HOUSTON: PetroTal Corp. has entered into an arrangement with Petroperu S.A. The arrangement will result in the Company’s liability to Petroperu in relation to the recent oil price movements being payable over a three year period, rather than at the point of sale of the oil.

The arrangement has been structured to minimize the impact of the recent oil price decline on the Company’s cash flows and forward plans, whilst allowing the Company to benefit from any future increase in oil prices when physical oil sales occur.  As announced on May 7, 2020, the liability relates to the oil price differential between the date that oil enters the Northern Oil Pipeline (ONP) and the current oil price (and, ultimately, the physical oil sales price).

Pursuant to the terms of the Oil Sales Contract and the oil swap contract referenced in PetroTal’s May 7, 2020 announcement, a contingent liability arose due to the significant reduction in oil prices in early 2020.  The purchaser of the oil, Petroperu, has agreed to resolve this entire contingent liability on a one-time basis that would see the obligation paid evenly over a three year period, at an annual interest rate of 6.5%.

At May 31, 2020, 2.1 million barrels of oil are either in the pipeline or storage tanks, and based on the average oil price for May 2020, the contingent liability is approximately $43 million. At March 31, 2020, there were 1.8 million barrels of oil in the pipeline or storage tanks.  The actual liability will be determined based on the future Brent oil price when the oil is sold.

For reference, based on the average Brent oil price of approximately $40/bbl for June to date, the contingent liability is approximately $26 million.  The Arrangement will allow PetroTal to continue to benefit from the higher oil prices forecasted by the Brent forward strip pricing curve when the physical oil sales occur while allowing PetroTal to invest in the Bretana oil field development.

As security for the Arrangement, the production facilities of PetroTal at Bretana will be pledged under a trust agreement pursuant to which such facilities will be held as security for the benefit of Petroperu. Along with the contractual monthly repayments, PetroTal may make additional pre-payments to facilitate an earlier payout.  Once Petroperu has been repaid in full, the trust agreement will terminate and any security in respect of the facilities shall be released.

PetroTal will continue to benefit from higher projected oil prices when the oil volumes that have been sold to Petroperu under the Oil Sales Contract and the oil swap contract are sold by Petroperu in Q3 and Q4 2020.

Carlos Barrientos Gonzales, General Manager of Petroperu, commented: “Petroperu appreciates the dedication and investment that PetroTal has made in the development of the Bretana oil field.  Petroperu expects to complete the significant upgrade of the Talara refinery in mid-2021 and the ability to utilize domestic oil production will be an important element.  PetroTal is an important player in Peru’s oil industry and is now an important oil producer in the Country.

“The Oil Sales Contract between Petroperu and PetroTal is an important link between our two companies, and I’m pleased that we’ve reached agreement to extend it to three years along with the additional contract enhancements.  In recognition of the significant investment PetroTal has made in the Bretana oil field and production facilities, Petroperu is very comfortable with allowing the contingent liability to be settled over the next three years.  The Bretana oil production coming through the Northern Pipeline also represents an important benefit for the Loreto Region and for the Country”

Manolo Zuniga, President and Chief Executive Officer, commented: “PetroTal is pleased to embrace the strong working relationship it has with Petroperu.  Oil production from the Bretana oil field is an important component of Petroperu’s pipeline and refinery network.  Solidifying a three-year arrangement for both settlement of the contingent liability and ensuring future oil sales, significantly enhances PetroTal’s operations.  It also sets the stage for PetroTal to continue the development of the Bretana oil field, as and when oil prices recover.

“Our focus on balance sheet strength and enhancing liquidity will ensure PetroTal has the financial strength for working capital management and the ongoing development of Bretana.  PetroTal appreciates the support of its suppliers and the continued dedication of our employees and contractors.  Together, PetroTal will emerge from the pandemic stronger, in order to rebuild value for shareholders.”