Malcy’s Blog – Oil price, IOG, Serica Energy, IGas Energy, Jadestone Energy & finally

WTI $103.41 +$7.69, Brent $104.97 +$7.00, Diff -$1.56 -69c, NG $4.57 +17c, UKNG 323.21p +73.21p

By Malcolm Graham-Wood

Oil price

No surprise that oil has gone higher on much more bombing in Ukraine. Today is the Opec+ meeting but it has been and gone, ten minutes to agree on a  rollover which probably won’t be reached as most are at peak production levels. No likelihood of any changes from those that could increase production as the agreement is tight.

Forget the Strategic Reserves, 60m barrels really is  a drop in the ocean and the API stats didnt help, a crude draw of 6.1m barrels is just what we didnt need right now and if the EIA follow (gasoline drew 2.5m b’s and distillates added 400/-) the underlying tightness of the market will be demonstrated.

IOG

IOG yesterday made the following statement regarding the gas sales agreement (“GSA”) entered into in 2021 with Gazprom Marketing & Trading Limited (“GM&T”).

In July 2021, following a competitive offtake process involving more than 10 bidders, the Company, via its subsidiaries IOG North Sea Limited (“IOGNSL”) and IOG UK Ltd (“IOGUKL”), signed a GSA with GM&T for its equity production from the Elgood and Southwark fields up to October 2023. GM&T is based in London and has been involved in the UK gas market for over two decades.

Elgood and Southwark, along with the Blythe field, collectively form Phase 1 of the IOG-operated Saturn Banks Project. The Company has a separate gas sales agreement in place with BP Gas Marketing Limited for Blythe gas.

The Company has, via IOGNSL and IOGUKL, served notices on GM&T with immediate effect. The Elgood and Southwark equity gas is now expected to be sold to an alternative buyer.

Andrew Hockey, CEO of IOG, commented:

“Our thoughts are with everyone affected by the shocking, unprovoked invasion of Ukraine. In that context, IOG has today served notices to GM&T with immediate effect.

We had strong interest in rights to buy IOG gas during the competitive offtake process we ran last year and would expect to sell the gas to a highly credible alternative buyer. We already have a separate sales agreement in place with BP Gas Marketing Ltd for the Blythe field.”

Across the board companies are reviewing their ties with sensitive counterparties in these extraordinary times and there may well be more like this to come. For IOG, with first gas around the corner and gas prices retesting all-time highs today, it seems more than likely there will be interest from other offtakers in the Elgood gas, with Blythe gas already contracted to BP Gas Marketing.  

Serica Energy

Serica Energy, a British independent upstream oil and gas company with operations centred on the UK North Sea, provides an update on Rhum field production operations.

A fault has been identified in the Rhum Subsea Control Module which has necessitated a temporary shutdown of Rhum production. There are currently no safety or environmental issues associated with this fault. A programme to replace the control module is being planned utilising a spare module held in stock. This will necessitate diving operations and the timetable is not yet finalised. It is likely, however, that Rhum production will not resume for at least two weeks.

Production from the Bruce field continues and has not been adversely affected. Serica’s other producing fields (Erskine and Columbus) are not impacted by this Rhum issue.

Mitch Flegg, Chief Executive of Serica Energy, commented:
“This is a frustrating event, but I am confident our skilled teams onshore and offshore will safely and efficiently implement the required repairs using equipment and plans already in place to deal with such a situation.

Production from Bruce, Erskine and Columbus has consistently averaged over 10,000boe/d net to Serica so far this year. We expect these rates to continue during the Rhum shut down and we will look for ways to optimise the Bruce production rates during this period.”

When the advert says that oil and gas companies operate in hostile areas and with challenging problems from time to time this is what it means, diving operations at Rhum will indeed be tricky but hopefully fixable and quite soon. On a brighter note although Serica is losing some equivalent barrels life goes on and as commented above gas has already traded at 453.95p/therm this morning…

IGas Energy

IGas has provided an operational, reserves and financial update for the year ended 31 December 2021. The information contained in this statement has not been audited and may be subject to change.

Operational Highlights

·    Net production, in line with guidance, averaged 1,962 boepd for the year, with operations, maintenance and project activities all being directly and indirectly impacted by COVID-19. Excluding COVID impacts, production would have been c.2,100 boepd.

·    Underlying operating costs for the year were c.$37/boe (at an average 2021 exchange rate of £1:$1.38).

·    We anticipate net production of c.2,000 boepd and operating costs of c.$38/boe (assuming an exchange rate of £1:$1.35) in 2022, albeit subject to the ongoing challenges that COVID-19 still presents.

·    Stockbridge 27 project is on track – a suspended injection well, is being recompleted as a water disposal well. Upon successful completion of the project in early Q2, a c.50 bbls/d uplift in production is anticipated.

·    Surrey County Council is still to confirm the date of the planning committee determination hydrogen projects at Albury and Bletchingley.

·    Deep Geothermal:

o  At the Stoke-on-Trent project, we are working with SSE Energy Solutions towards agreeing a thermal purchase agreement for the offtake of geothermal heat in Q3 this year and subject to securing government support, this will enable the project to progress towards financial close in Q4 2022.

o  We are engaging with network operators to utilise capital from The Green Heat Network Fund (GHNF) Transition Scheme which supports the commercialisation of low-carbon heat network projects.

o  We are currently reviewing additional sites for geothermal at strategic locations across the North West of England and we would expect to announce the acquisition of our first site in the Manchester area in H1 2022.

o  We have had several meetings with senior ministers including the Secretary of State for the Department for Business, Energy and Industrial Strategy (BEIS) where it is recognised that the next challenge for the UK in meeting its net zero ambitions is the decarbonisation of heat

§ As a result, a working group has been established by BEIS to look at the policy gap for the long-term support of deep geothermal heat.

·    Following the announcement of an agreement with CeraPhi, a programme has been agreed with an initial single well to be repurposed at Nettleham, to the northeast of Lincoln. Following the repurposing, scheduled for April/May 2022, a period of testing will be undertaken.

·    IGas recently announced Heads of Terms with Cornish Lithium to jointly develop geothermal energy projects in areas where it is believed there are significant lithium resources. The projects will supply renewable heat to end users whilst lithium is extracted from the brines.

Reserves Update

Key highlights from the Competent Persons Report (CPR) carried out by DeGolyer & MacNaughton (D&M).

IGas Group Net Reserves & Contingent Resources as at 31st Dec 2021 (MMboe)*

1P

2P

2C

Reserves & Resources as at 31st Dec 2020

11.74

17.12

20.34

Production during the period

(0.71)

(0.71)

Additions & revisions during the period

(0.46)

(0.62)

Reserves & Resources as at 31st Dec 2021

10.57

15.79

20.34

*Oil price assumption of c. $67/bbl for 2022-2024 then escalated at an average rate of 2.5% thereafter

·    1P NPV10 of $139 million: 2P NPV10 of $190 million

·    Reserves have, as anticipated, declined this year driven primarily by our 2021 production and higher operating cost assumptions.

Financial Highlights

·    RBL redetermination exercise concluded in December 2021 confirming £19.3 (US$26.2) million of debt capacity and headroom of £7.1 million as at 31 December 2021.

 ·    231,000 bbls are currently hedged in 2022 using swaps at an average price of $74/bbl and 114,000 bbls using puts with an average guaranteed minimum price, net of premiums, of $44/bbl.

·    Cash balances as at 31 December 2021 were £3.6 million with net debt of £12.2 million. The Company incurred net cash capex of £4.8 million in 2021.

·    Ring fence tax losses at 31 December 2021 were £267 million.

Stephen Bowler, Chief Executive, commented:

2021 was a challenging year for all, with COVID-19 impacting production through resource and supply chain constraints.  As we emerge out of the pandemic, and with higher commodity prices, we will balance capital investment with deleveraging the Group.

 The recognition that the strength and depth of our existing operational onshore expertise gives us in playing an important role in the UK’s transition to net zero, is evidenced by the number of new opportunities that we have announced over the last few months.

 The rationale for the rapid development of deep geothermal in the UK is compelling.  A combination of higher gas prices and a need to decarbonise large scale heat has resulted in a number of proposals and enquiries for this technology to provide a solution for end users.

 We believe in the opportunities that the energy transition presents and that they will create value for our shareholders as well as contributing to the low carbon ambitions of the UK.

Despite Covid, IGas has hit the guidance and will continue to be in line with expectations this year. Although this revenue has been excellent at current hydrocarbon prices it is interesting to see that the management is amongst the leading companies in the energy sector in transition.

Using its experience, it is already ahead of the game in deep geothermal and the project at Stoke-on-Trent looks at long last to be actually happening. Below 20p IGas is a very interesting shout on transition for the patient investor and if any of these initiatives come off there is significant upside for first movers..

Jadestone Energy

Jadestone has announced that full production has resumed at the Montara Project offshore Australia.

As previously announced, Montara production has in recent weeks been running at reduced rates following an engine failure in the gas reinjection compressor.  The engine has been replaced and gas lift reinstated, allowing for full production to be restored at rates seen immediately prior to the gas compressor fault. 

Paul Blakeley, President and CEO commented:

“A key element of our strategy to increase efficiency and uptime at Montara is availability of key spares. Having a spare gas re-injection compressor engine core on hand allowed us to effect timely repairs, thereby limiting the period of reduced production.  Our offshore team has worked diligently and safely to carry out this significant maintenance activity, with full production now restored as oil prices strengthen above US$100/bbl.  

Typically good work by the Jadestone team and the shares have responded accordingly well. The company and its high quality management ticks all the boxes for me and it remains a quality member of the Bucket List.

And finally…

Last night in the FA Cup the Posh did well to only go down 0-2 to the Noisy Neighbours whilst the Eagles go through beating the Potters 2-1 and the surprise of the round was Boro beating Spurs 1-0. Tonight the Hatters host Chelsea, the Saints entertain the Hammers and the Canaries go to fortress Anfield.

In the Prem last night it was Burnley 0-2 against the Foxes.

The opinions expressed here are those of the author

Malcolm Graham-Wood

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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