Dragon Oil Targets Double-Digit Growth in Oil and Gas Production in Turkmenistan

Refocus and Move Forward

While the second half of 2009 allowed most firms in the oil industry to catch their breath and recoup some of their losses from the dismal second half of 2008 and the first few months of 2009, Dubai-based Dragon Oil was consumed with its own internal shareholder battle. Although the recovery in oil prices allowed the Turkmenistan-focused producer to recover some of its earlier losses, a protracted process by Emirates National Oil Company (ENOC, the U.A.E. state oil company that holds 51.5% of Dragon), to commit to and then launch a buyout offer meant that Dragon essentially watched and waited as its shareholders mulled the future of the company. Ultimately, the 11% premium offered by ENOC to Dragon's minority shareholders at the time of the buyout offer in June failed to sway enough shareholders, and—despite Dragon's own recommendation to minority shareholders to accept the estimated US$3.9-billion offer—the buyout offer was rejected in December (see "Related Articles").

A stream of minority shareholders came out in opposition to the ENOC offer, saying that the 11% premium understated the "fundamental and strategic" value of the company, whose main asset is the rights to the Cheleken contract area offshore Turkmenistan. Yesterday, the company released its 2009 results, showing that its oil production from the Cheleken contract area grew 9% last year to an average of 44,765 b/d. Dragon also said that its net profits in 2009 fell 30%, from US$369 million to US$259 million, although it stated that it held a cash balance of more than US$1 billion at the end of 2009, giving it "significant financial flexibility". The company's main "strategic" value is its unique position as one of the only foreign companies operating in Turkmenistan's oil sector, while Dragon's oil production from the Cheleken contract area easily makes it the country's top foreign producer.

So, with the company's internal shareholder battle now resolved, Dragon indicated yesterday that it plans to move ahead more aggressively to capture more of this "fundamental" value by stepping up its investment in its Turkmenistan operations. The company said that it plans to spend up to US$700 million on infrastructure, including production platforms and pipelines, over the next three years, aiming to drill up to 40 wells in its offshore fields through 2012. The company said field development plans include the installation of additional platforms, as well as new wellhead and production platforms, while an additional; US$150–170 million would be invested in an onshore gas treatment plant for its Turkmen projects. Overall, Dragon said it anticipates increasing its oil and gas production by 10–15% per year through 2012.

Outlook and Implications

Dragon's reference to oil and gas production growth in the next three years indicates that the company is striving to reach a deal with the Turkmen government over gas output from the Cheleken contract area. Currently, Dragon flares or reinjects its associated gas output, while the company's oil production is mainly sent to Iran via swap deals. A potential deal with the Turkmen government could expand Dragon's opportunities on the gas front, giving the company the incentive to capture its current production and monetise future gas output. A deal with Turkmenistan could also provide incremental-but-important Caspian-region gas for Turkmenistan, either to supply volumes north via a planned new "Pre-Caspian" pipeline to Russia or potentially through a long-discussed trans-Caspian gas pipeline connecting Turkmenistan to Azerbaijan.

Gas monetisation would improve Dragon's profitability at the Cheleken contract area, as well as allow the company to move closer to realising the "fundamental" value that its minority shareholders talked about in rejecting ENOC's buyout bid. Still, Dragon is little more than a niche player in the global oil industry at this point, utilising its unique position in Turkmenistan for gain but also increasingly defined—and limited—by it. With the failed buyout bid behind it, Dragon is now looking to break free of its previous narrow focus, saying in a statement that it will look at opportunities this year in North Africa, the Middle East, and Central Asia as well. Dragon is aiming to find assets that add to its competitive advantage and provide the "best strategic fit" with the group; in announcing its intentions yesterday, the company is taking the first step to achieving that goal.

Related Articles

• Turkmenistan: 21 January 2010: Wintershall Plans to Surrender Exploration Block Offshore Turkmenistan
• Turkey - Iran - Turkmenistan: 10 January 2010: Turkey's Aim to Import Turkmen Gas via Iran Faces Hurdles
• Turkmenistan - Iran: 6 January 2010: Another Victory for Diversification as Turkmenistan Opens New Gas Pipeline to Iran
• Turkmenistan - Russia: 23 December 2009: Turkmenistan, Russia Agree to Resume Gas Supplies in 2010, Ending Impasse
• Turkmenistan - United Arab Emirates: 14 December 2009: Shareholders Vote to Reject ENOC Buyout Offer for Dragon Oil
• Turkmenistan - United Arab Emirates: 17 November 2009: Third Dragon Minority Shareholder Rejects ENOC Buyout Offer
• Turkmenistan - United Arab Emirates: 12 November 2009: Largest Minority Shareholder in Dragon Oil Rejects ENOC Buyout Offer
• Turkmenistan - United Arab Emirates: 3 November 2009: Turkmenistan-Focused Dragon Oil Agrees to Buyout Offer by ENOC
• Turkmenistan: 22 September 2009: Dragon Oil Prods ENOC to Take Action Regarding Potential Takeover
• United Arab Emirates: 5 June 2009: Dubai National ENOC Mulls Offer on Outstanding Shares in Dragon Oil