of the exercise of the Option minus the cumulative cash distributions made by PBS to CAV from the Effective Date until the date of the exercise of the Option.

The option may be exercised by Andalas at any time up to 6 months after completion of the 4 well workovers included in the Services.  On exercise of the option, any amount owing to Andalas shall cease to be repayable. Andalas will be granted security by CAV in respect of sums advanced in respect of the Services Agreement.

Betun-Selo KSO 

The Betun-Selo KSO was awarded to PBS by Pertamina in June 2012 and has 8 years remaining in the 15-year term.

The Betun-Selo KSO is made up of two fields - the Betun field and the Selo field.  Both fields are located in South Sumatra.  The Betun field is approximately 30 km NNW of Prabumulih, and the Selo field is some 60 km WNW of Prabumulih.

The Betun Field was discovered in 1949.  Field development started in 1950 with the last well (BTN-18) being drilled in 1986.  The field was abandoned by Pertamina and picked up as a KSO in 2012 by PBS.  The principal producing targets are the Talang Akar formation and the Batu Raja formation at depths of between 1800 - 2000m.  There are 4 producing wells (BTN 01, 03, 04, and 14); one suspended well BTN 17 (a possible gas producer for fuel gas); and, one water disposal well, BTN 5 (with a second possible injector BTN 18).  Currently, BTN 03 is shut in pending workover by ADL.  The Work Programme is anticipated to consist of work over of wells BTN 01, 03, 04 and 14. The KSO operator performed a 3D seismic over Betun in 2015.  While further drilling on Betun in the near future is not anticipated, recent analysis of the 3D data suggests additional drilling may be possible at some future point in time.   

The Betun wells are all on artificial lift - sucker rod tubing pumps with beam pumping units.  Oil production is currently in the order of 70 bopd.  The wells produce to a basic production facility consisting of: an inlet manifold, a 5000 bfpd three phase separator; a tank farm with one 500 bbl vertical storage tank, one 300 bbl horizontal storage tank, and one 500 bbl shipping tank); water treatment/injection pumps; and an oil shipping custody transfer facility.  Production is shipped to the Pertamina EP Adera field through a 4" trunkline.  

The Selo field was discovered in 1936 and developed through 1940.  The last well drilled, Selo-20, was drilled in 1959.  The wells drilled targeted and produced from the Talang Akar formation. However, the Talang Akar horizon is considerably shallower in Selo than Betun with targets in the 800 - 900m range.  Currently there are no wellbores accessible for workover/production, and no production facilities in the Selo field.  The field has been essentially abandoned.  However, analysis of recent passive seismic work as well as reprocessing and analysis of 2D seismic have indicated targets in the Lower Talang Akar and Basement suitable for drilling.  

Given Andalas may acquire an interest in the Betun-Selo KSO, it will not acquire an interest in the historic revenue, losses or net assets of PBS, the  Betun-Selo KSO contractor.

PT Celebes Artha Ventura

The Betun-Selo KSO contractor, PBS, is controlled by PT Celebes Artha Ventura (CAV) (www.celebescapital.com).  CAV trades under the name Celebes Capital and is the largest venture capital fund by assets under management in Indonesia.

Convertible Note

The unsecured convertible loan note facility providers comprise Optiva Securities and clients of Optiva Securities (corporate brokers to Andalas) (Facility Providers).

The £2 million principal of Loan Notes have been constituted and created pursuant to a loan note instrument dated 20 June 2019 executed by the Company.

The Facility Providers have agreed to provide an immediate amount of £560,000 under the Loan Facility to fund the Work Programme (the "Initial Drawdown").  Save for the Initial Drawdown and subject to the agreement of the Facility Providers, the commitments by the Facility Providers to subscribe for the Loan Notes (the "Convertible Loan Notes Facility") may be called upon by Andalas after production exceeds 150 bopd and in agreed amounts within the size and timeframe of the Convertible Loan Notes Facility. The Facility is for Group purposes and there is no restriction on its use.

Andalas may also terminate any commitments under the Convertible Loan Notes Facility and make repayments of any amounts drawn down by the Company by way of subscription for Loan Notes, at any time(s) of its choosing, without penalty.

A commitment fee of £30,000 is to be paid on drawdown by Andalas to the Facility Providers as a result of acceptance by the Company of the committed facility and will be payable again on the anniversary of that acceptance date (to the extent that the commitments or, following draw down, the Loan Notes remain outstanding at such anniversary date) if the facility has not been terminated.  Andalas shall also pay a drawdown fee of 5% on such amounts as are drawn by the Company under the Convertivle Loan Notes Facility (the "Drawdown Fee").  In addition, the Company has agreed to issue Optiva with warrants permitting it to subscribe for new shares at an exercise price equal to a 5% discount to the 10-day volume weighted average price of Andalas ordinary shares in an amount equal to 5% of the amounts drawn under the Convertible Loan Notes Facility.

The Drawdown Fee may, at the Company's sole option, be satisfied by the issue of new shares of no par value in Andalas ("Andalas shares"), cash or any combination of the two.  For this purpose, Andalas shares will be valued at a 5% discount to the volume weighted average price of the shares over the ten days' trading immediately prior to the relevant date, subject to a floor price of 0.15 p per Andalas share. 

The Loan Notes may be converted into Ordinary Shares on the election of the Company or Noteholder at any time (subject to any restrictions being in place because the relevant Noteholder(s) is/are in receipt of unpublished price sensistive information on the Company) at an issue price being equal to the higher of 0.15 pence and a 5% discount to the closing bid price on the day immediately prior to draw down.The final repayment date for any Loan Notes issued to the Facility Providers (following any draw down by the Company of their commitments) is 30 June 2020.

Qualified Person's Statement

The technical information contained in this announcement has been reviewed and approved by Mr. Gregor Mawhinney. Mr. Mawhinney is consulting for Andalas, acting in the role of Vice President Operations. He has nearly 40 years experience in the oil and gas industry, is a member of the Society of Petroleum Engineers (SPE) and a member of the Professional Engineers and Geoscientists of Newfoundland and Labrador (PEGNL).

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ('MAR).  Upon the publication of this announcement via a Regulatory Information Service ('RIS'), this inside information is now considered to be in the public domain.

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Technical Glossary