NIDO Petroleum plans to offload a 40 per cent interest in its Palawan Basin service contract 63 in the Philippines after signing a farm-out agreement with international oil and gas company Dragon Oil.

The farm-out, to be undertaken in two stages, will involve Dragon Oil initially purchasing a 40% participating interest in SC 63 from Nido’s current 50% interest.

To earn the stake, Dragon will pay 56% of the cost of the Baragatan-1 exploration well based on a US$25 million cost cap on behalf of Nido. This will result in the company being fully carried with a small overfund of $1.5 million.

On approval of the farm-out by the Philippines Department of Energy, Dragon Oil will reimburse Nido US$2.18 million of past seismic costs and US$1.22 million of other past costs on a success case basis towards development expenditure.

The second stage of the farm-out is subject to certain conditions and Philippine Government approvals being met which will allow PNOC–Exploration Corporation (PNOC-EC) the opportunity to divest a proportion of its participating interest in SC 63.

If approvals for the second stage of the agreement are secured, Nido will seek to secure an additional 10% participating interest in SC 63 from PNOC-EC on the same terms agreed between the companies, giving Nido a 20% working interest in SC63.

During the Baragatan-1 drilling operations Nido will remain as technical operator and PNOC-EC as operator of the service contract.

On completion of drilling, Dragon Oil will have the right to become operator of the service contract.

SC 63 covers an area of 10,560 square kilometres and is currently in Sub-Phase 2b of the exploration program, in which there is a commitment to drill one well.

This Baragatan prospect is anticipated to be drilled to a depth of 3,390 metres.

Dragon Oil, which is headquartered in Dubai and listed on the London Stock Exchange, has assets in Tunisia, Iraq, Afghanistan and Egypt.

Nido managing director Phil Byrne said he pleased to have Dragon Oil as a partner.

“Dragon Oil brings a wealth of exploration, development and operating experience to the SC 63 joint venture through their expanding portfolio, in particular through their world class Turkmenistan producing asset,” he said.

Dragon Oil chief executive Dr Abdul Jaleel Al Khalifa said the deal aligned with its expansion strategy.

“We have been looking into exploration opportunities in South-East Asia for a while and with this farm-in agreement, yet another asset is added to our portfolio,” he said. “We look forward to working with Nido and PNOC-EC in this exploration venture in the Philippines.”

Nido Petroleum plans to drill at least four exploration wells in its Philippine and Indonesian acreage in 2014.

Nido’s shares jumped 6.1% on the news to A3.5c.