Half-year Results 2020
Hurricane Energy plc, the UK based oil and gas company focused on hydrocarbon resources in naturally fractured basement reservoirs, provides its 2020 interim report and half-year results for the period ended 30 June 2020. The Company also announces the initial results from the Technical Review of its West of Shetland assets which commenced in June 2020.
2020 Interim results summary
· Since announcing a Technical Review on 8 June 2020, a strengthened Hurricane sub-surface team has performed a comprehensive reassessment of the Lancaster field.
· The Lancaster field is more complex than previously thought. Preliminary analysis suggests that rather than being primarily a basement reservoir, Lancaster has important oil-bearing sandstones onlapping the basement flanks, which may contain significant volumes of oil. Further work is required in order to understand their impact on current reservoir performance and their ultimate potential.
· The Lancaster oil-water contact (“OWC”) is now estimated to be at 1,330 metres TVDSS, compared to the range of 1,597-1,678 metres TVDSS in the Company’s 2017 Competent Person’s Report (“2017 CPR”). This shallower OWC is consistent with the observed earlier and higher water production, and more rapid reservoir pressure decline, than was originally anticipated.
· Reflecting these new technical interpretations, the Company’s unaudited estimate of recovery from the two existing Lancaster Early Production System (“EPS”) wells assuming no further activity has been reduced to 16.0 MMbbls from 37.3 MMbbls. Considering oil produced to end August 2020, remaining 2P reserves at 1 September 2020 are estimated at 9.4 MMbbls (subject to economic limit test).
· Consideration of near-term future activity is being focussed on means to provide reservoir pressure support primarily by water injection, which if successfully implemented could significantly add to reserves, and/or targeted development of the onlapping sandstone reservoirs.
· Reflecting these new technical interpretations, the Company’s unaudited estimate of 2C contingent resources in the Lancaster field has been reduced to 58 MMbbls remaining from 486 MMbbls in the 2017 CPR.
· The Company’s estimate of the OWC in the Lincoln field is now 1,846 metres TVDSS (± 50 metres), compared to a range of 2,109-2,325 metres TVDSS estimated in the Company’s 2017 West of Shetland Assets CPR (“2017 WoS CPR”). Accordingly, the Company’s unaudited estimate of 2C contingent resources for the basement alone in the Lincoln field has been reduced to 45 MMbbls gross, compared to 565 MMbbls gross in the 2017 WoS CPR.
· More definitive estimates of the range of reserves and resources will be made available in an updated CPR in Q1 2021.
Operations – Greater Lancaster Area (“GLA”)
· Hurricane continues to adhere to the strict procedures in place for UKCS offshore activity during the COVID-19 pandemic, with negligible disruption to the Company’s operations during the period.
· The Aoka Mizu FPSO continues to deliver excellent uptime, with an average of 99% in H1 2020.
· Lancaster EPS production averaged 14,600 bopd for both H1 2020 and the year to date ended August 2020. Prior to the recent scheduled shutdown, field production of c.15,000 bopd was from the 205/21a-6 well alone on natural flow, with the 205/21a-7z well currently shut in to manage reservoir voidage and pressure decline.
· In light of the revised interpretation of the OWC, the area of the P1368 Central licence outside the determined Lancaster field area is being voluntarily relinquished and, following relinquishment, the Company will be released of its obligation to drill the Lancaster commitment well.
Operations – Greater Warwick Area (“GWA”)
· Interpretation of the results of the 2019 drilling programme and ongoing pressure monitoring of the 205/26b-14 Lincoln well have led to a significant reappraisal of the GWA licence potential.
· The downhole gauges installed in the suspended 205/26b-14 Lincoln well are now yielding potentially important pressure data. Two sets of data have now been retrieved and analysed, providing valuable insight into long distance reservoir behaviour.
· As previously announced, the OGA has agreed to extend the deadline for the GWA licence commitment well from 31 December 2020 to 30 June 2022.
· Revenues of $81.9 million in H1 2020 from seven liftings of Lancaster crude (H1 2019: $22.5 million)
· Despite the significant volatility in oil prices during the period, the Company generated $21.9 million (H1 2019: $6.1 million) of operating cash flow due to low cash production costs† of $18.2/bbl (H1 2019: $24.0/bbl)
· Loss after tax for the period of $307.7 million (H1 2019: Loss of $21.4 million), including $238.9 million (H1 2019: $nil) relating to the impairment of the Lancaster field and a $34 million credit (H1 2019 : $23.5 million charge) in relation to the fair value of the Convertible Bond.
· Net free cash† of $106.2 million at 30 June 2020 (31 December 2019: $133.6 million).
· Net debt† of $123.8 million at 30 June 2020 (31 December 2019: $96.4 million)
† Non-IFRS measures. See Appendix B for definition and reconciliation to nearest equivalent statutory IFRS measures
· Lancaster EPS production for September to December 2020 is expected to average 12,000-14,000 bopd, based on production from the 205/21a-6 well on natural flow, expected decline rates and 95% FPSO uptime.
· Work continues on a possible 2021 activity programme for Lancaster, including the provision of pressure support via water injection, improved recovery from the existing EPS wells and evaluation of the onlapping sandstones. This planning is expected to be finalised before the end of 2020.
· While no drilling is anticipated on the GWA licence during 2021, Hurricane will continue to work with the GWA stakeholders on possible pathways towards development for the Lincoln discovery.
· Lower oil prices and reduced production expectations will negatively impact anticipated future cash flows, despite the expected reduction and deferral of licence commitment well spending. Consequently, the Company intends to engage with all key stakeholders regarding its forward work programme, capital allocation and financing arrangements.
Steven McTiernan, Chairman of Hurricane, commented:
“2020 is proving to be a hugely challenging year for Hurricane. We have had to contend with not only a significant fall in oil prices and the effects of the COVID-19 pandemic, but also poorer than expected reservoir performance from the Lancaster EPS.
The EPS was always intended as a long-term production test to establish the size and production characteristics of this unique and pioneering basement play. Basement reservoirs are subject to profound technical risks, with difficult well conditions impacting the effectiveness of evaluation tools, creating uncertainties which can only be resolved by observation of actual production performance.
It is nonetheless disappointing that the Technical Review has so far resulted in significant reductions in reserves and resources. On a more optimistic note, initial studies suggest water injection could partially mitigate the reserves downgrade, and onlapping sandstones at Lancaster could represent material upside potential.
The Board is enormously grateful to Beverley Smith for leading the Technical Review during a period of considerable change for the Company. We are also most fortunate that stewardship of the Company is now passing to Antony Maris, our new Chief Executive Officer, who has significant experience of basement reservoir developments and will provide strong leadership to the refreshed management team.”
Antony Maris, Chief Executive Officer Designate of Hurricane, commented:
“Through hard work and dedication, the Hurricane team developed the Lancaster project safely, on time and on budget, and has now successfully operated the Lancaster EPS for 16 months. This capability is a core strength of the business, and I am delighted to be joining this accomplished operating team.
Following the uncertainty of recent months, as the significance of the EPS reservoir performance has become clearer, we must now focus on extracting value from Lancaster and our other discoveries, while optimising the use of our significant installed infrastructure West of Shetland. In particular, the Technical Review has identified upside within sandstone reservoirs on the flanks of the Lancaster field, with the potential for volumes of recoverable oil which are significant in a UKCS context. Furthermore, together with Spirit, we are working towards consideration of a viable development plan for the Lincoln field.
Our near-term priority is further technical work to refine an activity plan for Lancaster, which we expect to be finalised by the end of this year and executed in 2021, with an overarching focus on capital discipline. We will be engaging with all our key stakeholders regarding our forward work programme and financing arrangements and updating the market on these efforts in due course.”
Hurricane was established to discover, appraise and develop hydrocarbon resources associated with naturally fractured basement reservoirs. The Company’s acreage is concentrated on the Rona Ridge, in the West of Shetland region of the UK Continental Shelf.
The Lancaster field (100% owned by Hurricane) is the UK’s first producing basement field. Hurricane is pursuing a phased development of Lancaster, starting with an Early Production System consisting of two wells tied-back to the Aoka Mizu FPSO. Hydrocarbons were introduced to the FPSO system on 11 May 2019 and the first oil milestone was achieved on 4 June 2019.
In September 2018, Spirit Energy farmed-in to 50% of the Lincoln and Warwick assets, committing to a phased work programme targeting sanction of an initial stage of full field development.
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