Vermilion Energy Trust (TSX: VET) said it has agreed to buy Marathon Oil Corp’s (NYSE: MRO) 18.5 percent non-operated interest in the Corrib field approximately 83 kilometres off the northwest coast of Ireland for an initial US$100 million and an additional sum of up to US$300 million depending on the date when first commercial gas is achieved.
Vermillion will be joining the Corrib joint venture consortium with Shell E&P Ireland Ltd as operator with 45.5 percent and Norway’s Statoil Hydro with 36 percent.
The additional amount ranges from a minimum of US$135 million to a maximum US$300 million. Currently, first gas is expected by the end of 2011, and the expected additional payment due pursuant to the terms of the agreement would be between US$190 and US$200 million.
“Given the advanced stage of the project, the risk of major cost overruns is considered manageable,” Vermilion said.
The Corrib field is expected to produce gross volumes in excess of 300 million cubic feet per day of natural gas for a period of two to four years before experiencing natural declines of 20 percent. Net production to Vermilion is initially anticipated at approximately 9,000 barrels of oil equivalent per day.
Current net reserves attributable to Vermilion from the Corrib field have been estimated by the Trust's independent reserve engineers at 17.5 million boe effective as at January 1 2009, although Vermilion believes that future development and/or production performance could increase reserves up to 35 million boe, according to internally prepared estimates of the ultimate potential.
The field, which is estimated to contain approximately 1.0 trillion cubic feet of natural gas in place, lies in 350 metre water depth and will initially produce from five wells, all of which have been completed and tested and are currently being tied into a subsea template.
The wells will be tied into an onshore gas treatment facility that is 75 percent completed and then into Ireland's natural gas grid. Several other prospects on the exploration license have been identified that could further extend the life of these assets if successfully drilled and completed.
One of these prospects, North Corrib, is being considered for drilling in 2010 after recently obtaining partner approval. The cost to drill these prospects would be approximately US$10 million per well, net to Vermilion, providing significant upside opportunity at relatively low cost.
Once on-stream, the production from Corrib is expected to increase Vermilion's total annualized production by approximately 30 percent and generate significant operating cash flow.
This acquisition positions Vermilion well for an eventual conversion to a corporation and the execution of its 2010 to 2015 strategic plan. The Corrib transaction also fits well with Vermilion's European strategy and will provide Vermilion with another strong foothold in attractive European energy markets and a path of identifiable growth over the next few years.