VAALCO Energy Inc (EGY) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2010 earnings report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, CEO Robert Gerry please go ahead, sir.

Thank you, Kathy, and good morning, ladies and gentlemen, and welcome to VAALCO Energy's third quarter conference call. As always, bear with me while I take you quickly through the forward-looking statements. This conference call includes forward-looking statements as defined by the US Securities Laws, forward-looking statements and those concerning VAALCO's plans, expectations, and objectives for future drilling completion and other operation and activities.

All statements included in this conference call that address activities events or developments that VAALCO expects, believes or anticipates, will or may occur in the future are forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and that actual results or developments may differ material from those projected in the forward-looking statements. These risks are further described in VAALCO's annual report on Form 10-K for the year ended December 31st, 2010, and other reports filed with the SEC, which can be reviewed at www.sec.gov.

Having said that, we -- you have the press release that we put out after the close of business yesterday. We had a good quarter. I would like to point out that in the press release we made a comment about our South Tchibala well that is currently being drilled. In the press release we mentioned that the completion assembly had slipped through the elevator as it was being lowered in the hole, and we had commenced, really, an operation to try to retrieve that. That occurred last Friday. Friday evening, and I'm pleased to that as of this morning, we have successfully latched on, at least to the casing collar and recovered the upward completion string to the rig floor. We're not out of the woods yet, as we need to recover the remaining -- the remainder, at least of the completion string, but at least we have some good progress to report, and are feeling better about it.

This morning I'm joined by Greg Hullinger, our CFO, and Russell Scheirman, our COO. I'm going to turn the meeting over now to Greg to take you through our financial statement. Then he'll turn it over to Russell to take you through our operations, and then I'll have some closing remarks. So Greg, go ahead.

Thanks, Bobby. And thank all of you for joining in on our conference call this morning. I'm pleased to review the financials for the third quarter of 2010, which was another very good quarter for VAALCO Energy. The Company reported net income attributable to VAALCO of $12.5 million, or $0.22 per diluted share for the third quarter 2010. This compared to net income attributable to the Company of $4.2 million, or $0.07 per diluted share in the third quarter of 2009. Three factors drove the improvement in the year to year quarterly net income numbers. If you routinely participate in our quarterly conference calls these will come as no real surprise.

The first factor is the crude oil price we received for the quarter. The sales price at $76.17 in quarter 3, 2010 was 14% higher than the $67.07 we received in quarter 3, 2009. Secondly, partially offsetting the effect of the higher crude oil prices was the decrease in volumes sold. Volumes sold in Q3 2010 at 429,000 barrels were 2% lower than the Q3 2009 sales volume of 436,000 barrels. The result of the higher price and the lower volumes resulted in higher revenues of $32.6 million in Q3 2010, versus revenues of $29.3 million in Q3 2009. The third factor driving net income is the amount of income tax we bay in Gabon. Income tax paid in the third quarter of 2010 was $7.4 million, this compared to $13.3 million in the year-ago third quarter.

The reduction in the amount of income tax paid is the result of having more barrels allocated to VAALCO as cost-oil barrel, rather than profit-oil barrels. The expenditures associated with our ongoing drilling program have kept the cost account relatively full, resulting in fewer barrels bearing income tax as profit-oil barrels. Operating income was $21.6 million in the third quarter of 2010, compared to $19.6 million for the third quarter of 2009. Crude oil production from the Etame, Avouma, Tchibala, and Ebouri fields averaged 20,600 barrels of oil per day in the third quarter of 2010, compared to 23,300 barrels of oil per day during the same period in 2009.

Natural decline and increase in water cut from mature wells were the primary factors in the production declines. Current production is approximately 20,000 barrels of oil per day, and Russ will talk more about producing operations here shortly, in just a few minutes. We had capital expenditures of $11.1 million during the third quarter, for a total of $23.4 million thus far in 2010. The capital expenditures incurred this year were primarily on the Ebouri 4H development well, where we spent $6.9 million the Southeast Etame number 1 well where we invested $7.6 million and the Etame 7H development well at $8.7 million and the capital expenditures are expected to be approximately $17 million for the remainder of the year. The expenditures for the remainder of the year are for the completion of Etame 7H well where we expect those costs to be about $5 million, the South Tchibala development well at $8.3 million, and the Omangou exploration well at an expected cost of $3.8 million.

I have increased the anticipated spending on the South Tchibala well by about $1.5 million over the prior estimate to cover the potential additional expenses associated with the mechanical problems that Bobby described just a minute or so ago. Production expenses totalled $4.8 million in the third quarter of 2010, compared to $5.7 million in quarter 3, 2009. This component is a little complicated this quarter. The normal elements of production expense, which are comprised of our FPSO costs, boat, and helicopter costs, these were fairly comparable in both of the periods. The primary reason for the lower production expenses was due to the trueing up of the domestic market obligation invoice received in the quarter for the 2009 calendar year.

Domestic market obligation or DMO, is a subsidized requirement by the energy companies operating in Gabon, to compensate the government to accomplish a 25% discount on the crude provided to the Gabon refinery. VAALCO's share was approximately $1 million less than in that 2008 calendar year DMO, which was paid in the third quarter of 2009. And then just rounding out this category, there was also an element of onetime FPSO labor costs due to a labor law change. Any way, after all of that, what I'm really saying is that production expenses are lower than they would normally would be, and I would expect them to go back to closer to the figures of $5 to $6 million in the fourth quarter.

Exploration expense of $700,000 was spent in the third quarter of 2010, compared to $900,000 in the same time period in 2009. Minimal exploration activity took place during the quarter, but this will change in the fourth quarter of 2010, as we are just about to begin a seismic exploration offshore Gabon in the shallow waters. Cash including amount was $107.6 million at the end of the third quarter of 2010. This compares to $97.0 million another the end of the third quarter of 2009. The Company does not have any debt on its books. With that, I'll be glad to answer any questions you may have on the financials later in the call. Russell Scheirman, our chief operating officer is now going to provide you with an operational update.

Thank, Greg. I'll start with Etame, where as Greg mentioned we're producing we're 19,000 and 20,000 barrels a day, we're on the fifth of our sixth well-drilling program at Etame, and as you recall we drilled the Ebouri 4H successful horizontal well and we repaired the Ebouri 3H that had pump problems, and we got those behind us, then we moved on to Southeast Etame where we made the discovery and delineated it with two sidetracks. I'll talk a little bit more about what we're planning on that discovery in a minute. After that, we moved over and drilled a sub sea well, the Etame 7H well this is a well in our Southern block in the Etame field, where we -- prior to this, we have only had one vertical well, and that well produces water-free after eight years, so obviously there was more oil in that block than we originally thought, and we needed a horizontal well to drain that fault block. That well was successfully drilled and is awaiting the arrival of the vessel that has the gas lift line that we will lay to that well, and once we get that gas-lift line installed later this month, we'll be able to kick that well off and put it on production. We are currently on the South Tchibala 2H well, which is the third well on the Omangou platform.

We had successfully gravel packed the well and we were running in the hole with the upper completion string when we had this elevator failure which resulted in the casing dropping about 20 meters down the hole. Over the weekend we got a-hold of it and got it back to the surface, and we are currently trying to determine the way forward. It has some drag when it was coming out of the hole. We don't know if the packer was set on the way down. So we'll figure that out, and eventually, though, we plan to pull the tubing string out of the hole, and then go back in after we check everything out, and rerun that string, and get that well on production. After we finish that well, we have one exploration well remaining in the program. It's the Omangou well. That's about a three-week well. It's underneath the salt wall in between the Etame and the Ebouri fields. So we'll move on to that after we finish up this Tchibala well and finish up our drilling program. Also later this month, we are going to be shooting a seismic program in the shallow waters. We have got about three or four prospects over in the Southern part of the block that we never had 3-D over. So we'll get the 3-D data hopefully by the end of the year, and we'll be processing that next year.

I mentioned that I'd update you a little bit on what we're doing on Southeast Etame. We currently have a task force that we put together that we call the Etame expansion project team. We're in the process of studying the remaining reserves in all of the fields, and what is the best way to get those reserves and increase our recovery factors. One of the potential outcomes for that, would be an additional platform at Etame, where -- so that we can drill some final wells in the Etame field to make sure we develop that completely. If we do that, we would probably incorporate the Southeast Etame discovery in with that concept. If we choose not to do that, we have some other options such as completing at sub sea. So we're working all of that in the mix, and we expect to have the results of the task force -- the task force report is due out in January of next year, and at that time we'll probably be able to provide additional guidance on how we want to move forward on Southeast Etame, and future Etame expansion.

I will mention that we just recently bid our contract for crude oil at Etame next year. We will have a new buyer, it's company called Macuria. They are a major trading house based in Geneva. We were very encouraged by the bids we received and we will start getting a premium to blend, and this will be the first time ever that we have gotten a premium to that blend. So apparently they have some interesting markets that they are going to be trying, and people are finding our crude attractive. Moving on to some of our other activities in Angola, we mentioned in our 10-Q that we have been informed by the ministry and by our block Chairman that we will be receiving the one-year extension to give us time to replace as a Interoil partner. We're waiting to see what they call the gazetting of that one year extension, and that will make it completely official once it is published in this gazette that they put out on a weekly basis within Angola. There is usually a month or two lag in those things, so -- but that -- we have been informed we have the extension.

We have opened a data room, and have had a series of companies that are starting to come through the data room to look at the block. That data room is planned to be open until the end of this month, at which time we hope to receive some offers for companies to come in. Officially, the companies are going to have to deal with Sonangol because Sonangol owns the interest, once they took it back from Interoil. We're trying to provide the company some guidance, but ultimately they will deal with Sonangol, and we open to have a new partner in place perhaps by year end, certainly by the first quarter, so we can get on with our two-well commitment that we have for next year.

At Mutamba our onshore block in Gabon, we received approval from the EGH for the total farm-in, and for the exploration extension. We have actually gone out for bid for this 2-D seismic programming we have been committed to and the bids have been received. We will be selecting a contractor and moving forward with that, the remainder of this year, and the first half of the next, at which time we hope to select a location and then we have got to build a drilling pad, et cetera, so I would expect sometime early 2012, we'll drill an exploration well on that block, maybe two, depending on what comes out of the seismic.

So for 2011, in terms of what we kind of have on our plate right now, we're expecting two additional development wells in Etame, one at Ebouri and one in the Avouma area. We will probably build one exploration well in the Etame area. I can't tell whether it will be at the front of the back end of the development program but we'll see, based on the results of the shallow-water seismic and some other things that might come out of the Etame expansion project. As well as the two-well drilling program in Angola, which is about $30 million net to VAALCO for that program. We have three prospects in Angola, and we'll -- with our -- hopefully with our new partner agree on the best two and get those drilled by year end 2011, early 2012. So that's kind of an overview of what we have been doing operationally, and with that Bobby, I'll turn it back to you for any final comments you have.

Thank you, Russell. A quick, maybe, fill-in on the tax force that Russell mentioned to the expansion project on the Etame marine permits. We have been working with a group, probably there are 10 people involved in this, if not more. The objective is really threefold. How do we maintain production at close to 25,000 barrels a day? Can we take production to 35,000 barrels a day is the second leg. And then optimistically, how do we raise production perhaps as high as between 35,000 and 50,000 barrels a day. That is really the thrust of the study group, what they are going through at the moment, and we'll see where that comes out. As Russell mentioned, the study will not be completed until January, February, probably of next year, but I think it would give you an indication at least of the potential that may cautionary word, may, remain on this Etame marine permit.

That combined with the additional seismic that VAALCO will commence shooting here shortly should give you a flavor that we are far from finished with the Etame marine prospect -- or concession. We have produced a little over 53 million barrels. VAALCO feels strongly, that we're only halfway there, and conceivably, we are less than halfway there. So it still remains an exciting prospect. As Russell also mentioned, Angola we hope to get at sometime probably in the second half of next year as we sort through who our potential partners are.

We have had one firm bid. I'm not at liberty to disclose who that bidder may be, but we'll see who is left in the shoot at the end of November, and select the partner of choice. As far as other opportunities, we are looking at an exciting prospect in another country in West Africa. We have a letter to them, indicating our level of interest. We'll see how that goes. We have studied a number of other opportunities in West Africa. Came very close to bidding on another one. But decided that we will keep our powder dry to see how Angola and this new prospect shape out. We still maintain a interest in, perhaps, a onshore, North America oil shale play. We have looked at a suite of opportunities there, have yet to pull the trigger. Our cash amounts again, we do have about $100 million to pull the trigger on an acquisition or a participation in a domestic or international opportunity. We are attuned to the market. We are most interested in closing a deal. VAALCO is in great financial shape to take advantage of the opportunity, and we look forward to be able to close on one of those very shortly.

So with that, Kathy, I'll turn it back to you, and open the session for questions.

Thank you. (Operator Instructions). Our first question comes from TJ Schultz. Please go ahead.

Hey, guys. On Etame, can -- I think you said right now production is at 20,000 barrels a day. Can you break that out between Etame, Ebouri and Avouma and just give a little detail on the Etame 7H and what impact that play have on production, and, you know, how certain you are on timing of the vessel to -- for the gas-lift line?

Yeah, we're currently producing about 7,200 barrels of oil from Etame, about 65,000 from the Avouma platform and between 6,500 and 7,000 barrels a day from the Ebouri platform. I think that adds up to 19,700 or something. The -- issues that we're dealing with right now is that the FPSO can handle 30,000 barrels of total fluids per day, so we are currently putting about 29,500 barrels a day through that FPSO at these production rates.

So what we'll be doing when we thing these two new wells on, since they will be lower water-cut wells, we would preferentially produce more from those wells, and cut back on some of the higher wart-cut wells, and you don't see a barrel-per-barrel gain if you will on the production so if we turned on the 7/8th well at 4,000 barrels per day, we won't necessarily get a complete 4,000 barrel per day gain, because we'll be out cutting back a well that's producing 40% oil, and 60% water maybe pick up 2500 barrels when we turn that 4,000 a day well on. And that's part of the reason we're doing this Etame expansion project is to see what we can do about finding other ways to process the water away from the FPSO so that we can send more oil to the FPSO and use the 30,000 barrels of capacity in a more efficient fashion. The Tchibala well is probably on the order of 3,000 barrels per day if we can produce that well. Again, we won't get a barrel per barrel increase, but I would expect us to finish out the year somewhere in the 22,000 to 23,000 barrel of oil per day range, somewhere in there once we get those two wells on.

Okay. And -- on the 7H to get that converted over. You are waiting on a vessel. Is that en route or do you have a specific date in mind?

It is due in Gabon November 17th. And it's probably a one-week exercise to get that gas-lit line handed over to the FPSO and laid over to the well, and then we can put the well in production.

Okay.

And the other thing it's going to do while it's over there, is we have designed some additional conductors that we are going to attach to the Avouma, and Ebouri platforms to give us room for more wells on knows platforms. Right now we're limited to three -- wells on each platform, and we have already got three at Ebouri and we're getting ready to drill a third at Avouma, so to be in a position to drill an additional development wells there next year we need to install these conductor guides. So we'll do that at the same time.

Okay. Just moving on over to exploration. I know you laid out kind of your plans for 2011 with the two development wells and possibly one exploration. Just on the seismic on the Southern Bart of the block, how long is that going to take to process to the point where you think you'll have a decision on going out there or one of your other leads?

Probably six to nine months. So that's why I'm saying if we -- if we start our drilling program sometime in the second half of next year with the development wells, we probably wouldn't be ready on the shallow water to call a location, but maybe by the end of that program we would. We also have a couple of things that we're looking at in the Etame trend, and maybe even a delineation well that we're talking to our partners about that would be within the -- you know, the development area, but perhaps not a pure exploration well, so we have got a number of things up in the air.

Okay. I mean, are any of those potential first half of next year, or are you going to wait to see the seismic before deciding on that?

The rig situation right now, it doesn't look like the rigs that we need will be available until late second quarter early third quarter unless we wanted to bring a rig from Vietnam or someplace, which we don't think we're in that big of hurry to spend $8 million mode to bring a rig in when we know there will be rigs available late second quarter, early third quarter.

Just one more on the new contract for the crude, can you quantify the premium that you are expecting to Robby?

I would rather not. It's not a huge premium, but it is a premium, and that was just kind of a nice deal to pick up an extra $0.50, $0.60 versus what we had been receiving in the past. We actually had a few bidders that were offering a premium. So somebody has found a better market most of our oil use to go to a refinery in St. Croix that was run by Amerada hess, and now it is going in to the Gulf Coast and going in to Europe, so I think there's some other people that have found the crude and like it.

Okay. Great. Thanks, guys.

We have a question from Jerry Gill. Please go ahead.

Hi, guys. Great quarter. On this -- these conductor guides you mentioned, Russell for expanding the slots on the platforms, is that just going to give you one more start on each, or more than that?

They are going to install three on each. They look just -- the brackets look just like the existing three conductors, and they bolt right on to the existing ones. I think, though, from a engineering aspect, we could -- we can't use all three of them at Avouma because that platform is not as beefy as the Ebouri platform. So even though we're installing three conductors, we can probably only use two of them, unless we do additional remedial structural work on Avouma, but we'll cross that bridge if we need to.

And regarding the 7H, in the time that you are waiting for this gas lift material, is the number 1 well still available to produce, or did you have to disconnect that?

No, it's producing.

It is, huh?

Remember, we used the 3H well that died back in 2005, as the -- we used those flow lines.

Oh, okay. Okay. That's right. And is the number 4 well, the granddaddy of them all, is that still producing?

It is still chugging along.

That's great. That's all I have now.

Good to hear from you Jerry.

Good to hear from you.

You have a question from Jimmy Weiland. Please go ahead.

Hi, fellas, nice quarter, just wanted to ask a question about your recent discoveries and the various side-track wells that you have done, have you determined whether they are related to the original discoveries, are they new field? Any current concept for how large they might be in commercial viability?

We have definitely found a new accumulation. The first side track we ended up crossing a fault and going in to the fault block where the 1V well is, part of the existing Etame field. That was a little bit of a surprise. That extended the side of that Southern foul block. So we knew it was a surprise on southeast Etame. But it was a good surprise on Etame. We think we know where the water contact is on the second side. We came in low and wet, but we did that on purpose cause we can extrapolate pressure data to figure out where the water contact is. So based on that we're pretty sure we have got at least a one-well development, and we want to incorporate it in to this Etame expansion to make sure we find the cheapest way to get the thing off.

Okay. And is that of the Etame well, or is that -- you were surprised when you reached in to that fault block, but it could possibly go even further than that?

Well, the fact that fault block extended all the way down to where this side track was meant that it had to be a lot bigger than we had originally mapped it, and so now we're kind of looking our -- looking at this Southern Etame fault block to determine whether we might need a second well in it or not. That's another thing we will be looking at as part of this expansion project. Right now we'll have the vertical well and the horizontal well on that fault block, but we landed the vertical well right next to the horizontal well, and we may need another well on that fault block away from the where the existing two wells are, to thoroughly drain that fault block, and that's something we'll be studying.

Okay. Your partnership changed over the last period of time, and are they now fully on board as to what is here, and the expenditure and timetables that you would like this -- the process to be on?

Yeah, really, the only new partner we have Jamie is the Chinese Sign Impact they bought out Addics. They are obviously an enormous company. All of our partners, all five, really, are participating in this enhancement study. Yes, everybody is -- seems to be cooperating very well. I think honestly, the agendas are somewhat different. I think Sign Impact is very aggressive. That's fine by us. Perhaps SAS Oil is a little more conservative, but I think the group is working well together. I think that good things will come out of this, and I think it's going to be a very satisfactory culmination to all of it. I suspect that what is going to happen, we're going to produce Etame someplace between 25,000 and 35,000 barrels. That will be the end result of all of this, and at what cost will be defined as we continue to hack away at the study group, but everything is working well.

Okay. And 25,000 -- to 35,000 barrels of relatively low water cut.

That's oil.

Right. Okay. Okay. And will we be able to take any of these new discoveries in to reserves by year-end, or how does the accounting for that work?

I doubt we'll be able to take Southeast Etame in, I'm sure we're going to get some credit for that fault block where the 7H well is. Both from the standpoint -- plus we have expanded the size of that fault block, so we'll get some revisions. We will have to see what happens on Omangou. You know, the sand is a lot thicker up there on the northern end of the block, so if we find something, you know, with 20 meters of sand in it, that's a different kettle of fish then what we have a Southeast Etame, and we might get some credit for that. And we'll have to see.

Omangou gets drilled approximately when?

As soon as we finish up this completion on this Tchibala well.

And Omangou results will be available approximately when?

By year end.

Okay. And lastly, on Angola, we have got a data room available through the end of the month. The likelihood that we will have signed up a partner at that point in time, and if we do, how quickly do -- would you like to be able to drill and are capable of drilling?

You know, I don't know that we know the answer to that question as Robby mentioned, we have had one offer. We'll just have to see. Unfortunately, we won't be in complete control of that process, because ultimately they are going to have to sign a production-sharing contract with Sonangol, and Sonangol is going to dictate what they want from this new partner, so we're just endeavoring to get as many people through that data room as we can. I think we have contacted some 25 companies. We have had half a dozen through the data room, and others that are still talking to us about it, and we're marching them through as fast as we can. We just hope that a few of those companies go to Sonangol and sit down and they get one signed up in and the minute we get one signed up, we'll get after it.

Okay. You have a one-year extension, you think at this point?

Yes.

Is that enough? Can't you request --

As long as we know that there is a new partner, we can get things moving. I mean the prospects are identified. We know where they are. We know how deeply they want to drill the wells. We're ready to go. We just have not been willing to pull the trigger on buying casing, wellheads and all of that equipment until we're sure we have a new partners.

And you have rigs ready to go?

We have rigs available.

How have the rig rates changed over in that part of the world?

They are way down.

Okay.

You know, at peak semi rates were $600,000 a day, and we're looking at -- you know, a third of that now.

Perfect. Okay. Great job, fellas. Thank you.

We have a follow-up from TJ Schultz. Please go ahead.

Bobby just kind of a bigger picture, I guess, or longer-term question, you guys have been sitting on quite a bit of cash for quite a long time, and should continue to have a pretty robust cash flow. I guess kind of two parts, you mentioned hiring a third-party to look at some onshore US assets, and you have talked over time about other opportunities in West Africa. I guess one just in North America, do you still have that third-party retained? And how is that going? And what are some of the roadblocks in West Africa for some of these opportunities to possibly get something done?

We do have a third-party still under retainer. They are searching, not easy for a small company to dive in to one of these projects, but I think we're getting closer. West Africa is a competitive atmosphere. I think size is the driving force that we have encountered there. There's a number of -- not a number, but certainly quite a few mega deals in West Africa that are beyond VAALCO's range, if you want. We retain -- are quite interested in a large transaction in a different country, and went through a process even of considering bringing in private equity, et cetera, et cetera because we liked it.

And -- but still, the requirements of VAALCO coming out of pocket with cash before a production was established there was a discovery, but the infrastructure of bringing it online and the necessity to drill a number of additional wells turned out to be, really, a bet that was about $500 million, and VAALCO felt that, as much as we liked it, and as much as we probably could have entertained some private equity or a partner, it would have restricted VAALCO to that one country. Much like we're in Gabon right now. So we passed on that Jamie -- excuse me -- TJ, and we are looking at another very attractive opportunity in West Africa. It also is large, but not as large as what I just mentioned to you. So granted we have had this cash on our balance sheet. We -- we have some question marks about some of the domestic transactions that people seem eager to jump in to. We have some problems making the economics work where some of our -- perhaps not in our peer group, but they are much larger, they don't seem to have the same hesitation about jumping in. We're a little more selective, but we are now, again, receiving a number of feelers. Would VAALCO be interested?

With the gas price being where it is, natural gas price, and oil being strong, it begs the question, obviously, of everybody's trying to switch their portfolio from natural gas to an oil portfolio, so competition in the oil shale plays amounts, and can we shoe horn our way in? I think we can. What is the timing of that? I can't tell you that. But certainly we are a known player now, and our actions to doing deals, so we'll see what happens.

Okay.

Okay?

Yeah. Thanks, Bobby.

(Operator Instructions). We have a question from Neil Nelson. Please go ahead.

Question for Russ on the Ebouri production at -- currently at 7,000 -- 6,000-some barrels a day, and I'm curious, when you cited the exit goal of about 22,000 to 23,000 barrels a day, if you can outline what could be done to increase Ebouri's production back up to the full 9,000 barrels per day or 10,000?

Well, the situation at Ebouri is that we have three wells, but we only have switch gear for two sets of ESPs. And we are in the process of building a switch-gear building that we'll be shipping over there in the first quarter of next year, and at that point, we'll be able to -- we have ESPs in all three wells, but we can only run two of them with the existing transformers and things that we have on the surface. What we tried to do was flow naturally, the new well for as long as we could get it to flow, but we had to go ahead and -- since it's the lowest water-cut well, and it started having some problems, we had to go ahead and switch it on to ESP, and right now, the 3H well at Ebouri is shut in. It's the highest water-cut well in the field, so as soon as get that switch gear over there, then we'll be able to turn the 3H well back on. And the good news about Ebouri is we have water knockout on that platform.

So we don't care if the wells are higher water cut there, because we'll knock the water out of the platform before we send the oil over to the FPSO. So really, that will be a good thing when we get that third ESP on, because we'll be able to get them all three on hopefully end of the first quarter next year.

Can you structurally retrofit the Avouma platform to do a water removal?

Yes. That's actually in our budget for next year to do that. And that will help also.

Okay.

And then one of the things the Etame expansion project is looking at is if we were to put a third platform out there, what kind of facilities would we want to put on it? We might even go so far as to put full production facilities on it, such that we would be able to send clean oil that would totally bypass the FPSO facility. So that's one of the things we're looking at.

When you say bypass it, you mean bypass the deck-top water processing?

Correct.

Okay.

Right now the Ebouri oil, even though we knock out most of the water, it still goes through the separators, so it does take up some room on the FPSO, albeit, it's mostly oil. But we don't have gas knockout capability on the Ebouri platform, so we end up sending the oil and gas over to the FPSO to be processed. And the Ebouri, unfortunately, is the lowest gas/oil ratio of the three fields it's got a very low gas to oil ratio. And that's why the wells didn't flow naturally for very long.

And it's not worth a gas lift on Ebouri? You'll never produce it with a gas lift?

No. No. We have got pumps. We have those electric pumps in the wells. That's better, because they don't -- you know, then you don't have to worry about whether you are running out of gas or gas lift. You just have to burn diesel to run the pumps.

Okay. Thank you very much.

There are no further questions. Please continue.

Well, I guess there's no further questions, Kathy, thank you all very much for your participation and look forward to seeing you at our next conference call. Again, thank you all very much.

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