By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s “delay” in renewing an oil explorer’s three Bahamian licences threatens the value of 80 percent of its balance sheet assets and ability to recover its previous investment in this nation.

Challenger Energy Group, the former Bahamas Petroleum Company (BPC), in unveiling its 2023 annual results last week revealed that renewal of its exploration licences for another three-year period is critical to maintaining the value of $94m in “intangible” assets booked in The Bahamas. 

The Grant Thornton accounting firm’s Irish subsidiary, which serves as Challenger’s external auditors, told shareholders in its opinion and report on the company’s financials that the extended wait for the Davis administration to make a decision on the licences could ultimately result in it being unable to “fully recover... some or all” of the value tied up in previous Bahamian exploration activities.

“The intangible exploration and evaluation assets include an amount of $94m relating to the exploration and evaluation assets in The Bahamas,” Grant Thornton said. “The offshore exploration licence is pending renewal with the Bahamian government for a third three-year exploration period from July 1, 2021, to June 30, 2024.

“The group believes that the extensive studies showing sufficient potential hydrocarbon volumes in untested horizons and structures within the licence area support the recoverability of the group’s capitalised exploration costs,” the accounting firm added, referring to the findings from the $100m Perseverance One test well that Challenger previously drilled in Bahamian waters some 90 miles west of Andros.

“However, the delay on the part of the Bahamian government may result in some or all of the carrying value of the capitalised exploration costs [being] not fully recoverable. The group remains in discussions with the Bahamian government over the terms of the licence renewal,” the auditors added.

“Because of the inherent uncertainty surrounding the Bahamian licence renewal, the judgements and assumptions made by the directors.... may differ from the actual results, and such differences could be material. The ultimate outcome of this matter is uncertain and the financial statements do not include any potential adjustments that may be required arising out of alternative outcomes.”

The financials later confirmed that the $93.963m value attached to exploration costs “relates almost entirely to the cost of exploration licences, geological and geophysical consultancy, seismic data acquisition and interpretation and the drilling of exploration wells in the Bahamian offshore licences”.

Challenger’s total “intangible exploration and evaluation assets” were carried at a $95.726m value on its balance sheet at year-end 2023, with The Bahamas accounting for virtually all that sum with its $94m. The latter figure also represents around 80 percent of the oil explorer’s $117.01m total assets, meaning that - if none of this sum can be recovered - Challenger would be left with a net worth of $4.452m.

The timing of any Bahamian government decision on Challenger’s licence renewals could thus have a significant effect on the oil explorer’s financials while it waits for its activities and prospects in both Uruguay and Trinidad & Tobago to come to fruition. Ever since Perseverance One, the company has shifted its focus to those two nations, which have become the core of its operations.

These implications perhaps explain why Eytan Uliel, Challenger’s chief executive, in his message to shareholders branded the Bahamian licence renewal process as “frustratingly slow” while conceding its importance to the company’s ability to “monetise” its local assets.

“In relation to the company’s licences in The Bahamas, throughout the course of 2023 we continued to pursue a renewal of the licences into a third exploration period. In parallel we continued to explore various alternative strategies seeking to monetise those assets. The process has been frustratingly slow, but we expect to make better progress in the coming 12 months,” Mr Uliel wrote.

“In the next 12 months we will be looking to see a result from efforts to realise value from our assets in Trinidad and, as noted, we hope to reach a resolution in relation to our licences in The Bahamas in the same timeframe. But, undoubtedly, the key area of focus and value creation for Challenger Energy going forward will be Uruguay.”

Challenger’s accounts described the long wait for the Government to make a decision on its licence renewal as “within the bounds of normal expectation in The Bahamas” noting that its first licence renewal took almost five years to come through. 

The “alternative strategies” likely refers to plans previously discussed by Mr Uliel to monetise the value of Challenger’s Bahamian licences, and previous exploration activity, through renewals that would require it to drill another well in this nation’s territorial waters within the three-year licence period.

Should commercially viable, extractable quantities of oil be discovered beneath the Bahamian seabed, Challenger - rather than extract it - would instead work with the Government to develop and share proceeds from a scheme involving the issuing of carbon credits whose value would be determined by the oil foregone.

Challenger has always signalled that it would likely not undertake any further exploratory drilling in Bahamian waters without securing joint venture or farm-in partner to take the bulk of the financial, technical and operational risk as it seeks to extract what value it can from its Perseverance One investment.

“Once this renewal process is completed, the key licence obligation for the new three-year period would be the drilling of a further exploration well within the licence area before the expiry of the renewed licence term. The ability of the group to discharge this obligation would be contingent on securing the funding required to execute a second exploration well,” Challenger’s financials said.

They also revealed that Challenger has yet to resolve outstanding licence fees owed to the Government from its previous licence term. “The parties entered into discussions with a view to finalising this outstanding matter, although as at the date of this report there has been no substantive progress on this issue with the Government of The Bahamas,” the oil explorer said. 

“The amount which the group considers to be outstanding is small, and the group expects this will be addressed as part of the broader discussion around renewal of the licence areas.”

Environmental activists yesterday blasted that it would be “lunacy” and “totally contradictory” for the Government to renew Challenger’s exploration licences for a fresh three-year term given the twin global messages that The Bahamas has been pushing about the devastating impact of climate change and its desire to be a leading issuer of “blue” carbon credits.

Joe Darville, head of Save the Bays, told Tribune Business: “It would be lunacy when we’re talking all this about all the carbon credits we could secure because we have the cleanest water, the cleanest air on Planet Earth. We would want to take a chance on that? Absolutely not.

“It would be totally contradictory to what we’re trying to tell the rest of the world; that we’re this sanctuary for carbon credits, and we consider something like that. It’s totally contradictory to the stand that we’re taking, and the Prime Minister is touting our clean air, our clean water and we could earn carbon credits from all the seagrass and mangroves we have.

“Do we want to take that chance in a million chances? Do we want to take a chance like that? Absolutely not.” The Our Islands, Our Future group, a coalition of environmental groups which has consistently opposed oil exploration in Bahamian waters, said the delays complained of by Challenger showed the Government is moving away from fossil fuels to better protecting the environment.

“The Government’s refusal to consider renewal based on non-payment of licence fees was an important step, and three years have now gone by since those licenses expired,” said Chris Wilke of Waterkeeper Alliance.

“With Challenger still knocking at the door, a permanent ban on oil drilling would provide the strongest possible assurance of the Bahamian commitment to safeguarding the marine environment and a clean energy future.”

“The fact that the Government has not renewed or considered these licences is a positive indication that The Bahamas is looking towards a cleaner, greener future,” said Andurah Daxon, executive director of Waterkeepers Bahamas. “We cannot afford to jeopardise our marine environment and coastal ecosystems for uncertain oil prospects.”