Vancouver-headquartered TAG announced yesterday it had signed a letter of intent with Genesis to sell its 15.1% interest in the Cardiff mining licence (PMP 38156-D) and surrounding exploration acreage (PEP 38738-D) for an undisclosed sum of cash and 1% royalty on any future production from both permits.

TAG chief executive Garth Johnson said the proposed transaction was the first following TAG’s review of its New Zealand operations.

He said the decision to sell TAG’s stake in Cardiff was made after considering the risk profile associated with the project and the possible need to commit significant additional capital.

As a result, TAG felt it prudent to mitigate the financial risk of Cardiff, while still participating in the prospect's upside through a royalty.

After a turbulent year that included some disappointing results from its onshore Taranaki exploration program, TAG last month announced it was considering selling some or all of its New Zealand interests and facilities, potential mergers or farmouts, and new joint venture opportunities that met the company's lower tolerance for risk.

Cardiff operator Austral Pacific Energy believes it could cost up to $US100 million ($A85 million) to develop Cardiff, which has yet to flow commercial quantities of gas from tight Eocene-aged formations, despite three years of sidetracking, workovers and testing.

Austral chairman Peter Hill last month said any Cardiff development would be a phased program involving up to 15 wells, plus processing facilities and pipelines.

The latest work on the Cardiff-2A sidetrack well – to isolate and test the primary zone, the Eocene-aged K3E interval – is underway, with results expected before Christmas.

No economically recoverable reserves have been assigned to Cardiff, although gas in place could exceed 215 billion cubic feet, plus 12.8 million barrels of condensate.

Genesis spokesman Richard Gordon told PetroleumNews.net today that despite the Government’s recently announced ban on new baseload gas-fired power stations for the next 10 years, Genesis was still predicting a gas supply shortfall from about 2015.

“Genesis Energy is keen to develop new sources of indigenous gas in order to meet that shortfall,” he said.

“We require gas for our existing electricity generation plant and have a considerable commercial and residential gas customer portfolio to supply.

“We are increasing our stake in Cardiff for commercial reasons. The Cardiff joint venture originally had four partners and shortly it will have two, which makes for a more straightforward governance structure.”

The original partners were Austral, Genesis Energy, and private companies Cheal Petroleum (which TAG acquired last year) and International Resource Management Corporation (which Austral took over last August).

Johnson also reported yesterday that production at the nearby Cheal oil field, TAG's primary asset, was being curtailed as a result of the temporary shutdown of the B wellsite facilities.

Production had dropped from about 850 barrels per day to about 400bpd, though this was expected to climb to about 700bpd once the permanent B site facilities were tied in to the A site production station.

In addition the Cheal-A4 well, one of the field's better producers, was producing at a reduced rate of about 140bpd due to casing leakage. The partners were considering a possible workover to return the well to full production capability of about 250bpd, he said.

The partners were also considering drilling two additional wells, Cheal-A5 and A6, and drilling Cheal-A5 as a horizontal well to maximise flows and drainage.

This was anticipated to be completed by late December and expected to further increase Cheal production and reduce production costs at the B site, according to Johnson.

He said TAG’s strategy for future growth included further development of Cheal and surrounding acreage, while balancing any financial exploration exposure through farmouts that maintained upside in the event of discovery.

The new Cardiff partners will be operator Austral Pacific Energy (44.9%) and Genesis Energy (55.1%).

The Cheal partners are operator Austral (69.5%) and TAG Oil (30.5%).