Melbana Energy farms out Cuban oil block to Sonangol

Australian oil and gas junior Melbana Energy (ASX: MAY) is farming out up to 70% of its stake in an onshore oil block in Cuba to Angola’s state-owned oil company Sonangol.

Sonangol produces more than 2 million barrels of oil per day and is Africa’s second largest oil producer, behind Nigeria’s state energy company.

Under the terms of the agreement, Sonangol will fund 85% of the costs associated with drilling and completing two exploration wells on Block 9 in order to earn a 70% participating interest in the project.

Melbana will only need to fund 15% of the well costs to retain its 30% participating interest in the onshore block.

Sonangol has also agreed to pay Melbana’s past costs of about $5 million, with the amount expected to largely cover Melbana’s estimated funding commitment to these two wells.

In its announcement today, Melbana said negotiations with the preferred drilling contractor are in advanced stages with drilling of the first well anticipated to start in the fourth quarter, subject to COVID-19 management practices.

Melbana executive chairman Andrew Purcell said the pandemic has made it a challenging period in which to advance formal agreements, but the companies have remained committed to the project.

“We are pleased, too, by the commitment being shown to the drilling of these two wells by the various contractors we are in discussions with. These are difficult times for the energy sector, but it does mean there is a lot of available capacity and inventory for this drilling program,” he said.

Drilling program

The planned Block 9 program will comprise drilling of Melbana’s two highest ranked and high impact exploration targets: Alameda and Zapato.

Melbana has been working with drilling contactors and service providers, who have an established presence and significant experience in Cuba, to generate updated proposals to drill the two wells.

All necessary permitting for the wells are either already in place, in the process of being renewed or extended or need only be sought once all rig and service agreements are in place and drilling is ready to begin.

“We look forward to commencing this drilling program later this year, subject to the impacts of COVID-19 on the movement of people and materials abating in a timely manner,” Mr Purcell said.

Melbana has built a contingency plan into its project schedule which it hopes can absorb any prolonged impact of the pandemic.

“Mills in China and Europe for the manufacture of tubulars and accessories, to supplement existing inventories, have been either working without interruption or have had their operations normalised after being slightly affected in Q1 of this year,” the company stated.

Sonangol has confirmed it has satisfactorily completed its confirmatory due diligence with the sole remaining outstanding condition on the farm-in agreement being Cuban regulatory approvals, which have been received and are in the process of being formally documented.

COVID-19’s corporate impact

In its March quarterly report, Melbana said the company implemented cost-cutting initiatives in response to the pandemic, including some employees taking leave without pay, directors’ entitlements being reduced by half and repricing of certain agreements with service and professional advisors.

During the quarter, the company also closed its off-market takeover bid for 100% of Metgasco (ASX: MEL) with only 27.8% of acceptances received.