On the 28^th of August, oil company SOCO International Plc published its interim results for the half-year to 30^th of June 2014. From this report it is clear that the focus of the company has been to continue delivering steady progress and growth, keeping revenue and cash flow strong and shareholders happy with a possible 22 percent cash return before the end of the year 2014.

Business-as-usual

At first sight, yes. SOCO mentions the oil exploration activities in Virunga National Park in the Democratic Republic of Congo. Nothing out of the ordinary: they own and operate the controversial Block V with an 85% interest held by 85% owned subsidiary. The oil company mentions that “after receiving all necessary regulatory approvals, the lake bed seismic survey on Lake Edward was completed in July. The acquired data will now be processed and interpreted. Work is ongoing to withdraw all the equipment and services used during the survey from the area under the supervision of the environmental authorities.”

Then comes the part where SOCO reiterates its well-known engagement of the 11^th of June 2014 with WWF, in which WWF and the Company announced that, they: “agreed the way forward on SOCO’s future activity. SOCO committed, that, in the absence of an agreement between the DRC and UNESCO, SOCO will not progress its operations in Virunga National Park”.

In or Out Virunga?

The company recalls that even if they have stopped with their exploration activities in Virunga Park, they still have “non-operational investment obligations regarding environmental baseline studies and social projects, which include the recent installation of facilities capable of providing potable water to several local communities”.

In other words the company is still active within the park boundaries and is able to legally conduct activities in line with their environmental and social projects’ commitments. However, some local organizations in Eastern DR-Congo remain skeptical about the nature of SOCO’s activities conducted after July 30^th. Read here the enclosed letter sent  to the Ministry of Environment mentioning these concerns_(UECN La compagnie pétrolière SOCO ne fera pas de forage dans le parc national des virunga) .

But how you can prove that a multi-million company is doing more than simple environmental studies or setting up a water tank? Even pictures are not good enough to tell us the whole story and truth behind SOCO’s prolonged presence in Virunga.

So, where’s the catch?

The most surprising part does not come from these pictures or letter, or even Congo, but from SOCO’s interim results report. The company mentions the risks to which it is subject and how these risks and uncertainties “could have a material impact on the Group’s performance over the remaining six months of 2014”.

The list is long … and even if many of these risks are inherent in the global oil and gas business, other look quite familiar and very much linked to oil exploration in DR-Congo and Virunga National park:

1. Operational risk – associated with conducting exploration, drilling, construction and production operations in the upstream oil and gas industry.
2. Empowerment risk – the conduct of international operations requires the delegation of a degree of decision making to partners, contractors and locally based personnel.
3. Credit risk – in respect of the Group’s short term financial assets and financial asset at fair value through profit or loss arising on the Group’s disposal of its Mongolia interest.
4. Foreign currency risk – associated with cash balances held in non-US dollar denominations.
5. Liquidity risk – associated with meeting the Group’s cash requirements.
6. Interest rate risk – applicable to the Group’s cash balances and financial asset.
7. Commodity price risk – associated with the Group’s sales of oil and gas.2014 Interim Results
8. Regulatory risk – arising in countries where the Group has an interest, including compliance with and interpretation of taxation and other regulations.
9. Contractual risk – in relation to contractual terms that may be subject to further negotiation at a later date.
10. Capital risk management – in relation to Group financing.
11. Reserves risk – associated with inherent uncertainties in the application of standard recognised evaluation techniques to estimate proven and probable reserves.
12. Reputational risk – associated with the conduct of oil and gas activity in locations where social and environmental matters may be highly sensitive both on the ground and as perceived globally.
13. Business conduct and bribery risk – the industry sector and certain countries where SOCO operates may be perceived as falling short of the standards expected by the UK Bribery Act.
14. Political and regional risk – due to the location of the Group’s projects, often in developing countries or countries with emerging free market systems.
15. Health, safety, environment and social risks – arising due to the nature and location of the Group’s activities.

Source: SOCO – 2014 Interim Results – emphasis has been added

Risky Business

Credit, capital, foreign currency, contractual risks and others are all types of risks associated with financing and investment. These risks are characteristic to any economic activity. But what happens when one specific company’s operation, such as drilling in Virunga, represents a major risk factor for the business and could have serious impacts on its reputation, revenues and  see its operating, capital or regulatory costs increase ? Can the company then retain its shareholders’ trust when risks become systemic and interrelated to other risks such as reputational, political, environmental, social and even empowerment risk?

Is SOCO at risk of breaching a tipping point in Virunga in the remaining months? Most probably.

Will the company take full responsibility of their operations in Virunga and deal with the consequences? Probably not.

Are shareholders still willing to take the risk to drill in Virunga when they expect a cash return of 73 million pounds?  That is the question.

SV