Malcy’s Blog – Oil price, IGas Energy, Orcadian Energy & finally

WTI $118.93 -$2.00, Brent $121.17 -$1.10, Diff -$2.24 +90c.

Author @mgrahamwood

USNG $7.19 -$1.42, UKNG 205.0p +44.5p, TTF €102.00 +€16.585

Oil price

A brief word this morning as I’m heading for the smoke, suffice to say that oil lost some of its recent gains partly due to the Fed decision today looking like 75 bp’s up rather than the 50 which up ’til recently was the whisper.

I’ll do the Opec monthly tomorrow along with today’s IEA report but their figures haven’t changed much, yet. Another reason for the fall was the dreaded Cove, Beijing is being locked down again, when will they realise that their vaccination is not fit for purpose?

The Freeport LNG plant will be shut completely until September and even then only slowly back so US exports to Europe will be down. That brings me on to the natural gas price which rose sharply in the UK and Europe, partly because of Freeport but also as Russia is warning about sanctions hitting maintenance on Nordstream 1.

The API stats were as I expected, crude rose 740/- barrels but gasoline drew by 2.2m which is a big warning sign. Over and out.

IGas Energy

IGas today provides the following statement in advance of the Company’s AGM, which is being held at 10.30 a.m. today.

Highlights:

·    Higher commodity prices drive strong operating cash flow generation

·    50% of capital costs for Stoke-on-Trent geothermal project to be Government funded

·    Progressing  development opportunities to support need for domestic energy

·    Public support for UK shale growing as evidenced by YouGov poll

Cuth McDowell, Interim Non-executive Chairman said:

“Today will be my last AGM since joining IGas as a Non-executive Director in 2012 and as I hand over the role of Chairman to Chris Hopkinson I would like to reflect on the past year and also discuss some of the exciting opportunities that lie ahead for your Company.

The constraints we all lived through over the last year presented challenges in our efforts to drive the Company forward, but we are pleased and grateful for the resilience shown by all our employees. Our teams managed the impact of COVID-19 on our operations professionally in the face of difficult circumstances. It is testament to a great deal of hard work.

Current Trading

We continue to anticipate net production of c.2,000 boepd for 2022.  As at 31 May 2022, cash balances were £3.2 million and net debt was £10.3 million, a reduction of £1.9 million since year end.

Currently the Group has hedged 146,000 bbls for the remainder of 2022 using swaps at an average price of US$76/bbl, and 93,000 bbls at an average floor price of US$44/bbl using puts. In addition, we have hedged 60,000 bbls for the first half of 2023 using swaps at an average price of US$95/bbl.

Operating cash flow before working capital movements expected to be c.£21 million in 2022*.

Operating costs are now forecast to be c. US$ 38.8/bbl driven primarily by increased energy costs and general price increases on equipment. However, positively, given IGas is a net exporter of electricity, there is a forecast net benefit to IGas of £1.4 million, equivalent to US $2.5/boe.

Energy Profits Levy

The Government announced on 26 May 2022 that it would introduce an Energy Profits Levy on UK production. Whilst we are awaiting the draft legislation, based on Government announcements we believe that IGas’ ring-fence profits will be subject to the Levy. The Levy takes effect from 26 May 2022, and based on current forecasts* we estimate a payment under the Levy of c.£2 million in respect of 2022, taking into account our current capital expenditure plans. Given this new Levy is part of a package that includes significant investment incentives, we will evaluate additional projects that could be brought forward to offset the impact, once the details of the legislation are agreed.

We have written to HM Treasury for clarification on the definition of qualifying expenditure for investment relief for example, in geothermal, which currently sits outside of the UK ring-fence tax regime.

*calculated based on oil price of $100/bbl and FX of $1.30:£1.00 for remainder of 2022

Geothermal Energy

I would like to thank shareholders for their support of our energy transition strategy and the steps we have taken in the past 12 months. Our geothermal business has made excellent progress and this has been directly recognised by the UK Government.

Specific provision has now been made for drilling of geothermal wells in the Government’s Green Heat Network Fund (GHNF) launched in March 2022. This now gives us a clearer line of sight to development as we firm up a number of rapidly emerging opportunities and move forward to finalise a Thermal Purchase Agreement with SSE on the Stoke-on-Trent project.

The Government is also actively working on longer term support for geothermal with the Department for Business, Energy and Industrial Strategy commissioning a Deep Geothermal Energy White Paper, an evidence-based assessment to help accelerate the development and deployment of deep geothermal energy projects as an opportunity to significantly contribute to the UK’s net zero goals.

The Importance of Domestic Energy Generation

What has become even more evident in the past few months, given the heightened challenges of the war in Ukraine, is the need for the UK to secure further indigenous supplies of energy to reduce its reliance on imports and consider all options to reduce spiralling energy prices.

We are progressing a number of development opportunities across our portfolio. Whilst all at different stages of maturity they have, in aggregate, the potential to add, in the medium term, an initial c.900 boepd and a further c.500 boepd in subsequent phases.

The Government’s scientific review of shale gas, being undertaken by the British Geological Survey, is underway and a report is expected before the end of June 2022.  We believe the science, as well as the need for increased domestic production of gas, should support a lifting of the moratorium.  We will be making the case for the safe development of our assets as we firmly believe that the geo-mechanics of the Gainsborough Trough present a significantly reduced risk of induced seismicity of the type experienced elsewhere in the UK.  The development of our assets in the Gainsborough Trough can demonstrate how shale gas can provide safe, secure and affordable energy for the UK in the near term.  

IGas has the potential to deliver five production well pads, with each pad having up to 16 wells, which would supply three million homes with initial production within 12-18 months with the right Government support to rapidly accelerate the development of this strategic national resource.

New polling by YouGov has revealed renewed support for shale gas extraction as the cost of living crisis bites.

YouGov’s poll found that 29% of respondents were in favour when asked about shale gas extraction in their local area and, if local shale gas production meant a reduction in bills for people in the community, then support grew even more. Excluding don’t knows, more than half of British adults (53%) would support shale development.

Yesterday, the Free Market Forum (part of the Institute of Economic Affairs) published a report – Green Light, Innovative approaches to decarbonisation which can be found here:

https://static1.squarespace.com/static/5f74ad4afd34df5b8a3b53a3/t/62a7114011ae1140a5f0a729/1655116097054/FMF_1_Green+Light_web.pdf.

We welcome their recommendation that calls for the moratorium on hydraulic fracturing to be lifted and for the traffic light system for induced seismicity to be substituted with a ground motion based framework as used by other extractive industries.

Outlook

We are committed to producing oil and gas responsibly and continue to invest in good return, short-term payback opportunities within our asset base to sustain production while at the same time generating free cash flow, underpinned by higher energy prices.

Our existing business gives us a strong platform to quickly develop our low-carbon energy businesses from both an operational and an investment perspective. It is an exciting time for IGas with opportunities to deliver significant future shareholder value.”

Nothing to add here for IGas, still some uncertainty on the Looney tax but the rest of the business looks in very good shape for the transition to the future. 

Orcadian Energy

Orcadian has announced a seismic licensing deal with the energy data company TGS. The agreement will provide Orcadian with high quality seismic data, revealing the reservoir structures and even the likely fluid type. The deal with TGS ensures that Orcadian will be able to use the best data available to evaluate the multitude of development opportunities and prospects within its North Sea portfolio.

Highlights

·    Orcadian will gain access to 2,070 sq km of newly reprocessed and interpreted, high quality 3D seismic data covering the bulk of its licences and enabling evaluation of nearby open acreage in the upcoming 33rd round;

·     Near term costs have been deferred and future payments to TGS will largely derive from a 1% royalty on production;

·     TGS will, subject to Pilot FDP approval, acquire 100 sq km of new seismic over the important Elke and Narwhal discoveries;

·     The North Sea Transition Authority (“NSTA”) has confirmed that acquisition of this data will satisfy the Phase B work commitment on P2482, Orcadian has requested that NSTA allows P2482 to continue into Phase B.

Orcadian has 79MMbbls of 2P reserves in the Pilot field, 78MMbbls of 2C Resources in Elke, Narwhal and Blakeney discoveries, and 191MMbbls of Prospective Resources across its Western Platform licences. Orcadian’s understanding of Pilot and Blakeney has already been much improved from interpretation of the data already licensed from TGS. This deal will enable Orcadian to improve its understanding of the full potential of its licences and the surrounding areas to the same level, in advance of the forthcoming 33rd Licensing Round.

TGS seismic data

TGS owns three surveys over Orcadian’s licences on the Western Platform:

·    the “Blakeney” survey which covers all of blocks 21/22a, 21/26a, 21/27a, and 21/27b. Orcadian has already licensed 205 sq km to enable interpretation of Pilot, Blakeney, Bowhead, and Feugh. This survey was shot in 2012 and was reprocessed in 2019/2020 to benefit from ongoing advances in processing technology as well as to focus on the Tay hydrocarbon bearing horizons;

·      the “Catcher North” survey covering all of 21/28 which was shot in 20112/13; and

·      the “Catcher” survey  covering all of 28/3a which was shot in 2011.

A map of these surveys and their relationship to Orcadian’s acreage holdings can be downloaded at this link: https://bit.ly/TGS-Orcadian-seismic

Details of the Transaction

Under the terms of the transaction TGS has agreed:

·      to defer, until Pilot FDP approval, a significant portion of the seismic licensing fees due under the existing licence arrangements;

·   to reprocess the “Catcher” and “Catcher North” surveys using the same processing sequence as successfully deployed on the “Blakeney” dataset;

·      to licence a further 1,865 sq km of seismic data to Orcadian, under a two-company group licence; 

·      subject to Pilot FDP approval, to acquire at least 100 sq km of new seismic over Narwhal and Elke; and

·      to deliver QI (Quantative Interpretation) products, to carry out seismic modelling and interpret the seismic over the entire area.

In return, Orcadian will grant TGS a 1% royalty on proceeds from future production from its Western Platform licences. On Pilot FDP approval, and concurrent with TGS’s commitment to acquire seismic over Elke and Narwhal, Orcadian will pay the outstanding prior financial commitment to TGS. The royalty terms are designed to afford Orcadian maximum flexibility in future fund-raising to stimulate development of this key future hub for UK energy.

The Directors believe this innovative licensing arrangement will enable Orcadian to meet future licence commitments, enhance its understanding of the regional geological setting, and to quantify prospectivity across the entire Western Platform project area; and to do so using the very best available data, reprocessed using the most appropriate parameters to image the Tay reservoirs. This arrangement is intended to create a long-term alignment of interests as well as a close technical working relationship between Orcadian and TGS.

Phase B of P2482

NSTA has agreed to amend the Phase B work programme for Licence P2484, such that new seismic acquired by TGS and licenced by Orcadian under this arrangement will satisfy the amended work commitment. Accordingly, Orcadian has formally requested that P2484 continue into Phase B.

Farm Out of Carra

As announced on 11 October 2021, Orcadian has entered into non-binding heads of agreement with Carrick Resources Limited on the announced farm-out of the Carra prospect. Orcadian confirms it is working with Carrick to progress the farm out agreement and further updates will be available in due course. 

Steve Brown, Orcadian’s CEO, said:

“We are delighted to have reached this agreement with TGS and look forward to further cementing our close working relationship.

The agreement enables us to use the very best subsurface data whilst giving us access to recent advances in seismic processing to extract understanding from that data. A good subsurface understanding is the foundation upon which we will build our success and securing access to the best data available is essential. We are delighted that TGS have the confidence in our project to enter into this deal under which the vast majority of their return will depend on us successfully taking the project into production. We now have licensed, what we believe is the highest quality data across all of our Western Platform licences, whilst minimising value dilution to our shareholders. This deal ensures a long term alignment between TGS and Orcadian as we seek to make the most of the development and exploration potential of our acreage.”

 Good news from Orcadian again today after yesterday’s comments and I repeat what I said then, this is one to watch and may be a flag bearer for the low carbon future of the North Sea, we shall see.

And finally…

England won the second test against New Zealand with a spirited display from almost all the team over the match although the Bairstow knock will be remembered by the full house who got in for free!

England got thrashed last night in some pathetic Cup no one wants to see but EUFA want to raise money from. The catch is that it carries ranking points, short and curlies or what?

The opinions expressed here are those of the author

Author @mgrahamwood

Disclaimer: Malcy’s Blog is provided for general information about the international oil and gas industry and the companies that operate within it. It does not constitute investment advice and Malcy does not buy or sell shares, warrants or bonds in any company written about within the blog. Information is taken from publicly available sources and any comment is that of the author who does not take any third party comment in the blog


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