Andalas Energy and Power Plc – Agreement to Farm-in to Indonesian Gas Project

Andalas Energy and Power Plc

 (“Andalas” or "ADL" or the "Company")

3 February 2016

ADL signs heads of agreement to farm-in to Indonesian gas project

Andalas Energy and Power Plc is pleased to announce that it has signed a non-binding heads of agreement to farm-in to the Technical Assistance Contract (‘TAC’) covering the Tuba Obi East oil and gas concession (‘TOE’) (“the concession”) in Jambi province, Sumatra.

The proposed transaction would constitute a reverse takeover within the meaning of the AIM Rules for Companies.

Highlights:

• Heads of agreement signed to acquire 30% working interest in TOE TAC via a farm-in
• TOE is a ‘beach head’ for Andalas into the Indonesian gas sector
• Any future gas production from the concession may support either:
  • Gas export with the project located close to a major export route; or
  • Gas-to-power being located in an area where a significant shortfall in energy generation exists
• Farm-in via execution of a US$1.075 million work programme.  Bonus payment of US$500k on renewal of the concession
• Work programme to be jointly operated by Andalas and includes technical studies and the drilling and testing of one appraisal well which would be put into production on success
• Subject to well results, further development studies will be undertaken
• Andalas’ gas and power study shows strong market for gas at high prices
• Transaction is a reverse takeover and the Company is preparing an admission document seeking shareholder approval which it will publish in due course

Andalas CEO, Mr David Whitby, said, “A farm in to the TOE concession in Indonesia will give us a ‘beach head’ to build a significant gas business in the country.  This is the result of many months’ work during 2015 by our team and our extensive network of Indonesian gas and power industry experts.  That work culminated in a comprehensive study of the Indonesian gas and power sector, from reservoir sand-face to gas burner tip, which I believe gives us a significant competitive advantage in realising the value of TOE and future blocks currently under evaluation.

“TOE is ideally located adjacent to the major Sumatran gas pipeline to Duri and Singapore, and close to the provincial capital city of Jambi which is in critical need of power generation.  We see great potential to add further value by expanding the concession to capture additional gas discoveries just outside the acreage. In addition to providing Andalas with a clearly defined road map, today’s agreement also marks the beginning of the process for our shares to be readmitted to trading on AIM and I look forward to providing further updates on our progress.

“ADL has assembled a top tier Indonesian drilling team that has commenced the well planning process to fast-track the spudding of our first well which will be a target following our readmission to AIM”

Tuba Obi East Gas

Tuba Obi East has tested gas in the key South Sumatra hydrocarbon bearing formations, namely, the Air Benakat Formation (ABF) and the Talang Akar Formation (TAF).  These zones have flowed gas to surface within and around the concession.

Crucially, the ABF has flowed gas outside the TAC but only limited data from the ABF has been gathered within the concession area.  Andalas’ technical analysis indicates that this reservoir zone contains potentially substantial gas resources that can be proven via the drilling and flow testing of the proposed appraisal well which may be completed as a production well on success.

Further geological, geophysical, reservoir and development studies will be undertaken following the analysis of test results from the well.  This work will be conducted in parallel with a proactive approach to the renewal and extension of the block contract and preliminary discussions with targeted consumers.

Gas and Power Study Demonstrates Significant Opportunities in Sumatra

During the last quarter of 2015 the Andalas team, supplemented by a number of Indonesian gas and power industry experts, completed a detailed study of the Indonesian gas and power sector with particular focus on the opportunities present in Sumatra.  The results of the study are now being utilised as the ‘road map’ to guide the Company’s future asset acquisition efforts.

The major conclusions of the study were:

• Indonesia is a demographically young nation with a rapidly growing middle-class supporting burgeoning demand for power
• Indonesia has one of the lowest electrification rates in the ASEAN region, with more than 60 million people estimated to be without access to electricity*
• The Indonesian gas and power markets have robust, increasing demand, that is yet to be fully met
• Gas and power prices are some of the highest in the world and insulated from volatile oil prices
• Market fundamentals mean pricing is expected to remain high
• Demand growth and the international push for reduced carbon emissions favours growing use of gas in the power sector
• There is ready access to pipeline and power infrastructure, especially Sumatra
• TOE has potential for gas export or Independent Power Production (IPP) – subject to proving gas volumes, deliverability, and quality

The study indicates that this concession and others currently under consideration are well situated to take advantage of the strong growth in the Indonesian gas and power sectors.

Farm-in Summary

Under the terms of the proposed farm in, Andalas will acquire a 30% direct working interest in the concession through the execution of a single well work programme.  The work programme includes the completion of a geological, geophysical and reservoir study along with the drilling and flow testing of a single appraisal well to assess the deliverability, recoverable volumes, and gas quality in the Air Benakat formation.  Block operator PT Akar Golindo and Andalas will jointly operate during the work programme, which is expected to cost around US$1.075 million.  Andalas has agreed to pay a further sum of US$500,000 to PT Akar Golindo if the concession is renewed.

Reverse Takeover

The proposed farm-in constitutes a reverse takeover pursuant to Rule 14 of the AIM Rules for Companies and, accordingly, the farm-in agreement will be subject to the approval of Andalas’ shareholders in general meeting.  Andalas will publish an admission document in due course and it has engaged Gaffney, Cline & Associates to prepare a Competent Person’s Report.

Further details of the TOE contract are as follows:

Location:                                 Jambi Province, South Sumatra
                                                approx. 30km NW Jambi City

                                                approx. 18km NE of Grissick-Singapore/Duri gas pipeline

Contract type:                        Technical Assistance Contract (TAC) with Pertamina

Contract issue date:              1997

Term/expiry:                          20 years; expires 14 May 2017

Area:                                      55 sq. km

Working interests:                 PT Akar Golindo (100%)

Current status:                       In good standing; producing oil on an intermittent basis

Hydrocarbon basin:               South Sumatran Basin

Producing reservoirs:            Oligocene Talang Akar Fm (TAF); Air Benakat Formation (ABF)

Reservoir depth:                    TAF approx. 1,600 to 2,110 metres; ABF approx. 800 metres

Structure:                               Closure approx. 20 sq. km; thickness up to 550 metres (gross)

Seismic coverage:                  2D and 3D seismic

Discoveries:                            1986 – Tuba Obi East field

Prospects and leads:             Berembang prospect; 2 unnamed exploration leads

Wells:                                      3 wells; 2 production; 1 suspended
                   

Productivity:                          Wells tested up to 350 bopd oil and up to 3 MMscf/d gas

Quality:                                   Oil 36°to 55°API light, sweet crude oil
                                                Gas near pipeline quality (approx. 7% CO₂)

Nearby discoveries:              Simpang Tuan (oil and gas), Karang Makmur (oil and gas)

For further information, please contact:

* PLN Statistics 2013, Table 19.