IOG plc (AIM: IOG.L) provides an operational and financial update following well clean-up and testing operations at the Blythe H2 well over 4-7 June.
Blythe H2 clean-up and testing
· The H2 well was drilled to a total depth of 13,400 ft MD and initial data indicated better reservoir quality (permeability and porosity) in the H2 wellbore versus H1
· The well has flowed at a maximum dry gas rate of 22.8 mmscf/d and 280-336 bbl/d condensate at the export pipeline pressure of 1250psi, with no formation water observed
· This is an improvement on current H1 rate, but below the expected initial H2 gas rate of 30-40 mmscf/d
· There is evidence that a potential mechanical blockage downhole is constraining flow. Equipment is being mobilised in the coming weeks to assess and rectify this potential blockage.
· No faults or fractures were encountered in the H2 reservoir section, unlike at H1 where a sub-seismic fracture appears to be causing formation water production
Blythe H2 next steps
· H2 will now be handed over for final hook-up and commissioning (“HUC”) and remains expected to be brought onstream this month, despite the 34 days lost to the well control event
· Safely completing the H2 HUC is expected to require approximately one week of planned downtime
· The remedial downhole equipment will be mobilised in the coming weeks and run in the well with the rig alongside, with H2 well shut in during these operations
· Once H2 production is on, H1 is planned to be shut in; in a higher gas price environment it could be possible to reopen H1 at lower rates to minimise water production
Blythe H1 production operations
· The current gross unconstrained H1 production rate is approximately 15.5 mmscf/d
· Average 2023 gross production year to date to 31 May was 13.9 mmscf/d, factoring in shutdowns and liquid letdowns alongside other Bacton gas streams
· Operating Efficiency over that period has been 93.9% and Production Efficiency 84.6%
· Final H2 well costs are expected to be approximately £15m net to IOG, consistent with guidance provided on 2 May
· The gas market environment has become increasingly challenging over recent months. In January 2023, the Company’s average realised gas price was 214 p/therm. When the 2022 Annual Report and Accounts (“ARA”) was released on 16 March 2023, the UK NBP Day-ahead gas price was 126 p/therm. This then fell to 64 p/therm by 6 June 2023. The average realised price for May 2023 was 72 p/therm and 2023 realised average to the end of May was 112 p/therm.
· The forward curve for 2H 2023 has also dropped considerably with near term prices at a 20-month low and less than half the level in February 2022 before the Ukraine war. Given the complex dynamics involved, there is also considerable uncertainty about the outlook for future gas prices.
· The going concern section of the ARA highlighted the evolution of gas prices as a key risk facing the business. The recent substantial further falls in gas prices means the Company is now likely to breach one or more of the covenants under the terms of its €100 million senior secured bond at the next covenant test date of 30 June 2023.
· The ARA also highlighted the importance to the Company of the Blythe H2 well. The Company is assessing the impacts of potentially lower than expected H2 production rates.
· The Board has been proactively taking mitigating actions to address balance sheet risks, including appointing an independent corporate finance firm, Smith Square Partners, which has considerable experience in advising companies in similar situations
· The Company has also engaged in preliminary discussions with an ad-hoc group of bondholders representing c. 40% of the bonds. The purpose of these discussions, which the Board views as constructive to date, is:
a) to secure pre-emptive waivers of potential covenant breaches
b) to agree measures to enable the Company to withstand short term consequences of recent gas price developments
c) to explore the most effective means of addressing the maturity of the bond in September 2024
· In this context, the Board remains highly focused on maximising near-term production and reducing operating costs, as well as minimising capital expenditure, as reflected in the Goddard farm-out process
· Cash at bank as at 31 May 2022 was £21.5 million, including restricted funds of £6.8 million
Rupert Newall, CEO, commented:
“The Blythe H2 well has tested at a maximum gas rate of 22.8 mmscf/d at the pipeline export pressure, appearing to be constrained by a suspected downhole mechanical blockage. H2 has been executed safely and efficiently considering that 34 days were lost to the well control event and remains on track to come onstream later this month following final hook-up and commissioning.
Meanwhile, the Company has come under increased pressure from severe gas market volatility, with UK NBP Day-ahead gas prices falling by over 85% from August 2022 to June 2023. In that context, we have initiated constructive discussions with an ad-hoc group of our largest bondholders around potential short and longer-term solutions. We will keep all stakeholders updated as appropriate on the progress of these discussions.”
This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 (“MAR”), and is disclosed in accordance with the company’s obligations under Article 17 of MAR.
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