PetroTal has entered into an arrangement with Petroperu which will result in the Company’s liability to Petroperu in relation to the recent oil price movements being payable over a three year period, rather than at the point of sale of the oil. The arrangement has been structured to minimize the impact of the recent oil price decline on the Company’s cash flows and forward plans, whilst allowing the Company to benefit from any future increase in oil prices when physical oil sales occur. As announced on May 7, 2020, the liability relates to the oil price differential between the date that oil enters the Northern Oil Pipeline ('ONP') and the current oil price (and, ultimately, the physical oil sales price).
Additionally, PetroTal announces an extension of the oil sales contract with Petroperu dated December 23, 2019 from one year to three years on enhanced terms. All monetary amounts in this release are in United States dollars.
- The contingent liability announced on May 7, 2020 has been structured into a three-year payment arrangement with Petroperu at an interest rate of 6.5% ;
- The contingent liability at the end of May is estimated to be approximately $43 million;
- The Arrangement allows PetroTal to settle the obligations to Petroperu now while still allowing the Company to benefit from higher oil prices forecasted by the Brent forward strip pricing curve when the physical oil sales occur;
- PetroTal and Petroperu have agreed to extend the one-year Oil Sales Contract to three years upon expiry of the current term on December 23, 2020;
- The Parties will establish a framework to ensure that future oil sales under the Oil Sales Contract have adequate hedge protection to avoid future downside losses;
- The Parties have agreed to further amendments to the Oil Sales Contract for lower pipeline tariffs and fees during the period of low oil prices; and,
- PetroTal is coordinating with Petroperu to reopen the Bretana oil field in early July.
Carlos Barrientos Gonzales, General Manager of Petroperu, commented:
'Petroperu appreciates the dedication and investment that PetroTal has made in the development of the Bretana oil field. Petroperu expects to complete the significant upgrade of the Talara refinery in mid-2021 and the ability to utilize domestic oil production will be an important element. PetroTal is an important player in Peru’s oil industry and is now an important oil producer in the Country. The Oil Sales Contract between Petroperu and PetroTal is an important link between our two companies, and I’m pleased that we’ve reached agreement to extend it to three years along with the additional contract enhancements. In recognition of the significant investment PetroTal has made in the Bretana oil field and production facilities, Petroperu is very comfortable with allowing the contingent liability to be settled over the next three years. The Bretana oil production coming through the Northern Pipeline also represents an important benefit for the Loreto Region and for the Country'.
Manolo Zuniga, President and Chief Executive Officer, commented:
'PetroTal is pleased to embrace the strong working relationship it has with Petroperu. Oil production from the Bretana oil field is an important component of Petroperu’s pipeline and refinery network. Solidifying a three-year arrangement for both settlement of the contingent liability and ensuring future oil sales, significantly enhances PetroTal’s operations. It also sets the stage for PetroTal to continue the development of the Bretana oil field, as and when oil prices recover.
Our focus on balance sheet strength and enhancing liquidity will ensure PetroTal has the financial strength for working capital management and the ongoing development of Bretana. PetroTal appreciates the support of its suppliers and the continued dedication of our employees and contractors. Together, PetroTal will emerge from the pandemic stronger, in order to rebuild value for shareholders.'
Eight Capital acted as strategic advisor to PetroTal on the Arrangement with Petroperu.