Dragon Oil should switch to lower, more sustainable production target in Turkmenistan, says Enoc

The Dragon Oil offshore oil platform in the Caspian Sea, offshore Turkmenistan. Courtesy Dragon Oil

Emirates National Oil Company (Enoc), which is seeking to fully acquire Dragon Oil, says the Turkmenistan-focused explorer should lower its production target in the central Asian state because of operational challenges.

Ireland-listed Dragon Oil has set an oil production target in Turkmenistan of 100,000 barrels per day over the next five years, above Enoc’s recommended level of 90,000 bpd, which Enoc considers to be more sustainable.

“These targets should maximise recoverable reserves by ensuring that a balanced production profile is followed,” Enoc said yesterday.

The potential of the Cheleken oil and gasfields off the shores of Turkmenistan is a key sticking point in Enoc’s efforts to persuade minority shareholders of Dragon Oil to sell their equity.

Enoc, which holds 54 per cent of Dragon Oil, has made a £1.7 billion (Dh9.75bn) offer last month for the shares it does not already own.

Enoc said it was expecting the operational challenges in Turkmenistan to lead to an additional investment exceeding Dragon Oil’s budget of up to US$700 million in capital expenditure this year.

The challenges include pressure decline, an increase in gas and water production, wax deposition, sand production and cease-to-flow wells.

As a result – and whether the company is eventually delisted or not – Enoc believes that Dragon Oil should not issue dividends in the near term.

“As we see it, there are operating challenges associated with sustaining production at Dragon Oil’s forecast levels,” said Saif Al Falasi, Enoc’s group chief executive.

“Mitigating these operating issues will likely require additional investments. That’s why I don’t see a need for Dragon Oil to maintain a dividend profile in the near term.

“These are difficult decisions for any publicly listed company and we see this as another reason for delisting Dragon Oil.”

Enoc has been locked in a dispute with some Dragon Oil minority shareholders over its buyout offer of 750 pence a share, which they deem as below fair value because it does not recognise the potential to double production in Turkmenistan over the next 10 years.

Dragon Oil shareholders have until July 30 to accept or reject Enoc’s offer.

Dragon Oil shares were trading at 725 pence each in London yesterday afternoon.

Enoc needs a majority of the minority shareholders – just over 23 per cent – to vote in favour of its offer to be able to delist Dragon Oil and privatise the company.

The UAE company failed in its first attempt to buy out minority shareholders six years ago.

Enoc does not expect the efforts of Dragon Oil’s two largest dissenting minority shareholders – the investment funds Baillie Gifford of Edinburgh and Setanta Asset Management of Dublin, which collectively own just over 10 per cent of the company – to be enough to rally support to block its buyout offer.

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