Half Year Accounts

The directors present their report together with the condensed interim financial report of the Group comprising of Oilex Ltd (the Company) and its subsidiaries for the half year ended 31 December 2020 and the auditor's review report thereon.

Directors

The directors of the Company at any time during the interim period and until the date of this report are detailed below. All directors were in office for this entire period unless otherwise stated.

Mr Jonathan Salomon                       Managing Director (and Interim Chairman)

Mr Mark Bolton                                  Executive Director and Company Secretary

Mr Paul Haywood                              Non-Executive Director

Mr Peter Schwarz                             Non-Executive Director

Financial

The Group incurred a consolidated profit after income tax of $418,881 for the half year (31 December 2019: loss of $2,023,782).

Following the voluntary shut in of the Cambay Field in Q1 2019 resulting in the cessation of production, no revenue has been recognised for the half year.

In the absence of a repayment schedule for outstanding cash calls from Gujarat State Petroleum Corporation (GSPC), the Company has continued to provide in full the amounts owing from its Joint Venture partner as well as amounts owing from the Cambay and Bhandut Joint Ventures, with the exception of a US$543,000 (A$705,000) Cambay cash call payment that the Company expects to be receive subsequent to the release date of these accounts following recent discussion with GSPC.

In addition to the above expected cash call payment, a reduction in Joint Venture cash call and recharges since 30 June 2020 has resulted in a reversal in the expected credit losses related to Cambay and Bhandut cash calls and recharges of $711,005.  This reversal has been partially offset by an expected credit loss expense of $176,996 for the Group's share of JPDA cash call receivables, and other receivables.  As a result, operating results include a credit to the expected credit loss expense of $534,009 (31 December 2019: $84,212 credit).  Furthermore, the Group has accrued an additional $138,849 as at 31 December 2020 (31 December 2019: $78,566) to cover GSPC's share of Cambay, Bhandut and Sabarmati Joint Venture third party liabilities.

Other income $446,668 (31 December 2019: $nil) includes the profit from the sale of the CoEra Group of $344,168; and government assistance arrangements of $102,500 (31 December 2019: $nil).

Reductions in exploration costs to $256,917 (31 December 2019: $545,111); care and maintenance costs to $63,765 (31 December 2019: $111,075); and administration costs to $424,297 (31 December 2019: $1,061,087) reflects a concerted focus on minimising expenditures in both Australian and Indian operations whilst Cambay remains on a care and maintenance programme pending the sale of GSPC's 55% participating interest in the project.

Finance income of $463,321 (31 December 2019: $1,171) includes a gain of $463,050 (31 December 2019: $nil) resulting from the FV revaluation of listed shares held in Armour Energy Limited.

Cash and cash equivalents held by the Group as at 31 December 2020 has decreased to $102,901 (30 June 2020: $173,816).

Review of Operations

The Company's primary objective is to maximise shareholder value from its principal asset in the Cambay Basin, located onshore Gujarat State in India, whilst also continuing to review other opportunities to create value and diversify risk by adding new assets to the Company's project portfolio which have to date focussed on the Cooper-Eromanga Basins in Australia (now sold to Armour Energy Limited) and the United Kingdom Continental Shelf (UKCS).

To that extent, Oilex continues to evaluate and implement a range of technical programme options to progress its main objective of accessing the significant gas resource potential present in siltstones in the EP-IV reservoir at the Company's Cambay PSC. North American unconventional drilling, completion, and stimulation technologies have been applied by the Cambay JV over the last six years with positive but commercially modest results and work is underway to optimise results for future work programmes. The current work programmes are focused on:

·           Implementing the settlement agreement reached with Gujarat State Petroleum Corporation (GSPC) to resolve the dispute over the Cambay PSC, and further develop the asset with a new partner;

·           Preparing detailed work programmes, including new wells for implementation under the approved Field Development Plan (FDP);

·           Arranging the necessary funding to implement the planned work programme; and

·           Evaluating the Company's new ventures in the UKCS and Asia.

Cambay Field, Gujarat, India

Oilex holds a 45% equity in the Cambay Field, with GSPC holding the remaining 55% Participating Interest (PI).

The Company's plans at Cambay are well advanced and include the drilling of up to two vertical wells, subject to, inter alia, securing the necessary funding.  

The priority will be to implement the drilling and stimulation recommendations from the Baker Hughes-GE study in the EP-IV zone. Any early production will utilise the existing processing and storage facilities, which will be upgraded as required to provide a low-cost path to commercialisation. Assuming success, a more extensive drilling programme will follow, with the aim of aggregating sufficient production volumes to connect to the high-pressure pipelines which would offer greater offtake stability and improved gas prices. 

The re-commencement of field operations is, amongst other matters, dependent on finalisation of the settlement agreed with GSPC and necessary financing.  Furthermore, upon the removal of the applicable Covid-19 restrictions in India, the Company will review the planned work programme and update the market at that time.

There was no production from the Cambay Field during the six-month period to 31 December 2020.

GSPC Divestment Process for Cambay PSC

On 9 September 2019, the Company announced that it had reached a settlement with GSPC which, upon completion, will resolve the ongoing Cambay PSC dispute.  Pursuant to the settlement, Oilex and GSPC have agreed that GSPC's 55% PI in Cambay PSC would be subject to a sale process. 

During the December 2020 quarter, the Company advised that the sale process being conducted by GSPC for its 55% interest in the Cambay PSC continues.  The Company highlights that the sale process of GSPC's PI is internal and confidential to GSPC.  The sale has been and continues to be, subject to significant delays reflecting the impact of Covid-19 on all parties, and India generally.  Regular dialogue continues with both GSPC and the requisite representatives of the Government of India (GoI) to bring these efforts to a positive conclusion.

In February 2021, the Company advised that it was in advanced discussions with GSPC to acquire its 55% interest in the Cambay PSC.

The Company also notes that the settlement agreement with GSPC has not waived the unpaid cash calls and, accordingly, the Company maintains its rights under the JOA.

Environmental Clearance

The Company is presently in the final stages of obtaining a new environmental clearance from the Ministry of Environment and Forest and Cabinet Committee to supersede the previous clearances already obtained under the previous regulatory requirements.  The clearances are necessary to recommence production at Cambay and in support of the planned drilling programme at Cambay.  Presently, an Environmental Impact Assessment has been prepared by the Company's independent consultants and is pending submission to the applicable authorities and following public hearings.  The public hearings are delayed due to the continued effect of Covid-19.

Following receipt of the necessary environmental clearances, production from well C-73 and C-77H are on standby for re-commencement.

Cambay Joint Venture Management

As at 31 December 2020, the Joint Venture partner owed USD$5.5 million (inclusive of the est. USD$3.054 million pursuant to the Event of Default issued in 2018).  Oilex as Operator continues to bear the ongoing costs of the Joint Venture and has managed payment of the Cambay Joint Venture creditors.

Bhandut Field, Gujarat, India

Oilex holds a 40% equity interest in the Bhandut Field, with GSPC holding the remaining Participating Interest (PI). Previous drilling in the Bhandut Field intersected a number of hydrocarbon zones, some of which produced historically and are now shut-in. 

The field is currently on care and maintenance; and has existing production facilities.  The 2021 WP&B has been submitted to the Director General of Hydrocarbons for approval.

On 28 January 2020, Oilex announced that it had accepted an offer from Kiri and Company Logistics Private Limited (Kiri) to acquire the Company's PI in Bhandut.  Pursuant to the agreement entered with Kiri, the Company will receive US$0.29 million in cash proceeds for the sale of its PI and transfer of operatorship rights to Kiri.  Furthermore, Kiri has expressed an interest in engaging the services of Oilex's office to review field production, stabilize operations, and initiate field re-development of the Bhandut PSC in accordance with the FDP.  Bhandut is presently shut-in and has been fully provided for in the Oilex financial statements.

The sale of the Bhandut PSC is nearing completion with only transfer by the GoI now required.  The Company continues to assist Kiri in finalising the transaction and with its future activities in the PSC under a contract arrangement.Cooper-Eromanga Basins

Divestment of Cooper Eromanga Basin Assets

On 15 October 2020, Oilex announced the completion of the sale of all of its interests in the Cooper-Eromanga Basins to Armour Energy Limited (Armour).   Pursuant to the Share Purchase Agreement (SPA), Armour has now acquired 100% of the issued capital of CoEra Limited (CoEra), a wholly-owned subsidiary of the Company which holds all of Oilex's interests in the Cooper-Eromanga Basins.

As consideration for the acquisition of Oilex's interests in Cooper-Eromanga Basins, Armour issued 22.05 million Armour shares to Oilex. Armour has also reimbursed Oilex in cash for past costs of A$125,000.

United Kingdom Continental Shelf

Completion of East Irish Sea Transaction P2446

On 14 December 2020, the Company announced that it had completed the agreement with Burgate Exploration and Production Ltd (Burgate), to acquire a 100% participating interest in the Doyle-Peel licence (P2446) in the East Irish Sea (EIS), offshore the United Kingdom. 

The EIS licences provide an attractive entry into a proven gas fairway in the centre of the East Irish Sea Basin.  The licence is in shallow water near existing infrastructure reducing the complexity, risk and cost of development. The EIS is a prolific basin which has produced around 8 TCF of gas to date with considerable existing gas production, gathering, processing and transportation infrastructure.  The depth to the target reservoirs is less than 2,000 metres thus meaning modest drilling costs.

Project Overview

The license lies on the west dipping graben edge of the Tynwald Fault Zone on the structural trend with the Rhyl and North Morecambe producing gas fields.  Historical production from the primary Triassic Ormskirk reservoirs on this trend show excellent deliverability characteristics with a very effective seal in the overlying evaporites and mudstones of the Mercia Mudstone group which attains a thickness in excess of 1,000m across the basin. Gas charge comes from the Carboniferous Coal Measures which underlie much of the basin. A secondary reservoir-seal pair is provided by the Permian Collyhurst sandstone and overlying evaporites.

The Doyle and Peel prospects are tilted fault blocks closed on the up dip east side by the north-south trending boundary fault of the Tynwald Fault Zone, which juxtaposes the reservoir against the Mercia Mudstone salts and shales forming a very effective cross fault seal. There is a clearly defined east-west fault bounding the southern extent enhanced by igneous dykes providing the seal mechanism.  The prospects both display seismic amplitude responses with similarities to the surrounding fields.

Blocks 113/22a (Doyle) and 113/27e (Doyle and Peel) have been merged into a single licence being P2446 ("P2446 Licence").  Block 113/22a was awarded in the UK Offshore 31st licensing round whereas block 113/27e was awarded in the 30th round.

The remaining committed work programme, which is estimated to cost approximately £25,000, and which Oilex will need to secure funding for, is required to be undertaken by October 2021 and includes reprocessing of 50 sq kms 3D seismic data, and obtaining 2,500 kms Aeromagnetic data.  Following this, the Licence has a three-year drill or drop election.

Transaction Overview

The transaction to acquire a 100% participating interest in the licence has a remaining consideration of:

·      payment of a total of £60,000 in four equal quarterly instalments.  The first of these was made in January 2021;

·      an overriding royalty to be paid to Burgate on the following basis:

i.      0.5% of actual gross revenue from commercial production up to the point when gross capital expenditures related to the development of the licence have been fully recovered from net cash flows ("Payback"); and

ii.      following Payback, the royalty to be paid shall be 2.25% of actual gross revenues.

JPDA 06-103, Timor Sea

(Oilex: PSC Terminated 15 July 2015 - Operator and 10% interest)

In October 2018, the Company announced the Autoridade Nacional Do Petroleo E Minerais (ANPM) had commenced arbitration proceedings against Oilex and its joint venture partners, in regard to the JPDA PSC where Oilex and its joint venture partners in the PSC were subject to a penalty claim of US$17 million (plus interest).  Oilex is the Operator of the PSC on behalf of the joint venture.

In August 2020, on behalf of the Joint Venture Participants, the Company announced that it had executed a Deed of Settlement and Release (Deed) with the Autoridade Nacional Do Petroleo E Minerais (ANPM) to terminate the ongoing arbitration proceedings arising from the termination of the PSC by the ANPM in 2015 and settle all claims and counterclaims between the parties.  The execution of the Deed sees an amicable conclusion to the arbitration proceedings.

Under the terms of the Deed, Oilex has committed to a settlement of US$800,000 payable in the 2021 and 2022 financial years.  The settlement was fully provided in the Company's annual financial statements to 30 June 2020.  In addition, the Company has entered into an unsecured loan facility agreement with two of its joint venture partners which further provides the Company with the option, at its sole discretion, to further extend the settlement payments substantially into 2022 and 2023.

West Kampar PSC, Central Sumatra, Indonesia

During the quarter, the Company announced substantial progress has been made towards the Company's strategic objective to regain a participating interest in the West Kampar PSC in Indonesia, which is expected to lead, subject to financing, to recommencing production from the Pendalian Oilfield.

The Government of Indonesia (GoI) has advised that our Proposed Direct Bid, through the Joint Study of the West Kampar Region, is declared administratively complete and has recorded it as a proposal for a Direct Offer through a Joint Study as stipulated in ESDM Regulation No. 35 of 2008. 

This confirmation from the GoI, which is exclusive to Oilex, provides a pathway to progress the proposed development of West Kampar and provides certain preferential rights in the award of the West Kampar PSC by the GoI.  Oilex's interest in the study and ultimate potential award of the PSC will be on a 50-50 joint basis with its local Indonesian partner, PT Ephindo.

Technical work carried out by Oilex and its advisors estimate that the field can be quickly brought back online at 350 to 400 bopd and that significant additional production potential may be possible from infill drilling and also water injection support.  The return to production will require careful execution in the field given that it has been shut in since 2016.  The oil occurs in five good quality, stacked reservoirs with some stratigraphic complexity, and the application of 3D seismic data which has been acquired but not interpreted should provide a significant improvement in the understanding of the reservoir distribution and future development planning.  Access to the data is to be negotiated with the seismic company that acquired it.  The oil is of good quality with no or little gas.  It is believed that previous production costs can be reduced.  A number of exploration opportunities are present both close to the Pendalian field and in the more distant parts of the block, these require further review evaluation. 

Materiality uncertainty related to going concern

The auditor's review report contains a materiality uncertainty related to going concern in relation to the potential uncertainty regarding continuation as a going concern. The consolidated financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and settlement of liabilities in the normal course of business.  The Group will require funding in order to continue its exploration activities and progress the Cambay Field drilling programme.

The funding requirements of the Group are reviewed on a regular basis by the Group's Executive Director and Company Secretary; and Managing Director and are reported to the Board at each board meeting to ensure the Group is able to meet its financial obligations as and when they fall due. Until sufficient operating cash flows are generated from its operations, the Group remains reliant on equity raisings, joint venture contributions or debt funding, as well as asset divestitures or farmouts to fund its expenditure commitments.

The Company continues to actively develop funding options in order that it can meet its expenditure commitments and its planned future discretionary expenditure, as well as any contingent liabilities that may arise.

Further information is provided in Note 2 (b) of the consolidated financial statements.

Corporate

a)         Cash Balance

At 31 December 2020, Oilex retained cash resources of $102,901.  Subsequent to the end of the December 2020 quarter the Company announced that:

·      the Company sold 5 million shares held in Armour Energy Limited for net proceeds of $250,000. The Company retains a further 17 million shares in Armour Energy Limited. As at 9 March 2021, the closing share price for Armour Energy Limited on the ASX was A$0.04;

·      it had conducted an equity capital raising of GBP £350,000; and

·      Agreed to defer the repayment date of the Series D GBP £225,000 loan by three months to 30 June 2021.

Significant Events After Balance Date

a)     The impact of the Coronavirus (COVID-19) pandemic is ongoing and while it has been financially negative for the Group up to 31 December 2020, it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is dependent on measures imposed by the Australian and Indian Governments and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided.

b)     On 15 January 2021, the Company sold 5 million shares held in Armour Energy Limited for net proceeds of $250,000.

c)     On 29 January 2021,113,636,364 share options @ £0.0011 issued to lenders exercisable on or before 29 January 2021, were not exercised and have lapsed.

d)     On 12 February 2021, the Company announced the issue of 4,646,025 new ordinary shares @A$0.0020 per share as consideration in lieu of non-executive directors' fees.

e)   On 12 March 2021, the Company conducted an equity capital raising of GBP £350,000; and

f)      On 12 March 2021, the Company agreed to defer the repayment date of the Series D GBP £225,000 loan by three months to 30 June 2021.

There were no other significant subsequent events occurring after the interim reporting date.

Lead Auditor's Independence Declaration

The lead auditor's independence declaration is set out on page 6 and forms part of the Directors' Report for the half year ended
31 December 2020.

Signed in accordance with a resolution of the Board of Directors.                                         

Mr Joe Salomon                                                                                                      Mr Mark Bolton

Managing Director and Interim Chairman                                                               Executive Director and Company Secretary

West Perth, Western Australia

13 March 2021