LONDON (ResourceInvestor.com) -- Aminex plc [LSE:AEX] is that rarest of things, a junior oil & gas prospector with a proven record of exploration success and interesting new prospects in its portfolio, plus a small production base to help sustain its current programme. Most notably, the company is currently in prime position to gain access to North Korea's highly prospective offshore exploration acreage.
Provenance
Previously, Aminex has successfully developed hydrocarbon assets in the former Soviet Union, the divestment of which began in 2001, when the company sold its Russian interests to Lukoil for $38.5m, resulting in a payout to shareholders of $7.5m. This was followed in 2004 by the sale of the company's interests in Tatarstan, a Russian autonomous internal republic, to Tatneft.
The company's Chief Executive, Brian Hall, says the decision to sell out of Russia was partly a strategic one, in anticipation of a deteriorating operating environment for western companies as their presence declined in importance to the Russian authorities following the rise of domestic players.
However, Aminex then ran into trouble in its next primary exploration area, Romania, after drilling Nyuni-1, the country's first recent offshore well in conjunction with what was at that time Romania's state oil firm, Petrom. The latter proved a less than perfect partner, flatly refusing to pay its full share of the costs of Nyuni-1, which had in any case escalated beyond expectations due to technical difficulties. Extensive legal wrangling ensued before Petrom, now privatised, elected earlier this year to settle the dispute out of court for a sum in excess of $4m.
The upshot today is that the settlement with Petrom, plus the fortuitous disposal at the end of last year of an ageing and high cost oil field in the US for a good price, has transformed Aminex's financial position, and coupled with the recent placing of over lb6m worth of shares will allow it to move decidedly forward again in Tanzania, and perhaps most interestingly, in North Korea.
North Korea
Aminex is now preparing to begin exploration in North Korean waters, and hopes that its advantage as the sole foreign oil & gas company active the country will allow it to make the first major discovery there. The company's relationship with the North Korean government charges it, under a 20 year agreement, with the creation of a significant oil & gas sector in the country, to be achieved through the establishment of a regulatory environment conducive to the involvement of other foreign firms. In return for this, Aminex has the right to choose the exploration acreage it deems most attractive for itself.
Any output that might result from the agreement in the future would be covered by a relatively conventional production sharing arrangement that the company hopes will soon be finalised, and is described in essence by Hall as 'fair to both parties' in its terms. Significantly, Hall expects the production sharing arrangement to grant Aminex the right to sell output at world prices, and envisages provisions for a tax holiday and relief from customs duties.
Prospectivity for oil & gas off both the east and west coasts of North Korea is widely accepted by geologists, but dealings with the pariah state would likely be too daunting for many and are forbidden to American companies, both of which partly explain how Aminex has been able to secure such a potentially lucrative position in the country.
The company works closely with the North Korean cabinet minister responsible for economic development, and finds the country's administration to be both competent and sincere to deal with. North Korea desperately needs to alleviate the dire domestic shortage of hydrocarbon resources that coupled with a sanctions enforced lack of trade and hence foreign exchange for imports limits it economically and militarily, and seemingly realises that the most expeditious way of doing this is via foreign expertise and investment in the sector.
There are obviously pitfalls to be encountered while operating in a country as shrouded in secrecy and mystique as North Korea, but on the whole, the political risk to Aminex of working there is arguably less than that of most African, Latin American or Central Asian nations. Indeed, Hall reports little hostility or consternation regarding political risk from the array of City of London institutions that have subscribed for shares in Aminex's recent placing.
Much time and effort has been expended by Aminex on the reprocessing of existing North Korean seismic data, as a precursor to the shooting of new seismic in order to follow up interesting areas. This could plausibly be followed by the drilling of an initial exploration well by the end of 2006.
Ultimately, Aminex will be looking to involve partners in its North Korean endeavours, there being far too much prospective offshore acreage off both coastlines for a single company of its size to handle. The key benefit therefore of Aminex's perseverance in North Korea over several years, which has culminated in the 20 year development deal, is the access it hopes to gain to the country's most attractive acreage, and hence the chance to reap the rewards of this even as larger European or Asian players become involved.
Tanzania
In Tanzania, Aminex hopes to be able to drill a second exploration well within 18 months or so. The company has reanalysed the results of Nyuni-1, which suffered from inadequate flow rates, and come to the conclusion that they are more encouraging than it had previously thought. The source rock of the hydrocarbons that were encountered by the well is now thought to be of Jurassic age, which indicates that they may in fact be quite widespread, leaving open the possibility of a substantial discovery in the area.
Despite the logistical difficulties of operating offshore Tanzania, Hall feels that it is 'only a matter of time' before oil is discovered there, in addition to the producing natural gas reserves that have already been discovered in the vicinity by others. To this end, Aminex will be shooting new seismic over the next few weeks in order to gain a clearer understanding of the complex geology close to the site of the Nyuni-1 well, which was drilled atop a tiny coral island in the Indian Ocean. After interpretation, this should facilitate the selection of a site for the second well.
The company also has a larger, onshore licence in Tanzania, for which it is currently looking to bring in partners to help defray the comparatively high expense of shooting seismic onshore, where population and other obstacles pose problems not encountered offshore. According to Hall, several established oil and gas firms may be interested in a deal regarding shared exploration of this acreage.
Other Activities
Future involvement by Aminex is identified by Hall as a possibility in Madagascar, Sudan, and in a cooperative venture with a company whose technology liberates stranded natural gas, should suitable projects become available.
Meanwhile, production is being largely maintained and some expansionary investment made in Aminex's US interests, though there is scant possibility of any extraordinary growth being derived from this area of its business. The company's US operations provide a solid, moderate revenue stream, but being in a mature hydrocarbon province do not merit a core development focus when higher impact projects are available.
From an Investment Perspective
Aminex has been devoid of the hype that has surrounded many companies in the junior oil & gas sector in recent months, and ergo has been much less affected by the recent share price boom, albeit followed by a subsequent decline in many cases, that has been exhibited by others.
Indeed, lack of near term excitement has contributed to a significant decline in Aminex's share price since October of last year, when it stood at just over 17p shortly after the announcement that the 20 year deal had been signed with the government of North Korea, and today the shares are level at approximately 9p.
While the news that really gets the market excited, that of drilling, is not due from Aminex until 2006, given the high prospectivity of its ground in North Korea and Tanzania, and the likelihood that today's prevailing buoyant oil price will remain so, at least in the medium term, then in the same term, shares in the company may have a lot of growth potential.
